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Technology transfers, foreign investment
and productivity spillovers:
Evidence from Vietnam
John Rand
University of Copenhagen
Presentation based on work done in collaboration with Carol Newman,
Theo Talbot and Finn Tarp
Motivation
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Attracting FDI is a policy priority in many developing countries, including Vietnam.
•
Aside from providing jobs and capital, FDI firms also bring new technology and
knowledge.
•
Argument is that FDI firms are likely to be technologically superior to domestic
firms.
•
Through their interactions, knowledge/new technology can be transferred to domestic
sector leading to productivity improvements.
•
This can happen through many different mechanisms but disentangling these
empirically have been challenging.
•
While the topic has received a lot of attention in the literature there is conflicting
empirical evidence on the nature of spillovers and limited evidence on the underlying
mechanisms.
Interactions – What do we mean?
•
Recent newspaper example
•
Taiwanese company
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Binh Duong chosen, because
other Taiwanese companies
located here + good business
environment.
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Produce lighting products for
exports to the EU and US.
•
Machinery and intermediate
inputs imported from China.
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Interactions??? Vertical
spillovers???
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What we do ….
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Use a unique data source to analyze various mechanisms for spillovers from foreigninvested firms to the domestic enterprises in Vietnam
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We examine whether horizontal, forward and backward spillovers exist in this
context
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We disentangle contractual technology transfers from externalities associated with
FDI using a measure gathered from specially designed survey data
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We consider the extent to which competition effects dominate positive externalities
from FDI.
•
We compare spillovers from joint-venture FDI firms and wholly-foreign owned
firms.
Conceptual framework (1)
•
Horizontal or intra-sector spillovers (Caves, 1996):
FDI firm has firm-specific asset with a public good characteristic (e.g. knowledge or
superior technology)
Cannot prevent it from being transferred to competing firms
E.g. through worker mobility, business or other networks, etc.
•
Vertical or inter-sector spillovers (Rodriguez-Clare 1996):
Through the supply chain
Backward: from foreign firms to domestic input suppliers by increasing demand for
specialized inputs.
Forward: from foreign intermediate input suppliers to domestic producers by increasing
the production of more complex inputs.
To illustrate…..
Conceptual framework (2)
Foreign Firm
Supplies inputs
Domestic Firm
Backward
linkage/technology
transfer
Supplies inputs
Foreign Firm
Forward
linkage/technology
transfer
Conceptual framework (3)
Backward spillovers:
•
•
Positive:
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Deliberate knowledge transfer e.g. technical assistance, management experience,
quality assurance (Moran 2001).
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Incentives for suppliers to improve quality of inputs (Javorcik 2004).
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Scale economies.
Negative:
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Asymmetric bargaining power (Girma et al. 2008).
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Domestic firms not suited to producing input varieties demanded by foreign firms
(Rodriguez-Clare 1996).
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Increased competition from other foreign firms supplying inputs (Aitken and Harrison
1999) or from imported inputs.
Conceptual framework (4)
Forward spillovers:
Forward spillovers have been very little attention in the literature.
•
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Positive:
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Embodied technologies (Girma et al 2008)
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Accompanying services (Javorcik 2004)
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Competition effects
Negative:
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‘Lock-in’ to using inputs purchased from FDI firms
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Asymmetric bargaining power possible if FDI firms gain dominant position upstream
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Cultural factors
Empirical Evidence
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Horizontal spillovers:
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Very little empirical evidence that they exist
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Foreign-invested firms compete with domestic firms in the same sector – incentive to
prevent their technology from leaking (Javorcik 2004)
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Barrios et al. (2011), Blalock and Gertler (2008), Bwalya (2006), Damijan et al.
(2008), Javorcik (2004) and Kugler (2006) - none find evidence for horizontal
spillovers
•
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Backward spillovers:
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Javorcik (2004)- Lithuania
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Blalock and Gertler (2008) – Indonesia
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Kugler (2006) - Columbia
Forward spillovers:
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No evidence (as far as we know)
Related issues
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Characteristics of foreign and domestic firms may matter:
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Javorcik (2004) – backward spillovers only evident from partially-owned foreign
firms.
