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The origins of which foreign firms demand more low-tech products possibly bring higher backward spillovers to domestic suppliers. Lower backward spillovers from FDI originating from coun[r]
(1)Backward Spillover from Different FDI Origins: The Role of Geographical Distance and
Technology Intensity of Input Consumption
Pham Thi Bich Ngoc
Hoa Sen University, HCMC
Pham Thi Bich Ngoc - Hoa Sen University APPLIED ECONOMICS
University of Economics Ho Chi Minh City
(2)FOREIGN DIRECT INVESTMENT? (OECD, IMF)
FDI reflects the objective of establishing a lasting interest by a resident enterprise in one economy (direct investor) in an enterprise (direct investment enterprise) that is resident in an
other economy, in which:
The foreign investor owns 10% or more of the ordinary shares or voting power for an incorporated enterprise or an unincorporated enterprise in which the foreign investor has equivalent ownership.
Direct Investment: Equity capital/ Reinvested earnings/ Acquisition of intangible assets
FDI modes: Greenfield vs M&A
(3)TYPES OF AFFILIATES AND THE EFFECTS:
0% 10% 50% 100%
Direct Investment
Voting Power:
Associates Subsidiaries
Effects of FDI
Product market effects Factor market effects
(4)http://vov.vn/kinh-te/doanh-nghiep/doanh-nghiep-fdi-duoc-qua-nhieu-uu-ai-310198.vov
http://vietbao.vn/Xa-hoi/FDI-Trung-Quoc-Lo-lach-luat-chen-ep-doanh-nghiep-Viet/158032584/157/
http://cafef.vn/kinh-te-vi-mo-dau-tu/lo-trinh-cat-giam-thue-den-2018-
moi-lo-cho-nganh-cong-nghiep-phu-tro-201405191626025677ca33.chn
(5)Inflows of Foreign Direct Investment, 1980-2009
(6)Horizontal vs Vertical FDI
Two main types of FDI:
Horizontal FDI when the affiliate replicates the
production process (that the parent firm undertakes in its domestic facilities) elsewhere in the world.
Vertical FDI when the production chain is broken up, and parts of the production processes are transferred to the affiliate location.
(7)Outward Foreign Direct Investment for Top Countries, 2007-2009
Source: UNCTAD, World Investment Report, 2010
(8)The Firm’s Decision Regarding Foreign Direct Investment
Proximity-concentration trade-off:
High trade costs associated with exporting create an incentive to locate production near customers
Increasing returns to scale in production create an incentive to concentrate production in fewer locations.
(9)The Firm’s Decision Regarding Foreign Direct Investment (cont.)
Foreign outsourcing or offshoring occurs when a firm contracts with an independent firm to produce in the foreign location
In addition to deciding the location of where to
produce, firms also face an internalization decision: whether to keep production done by one firm or by separate firms.
(10)HORIZONTAL VS VERTICAL FDI
HORIZONTAL
BACKWARD
FORWARD
FOREIGN FIRMS
in the same industries
in downstream industries
in upstream industries
Foreign firms produce complements or substitutes of the local firms’ products
Foreign firms use inputs from local firms to create outputs
Foreign firms create and sell intermediate inputs to local firms
LOCAL FIRMS
VER
TIC
(11)2 SPILLOVER EFFECT – THEORETICAL FRAMEWORK
Once a MNC has established a subsidiary, they are likely to bring along
more sophisticated technology, marketing and managerial practices which
are possibly spilled over to the domestic firms through the channels: imitation, skills acquisition, competition and exports (Wang and
Blomstroem, 1992; Haacker, 1999; Aitken & Harrison, 1999)
FDI may raise productivity levels of domestic firms in the industries
which they enter by improving the allocation of resources in those industries (Javorcik, 2004, Helpman, 1999)
In nature, spillovers from FDI are more likely to be vertical than horizontal/
MNCs can use ways of protection such as intellectual property, trade
secrecy, paying higher wages to prevent labor turnover or locating in countries or industries where domestic firms have limited imitative capacities to begin with (Gorg and Greenaway, 2004; Javorcik, 2004).
(12)SPILLOVERS THROUGH HORIZONTAL AND VERTICAL LINKAGES
University of Kiel, Germany
HORIZONTAL (+/-)
BACKWARD (+/-)
FORWARD (+/-)
FOREIGN FIRMS
LOCAL FIRMS
- Knowledge transfer
- High requirement , - demand increase motivation
New, improved, less costly intermediate inputs
- Demonstration effect
- Competition effect
- Labor mobility effect
- Market stealing effect
(13)3 EMPIRICAL STUDIES
Authors H B F
Goerg & Greenaway, (2004), (17 researches for developing countries/ 15 for developed ones,
and for transition ones, 1966-2000)
+ (20 cases)
-(5 cases)
Goerg & Greenaway, (2004), (5 researches on vertical
spillovers, 1974-2000) + (3 cases) + (1 case) Javorcik (2004) (Lithuania, 1996-2000) ? + ? Bwalya (2006) (Zambia, 1993-1995)
+ - X
Kim, H H & Kim, J.D (2010) (Korea, 1990-2008)
+ + ?
(14)EMPIRICAL STUDIES, VIETNAM
H: horizontal; B: backward; F: forward X: not researched; ?: not evidenced
Researches Data Objects Dependent variables
H B F
Le, Q H and Pomfret, R., (2008) Firm GSO, 2000-04 Manufacturing Labor productivity
- + X
Nguyen, N A et al
(2008) Firm GSO, 2000-05 Manufacturing Service Output -+ + ? + -Nguyen, D C et al
(2008)
Firm WB, 2002-04
Manufacturing Revenue - ? +
Nguyen, P L (2008)
Firm GSO, 2000-05
(15)-Backward Spillover
MNEs play two roles to domestic firms:
(1) They typically produce more complex products, acting as a spur to local suppliers to upgrade their own technology base (Rodríguez-Clare, 1996),
(2) Their increased demand for inputs induces employment and growth in domestic upstream firms (Markusen and Venables, 1999)
Backward spillovers can work on condition that local suppliers have to
be technologically advanced to absorb knowledge spillovers and deal with the demand for specialized inputs (Kwon and Chun, 2009)
Low level of local linkages could be due to the incapacity of local firms
to meet appropriate quality standards, and to compete with global components prices (Athukorala and Menon, 1996; Hobday, 1996)
(16)FDI and The Role of Investors’ origins
Development distance between two economies (Findlay, 1978 )
Technology gap between the host and home countries (Glass and Saggi, 1998)
Geographical distance between the host and home
countries (Rodrigues-Clare, 1996)
Sourcing countries in or out of the agreement
association (Regional preferential trade agreements) (Javorcik and Spatareanu , 2011)
backward spillovers from investors from EU (-), America (+), and Asia(not significant) to the Romanian firms
(17)HYPOTHESIS
FDI from one source economy could be low-tech or high-tech intensive
due to their development level
FDI from origins that the investors demand more low-tech products
possibly bring higher potential of backward spillovers to local suppliers
(18)The paper’s novelty
It does not stop at finding different backward productivity
spillovers by investors’ origins but go further by explaining why and how this channel occurs:
- The role of geographical distance: we separate two groups
-near vs far from Vietnam
- The role of technology intensity of MNEs’ Input Consumption:
we create a low-tech intensity indicator (LTI) for foreign investment from one source country both in the same and downstream sectors
Previous scholars: the difference between countries
>< My study: different behaviors and characteristics of investors from developing and developed nations
Sample: 23 Vietnamese manufacturing sectors, 2007-2010 114, 733 obserations
(19)FDI in Vietnam - WHY?