•
Giroud et al (2012), Marin and Bell (2006) – spillovers more likely from firms that
are technologically/knowledge intensive.
•
Crespo and Fontoura (2007) – absorptive capacity of domestic firms matters
• Blomstrom and Sjoholm (1999) – export status of firm
• Aitken and Harrison (1999) – firm size
• Marin and Bell (2006) – investments in technology and training
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Distinction between externalities and actual technology transfers:
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Giroud et al. (2012) and Zanfei (2012) critique literature on this point
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Smeets (2008) – technology transfers and spillovers are distinct concepts that should
be considered as such in empirical analysis
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This is one of our key points of departure…..
Common Empirical Approach (1)
• Measurement of spillovers (Javorcik, 2004)
• Horizontal spillovers: the proportion of total revenue, R, within each
4-digit sector, j, accounted for by k foreign-owned firms (firms
denoted with subscript i and time with t).
k
H jt   Rijt
i 1
n
 Rijt
i 1
Common Empirical Approach (2)
• Forward spillovers: the proportion of total revenue in upstream
sectors accounted for by foreign-owned firms
J 1
F jt   αut H ut
u 1
ut is the proportion of inputs into sector j that are purchased from
sector u in time t and Hut is the proportion of foreign-owned firms in
upstream sector u.
Common Empirical Approach (3)
• Backward spillovers: the proportion of total revenue in downstream
sectors accounted for by foreign-owned firms
J 1
B jt   αdt H dt
d 1
dt is the proportion of output from sector j that is sold to sector d in
time t and Hdt is the proportion of foreign-owned firms in
downstream sector d.
Common Empirical Approach (4)
• Baseline model (Javorcik, 2004): detecting spillovers
lnYijt  αi  βl ln Lijt  βk ln Kijt  δH H jt
 δF F jt  δB B jt  s j  τt  eijt
Y: value added
L: total labor input
K: capital inputs
i: firm fixed effects
sj : 4-digit sector fixed effects
t : time fixed effects

How is productivity of firm related with foreign dominance within sectors
(H), in upstream sectors (F) and in downstream sectors (B)?
Our Empirical Approach (1)
• Detecting technology transfers:
ln Yijt   i   l ln Lijt   k ln K ijt   H H jt   B B jt   F F jt
 TB tech _ backijt  TF tech _ forijt
 B tech _ backijt  B jt  F tech _ forijt  F jt
 s j   t  eijt
tech_back: firm received a technology transfer from a downstream firm
tech_for: firm received a technology transfer from an upstream firm
Two Marginal Effects of interest:
 lnYijt
B jt
 δB  φB tech _ backijt
 lnYijt
F jt
 δF  φF tech _ forijt
B: backward FDI spillovers due to direct technology transfers
F: forward FDI spillovers due to direct technology transfers
B: backward FDI spillovers due to externalities
F: forward FDI spillovers due to externalities
Our Empirical Approach (2)
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OLS estimation biased.
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Standard “endogenuos” OP approach using Wooldridge’s (2009)
one step GMM estimator.
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Allows us to simultaneously address the problem of measurement error in
the capital input which will place further downward bias on the estimate
of capital.
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Identification challenge: many potential confounding factors that
impact on the change in the amount of FDI into a sector and the
change in the productivity of the firm. We try to address most of
the concerns.
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Data
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Technology and Competitiveness Survey (TCS) 2009 and onwards
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Sample of more than 7,500 firms
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Vietnamese Enterprise Survey (various years)
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Population of all registered enterprises in Vietnam with 30 employees or
more and representative sample of smaller firms
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TCS implemented by GSO as part of Vietnam Enterprise Survey
and so data can be combined.
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Supply Use Tables (SUT) for Vietnam in 2007 to measure
proportion of inputs/outputs traded between sectors.
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Export and import data at 4-digit level taken from COMTRADE –
control variables.