• Vietnam is one of the top destinations for FDI in 2008-2010 (UNCTAD, 2008)
• FDI inflows increased from $1.3 billion in 1991 to $19.9 billion in 2010 • Two peaks:
$10.16 billion in 1996
$71.73 billion in 2008
200 400 600 800 1000 1200 1400 1600 1800 10000 20000 30000 40000 50000 60000 70000 80000 19 91 19 92 19 93 19 94 19 95 19 96 19 97 9 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 0 20 08 20 09 20 10
Registered capital (Mill USD) Implementation capital (Mill USD) Number of projects
AFTA WTO
ASEAN
(20)FDI by origin:
• App 70 countries and territories invest in
manufacturing sectors • Asian economies
account for the major part of FDI inflows
• A strong wave of FDI from ASEAN, Europe, Japan, and Taiwan in 2008 ASEAN 11% the US 4% China 3% Europe 8% Japan 24% South Korea 12% Taiwan 24% Multi 5% Others 9%
The Investors' Shares in Manufacturing by Nationality, 2007 - 2010
(21)𝐻𝑜𝑟𝑖𝑧𝑜𝑛𝑡𝑎𝑙𝑗𝑡 = ∀𝑖∈𝑗𝐹𝑜𝑟𝑒𝑖𝑔𝑛𝑠ℎ𝑎𝑟𝑒𝑖𝑡 ∗ 𝑌𝑖𝑡 𝑌𝑖𝑡
∀𝑖∈𝑗
ajk - the proportion of sector j’s output supplied to sector k
m – Origins: Japan, Taiwan, South Korea, US, China, ASEAN, EU, Multi
MODEL AND ESTIMATION STRATEGY:
𝑙𝑛 𝑌𝑖𝑗𝑡 = 𝛼+𝛽1 𝑙𝑛 𝐾𝑖𝑗𝑡 +𝛽2 𝑙𝑛 𝐿𝑖𝑗𝑡 +𝛽3 𝑙𝑛𝑀𝑖𝑗𝑡 +𝛽4 𝐻𝑜𝑟𝑖𝑧𝑜𝑛𝑡𝑎𝑙𝑗𝑡 +𝛽5 𝐵𝑎𝑐𝑘𝑤𝑎𝑟𝑑𝑚𝑗𝑡 +𝜀𝑖𝑗𝑡
𝐵𝑎𝑐𝑘𝑤𝑎𝑟𝑑𝑚𝑗𝑡 = 𝑎𝑗𝑘
𝑘 𝑖𝑓 𝑘≠𝑗
𝐻𝑜𝑟𝑖𝑧𝑜𝑛𝑡𝑎𝑙𝑚𝑘𝑡
𝐻𝑜𝑟𝑖𝑧𝑜𝑛𝑡𝑎𝑙𝑚𝑗𝑡 = ∀𝑖∈𝑗𝐹𝑜𝑟𝑒𝑖𝑔𝑛𝑠ℎ𝑎𝑟𝑒𝑖𝑡 ∗ 𝐷𝑚∗ 𝑌𝑖𝑚𝑡 𝑌𝑖𝑡
∀𝑖∈𝑗
where
(22)Low Tech
High Tech
1 X D15 Manufacture Of Food Products And Beverages 2 X D16 Manufacture Of Tobacco Products
3 X D17 Manufacture Of Textiles
4 X D18 Manufacture Of Wearing Apparel; Dressing And Dyeing Of Fur 5 X D19 Tanning And Dressing Of Leather
6 X D20 Manufacture Of Wood And Of Products Of Wood 7 X D21 Manufacture Of Paper And Paper Products
8 X D22 Publishing, Printing And Reproduction Of Recorded Media
9 X D23 Manufacture Of Coke, Refined Petroleum Products And Nuclear Fuel 10 X D24 Manufacture Of Chemicals And Chemical Products
11 X D25 Manufacture Of Rubber And Plastics Products
12 X D26 Manufacture Of Other Non?metallic Mineral Products 13 X D27 Manufacture Of Basic Metals
14 X D28 Manufacture Of Fabricated Metal Products 15 X D29 Manufacture Of Machinery And Equipment N.e.c
16 X D30 Manufacture Of Office, Accounting And Computing Machinery 17 X D31 Manufacture Of Electrical Machinery And Apparatus N.e.c
18 X D32 Manufacture Of Radio, Television And Communication Equipment And 19 X D33 Manufacture Of Medical, Precision And Optical Instruments
20 X D34 Manufacture Of Motor Vehicles, Trailers And Semi?trailers 21 X D35 Manufacture Of Other Transport Equipment
22 X D36 Manufacture Of Furniture; Manufacturing N.e.c 23 X D37 Recycling
*Notes: Manufacturing industries classified according their global technological intensity (OECD, 1993)
(23)Distribution of Horizontals and Backwards - Japan
(24)Distribution of Horizontals and Backwards - China
(25)Low-tech Intensity Indicator (LTI) For backward linkages:
• If j = 15 low-tech industries:
• If j = high-tech industries:
• If LTI > 100%: the buyers from country or association m purchase more local low-tech
products
• If LTI<= 100%: the buyers from country or association mpurchase more local high-tech
products
For horizontal linkages:
• If LTI > 100%: foreign affiliates from country or association m appear more in low-tech
industries
• If LTI<= 100%: foreign affiliates from country or associationm appear more in high-tech
industries
𝐵𝑚_𝑙𝑜𝑤𝑡𝑒𝑐 ℎ = 𝐵𝑗 𝑚𝑗𝑡 15
𝐵𝑚_ℎ𝑖𝑔ℎ𝑡𝑒𝑐ℎ = 𝐵𝑗 𝑚𝑗𝑡 LTI = 100* Bmt_lowtech/Bmt_hightech
LTI = 100* Hmt_lowtech/Hmt_hightech
(26)Low-tech Intensity for Backwards and Horizontals
%
Backwards- LTI
Horizontals-LTI
2007 2008 2009 2010 Avr Avr.
The US 258.9 200.5 235.6 202.6 224.4 99.3
ASEAN 268.2 194.2 190.6 183.2 209.1 108.9
China 217.3 292.6 301.3 319.5 282.7 218.6
Europe 201.8 193.8 192.5 158.9 186.8 83.2
Japan 63.1 60.3 63.2 57.6 61.1 9.0
South Korea 110.1 112.9 111.7 150.2 121.3 105.7
Taiwan 242.3 241.3 232.4 242.5 239.6 192.9
Multinationals 117.9 121.5 104.3 131.4 118.8 13.6
(27)BACKWARD SPILLOVERS BY ORIGIN, 2007-2010
Variables
Dependent Var._ lnTFP
OLS FE (JVs+100%FIEs) FE (100% FIEs)
Btaiwan 2.139*** (0.429) 1.866*** (0.315) 2.276*** (0.321)
Bchina 3.014*** (1.036) -1.901*** (0.714) -1.678** (0.740)
Bamerica 9.481*** (2.080) 2.565* (1.504) 4.230** (1.692)
Basean -6.802*** (1.422) -8.226*** (1.202) -8.510*** (1.135)
Beurope 2.677*** (0.701) 2.591*** (0.712) 1.221* (0.635)
Bsouthkorea 0.203 (0.882) 0.200 (0.350) -0.186 (0.363)
Bmulti -0.246 (0.371) 0.343 (0.325) 0.203 (0.326)
Bjapan 1.356*** (0.350) -0.402*** (0.112) -0.323*** (0.108)
Year dummies Y Y Y
Observations 114,733 114,733 114,733
R-squared 0.076 0.085 0.086
F_tests (P_ values): 0.000 (Btaiwan=0, Basean=0, Beurope=0, Bjapan=0), 0.007
(Bchina=0), 0.088 (Bamerica=0), 0.568 (Bsouthkorea=0), 0.291 (Bmulti=0)
(28)(29)The Relation between Backward Spillover and LTI -10 -8 -6 -4 -2
0
All foreign firms by origin
-10 -8 -6 -4 -2
0
Wholly foreign firms by origin
TW
MU
MU JP SK
EU US
TW
CN
ASEAN
JP SK
EU US
CN
ASEAN
(30)Investments from one origin and their demand have specific characteristics: low-tech or high-tech intensive
The origins of which foreign firms demand more low-tech products possibly bring higher backward spillovers to domestic suppliers
Lower backward spillovers from FDI originating from countries which are located nearby Vietnam due to high potential of imports
Local high-tech manufacturers should promote themselves to meet the demand from FDI customers
CONCLUSION:
http://vov.vn/kinh-te/doanh-nghiep/doanh-nghiep-fdi-duoc-qua-nhieu-uu-ai-310198.vov http://vietbao.vn/Xa-hoi/FDI-Trung-Quoc-Lo-lach-luat-chen-ep-doanh-nghiep-Viet/158032584/157/ http://cafef.vn/kinh-te-vi-mo-dau-tu/lo-trinh-cat-giam-thue-den-2018- moi-lo-cho-nganh-cong-nghiep-phu-tro-201405191626025677ca33.chn