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Summary Statistics (1)
Mean
St. Dev.
Tech Transfers:
Tech Transfer Forwards
Tech Transfer Backwards
0.205
0.133
0.404
0.339
Absorptive capacity:
New Machinery
New ICT
Process Innovation
Quality Innovation
Expand Variety
Expand Product
Switch Sector
Tech Adaptation
R&D
0.130
0.163
0.504
0.779
0.440
0.148
0.029
0.117
0.106
0.336
0.370
0.500
0.415
0.496
0.355
0.167
0.322
0.308
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Summary Statistics (2)
Mean
St. Dev.
28.4
29.0
23.7
5.3
38.2
28.2
10.0
21.3
20.2
18.9
3.8
16.3
14.2
5.9
FDI Spillovers:
Horizontal
Forwards
Forwards 100%
Forwards JV
Backwards
Backwards 100%
Backwards JV
Note: Time-varying sector level controls also included:
concentration, imports and exports.
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Results (1)
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Positive forward spillovers - Negative backward spillovers - No horizontal spillovers
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Consistent across all models
There is a clear distinction between externalities and direct technology transfers
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even after controlling for technology transfers a large part of FDI spillovers
remains unexplained.
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But we find that:
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Forward spillovers:
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OLS: JVs create productivity externalities that filter along the supply chain.
Wholly foreign-owned projects only enhance the productivity of domestic
customers where there is a contractual obligation to transfer knowledge.
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IV: Cannot conclude anything about whether upstream spillovers come from JVs or
100% foreign owned FDIs. Forward linkages generally positive through the
externality effect.
Results (2)
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Backward spillovers:
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Negative spillovers are found and are due to wholly foreignowned firms.
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Part of this is explained by negative competition (crowding
out) effects. Controlling for sector concentration we also find
negative spillovers from JVs in competitive sectors.
• Raises a key question:
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Are there any knowledge spillover benefits to domestic
Vietnamese firms from being directly linked with FDI firms?
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Are there any direct benefits from
engaging with FDIs?
• No evidence that direct supply chain linkages are
productivity enhancing.
• No evidence that direct technology transfers are
productivity enhancing.
• Some evidence of negative productivity effects
associated with having FDI customers once
interaction with tech transfers is controlled for.
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Conclusion (1)
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Contrary to other empirical studies we find for Vietnam that forward linkages lead to
positive productivity spillovers, but the main part of these are unexplained (through
externalities).
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Backward linkages negatively impact the productivity of domestic firms, and increased
competition from imports explains most of the negative backward spillover from
downstream FDI firms.
•
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Absorptive capacity can maybe cushion firms from negative backward spillovers
Additional supportive evidence.
Zooming in on the Direct Tech Transfers
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Purpose sampling using a methodological triangulation approach
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7 countries including Vietnam
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Data collected based on an identical semi-structured interview guide. The sample of
firms were selected as follows (purpose and sequential/snowball sampling):
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Semi-structured interviews with country IPAs. Should lead to the identification of
the 15 most influential MNCs/FDIs with majority foreign ownership. FDIs/MNCs
that produce intermediates for the domestic market (if present) should have high
priority.
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Semi-structured interviews with identified MNCs/FDIs. The interview should lead to
the following identification : (i) three domestically owned industrial firms which are
customers of the MNC/FDI. (ii) three domestically owned industrial firms which are
suppliers to the MNC/FDI. (iii) three in-country direct competitors to the MNC/FDI.
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The interviews above could lead to the identification of relevant (i) competitors ,
(ii) domestically owned industrial suppliers of FDIs/MNCs and (iii) domestically
owned industrial customers of FDIs/MNCs. Semi-structured interviews carried out.
Identifying Links: Vietnam
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Identifying Links: Kenya
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Conclusion (2)
• Preconditions for vertical spillovers (within country)
are relatively weak in the African countries
considered due to less developed customer/supplier
chains and networks (Economic Complexity).
• However, for a given business network structure
direct spillovers (especially forward linkages) are
more likely to occur in the African sample.
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