Motivation

1. Technology transfers, foreign investment and productivity spillovers:Evidence from VietnamJohn RandUniversity of CopenhagenPresentation based on work done in collaboration with Carol Newman, Theo Talbot and Finn Tarp

2. Motivation • 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.

3. Interactions – What do we mean? • Recent newspaper example • Taiwanese company • Binh Duong chosen, because other Taiwanese companies located here + good business environment. • Produce lighting products for exports to the EU and US. • Machinery and intermediate inputs imported from China. • Interactions??? Vertical spillovers???

4. What we do …. • Use a unique data source to analyze various mechanisms for spillovers from foreign-invested firms to the domestic enterprises in Vietnam • We examine whether horizontal, forward and backward spillovers exist in this context • We disentangle contractual technology transfers from externalities associated with FDI using a measure gathered from specially designed survey data • 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.

5. 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…..

6. Conceptual framework (2)

7. Conceptual framework (3) Backward spillovers: • Positive: • Deliberate knowledge transfer e.g. technical assistance, management experience, quality assurance (Moran 2001). • Incentives for suppliers to improve quality of inputs (Javorcik 2004). • Scale economies. • Negative: • Asymmetric bargaining power (Girma et al. 2008). • Domestic firms not suited to producing input varieties demanded by foreign firms (Rodriguez-Clare 1996). • Increased competition from other foreign firms supplying inputs (Aitken and Harrison 1999) or from imported inputs.

8. Conceptual framework (4) Forward spillovers: Forward spillovers have been very little attention in the literature. • Positive: • Embodied technologies (Girma et al 2008) • Accompanying services (Javorcik 2004) • Competition effects • Negative: • ‘Lock-in’ to using inputs purchased from FDI firms • Asymmetric bargaining power possible if FDI firms gain dominant position upstream • Cultural factors

9. Empirical Evidence • Horizontal spillovers: • Very little empirical evidence that they exist • Foreign-invested firms compete with domestic firms in the same sector – incentive to prevent their technology from leaking (Javorcik 2004) • 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 • Backward spillovers: • Javorcik (2004)- Lithuania • Blalock and Gertler (2008) – Indonesia • Kugler (2006) - Columbia • Forward spillovers: • No evidence (as far as we know)

10. Related issues • Characteristics of foreign and domestic firms may matter: • 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 • Distinction between externalities and actual technology transfers: • Giroud et al. (2012) and Zanfei (2012) critique literature on this point • Smeets (2008) – technology transfers and spillovers are distinct concepts that should be considered as such in empirical analysis • This is one of our key points of departure…..

11. 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).

12. Common Empirical Approach (2) • Forward spillovers: the proportion of total revenue in upstream sectors accounted for by foreign-owned firms utis the proportion of inputs into sector jthat are purchased from sector u in time t and Hut is the proportion of foreign-owned firms in upstream sector u.

13. Common Empirical Approach (3) • Backward spillovers: the proportion of total revenue in downstream sectors accounted for by foreign-owned firms dtis the proportion of output from sector jthat is sold to sector d in time t and Hdt is the proportion of foreign-owned firms in downstream sector d.

14. Common Empirical Approach (4) 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)? Baseline model (Javorcik, 2004): detecting spillovers

15. Our Empirical Approach (1) 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: 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 Detecting technology transfers:

16. Our Empirical Approach (2) • OLS estimation biased. • Standard “endogenuos” OP approach using Wooldridge’s (2009) one step GMM estimator. • 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. • 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.

17. Data • Technology and Competitiveness Survey (TCS) 2009 and onwards • Sample of more than 7,500 firms • Vietnamese Enterprise Survey (various years) • Population of all registered enterprises in Vietnam with 30 employees or more and representative sample of smaller firms • TCS implemented by GSO as part of Vietnam Enterprise Survey and so data can be combined. • Supply Use Tables (SUT) for Vietnam in 2007 to measure proportion of inputs/outputs traded between sectors. • Export and import data at 4-digit level taken from COMTRADE – control variables.

18. Summary Statistics (1)

19. Summary Statistics (2) Note: Time-varying sector level controls also included: concentration, imports and exports.

20. Results (1) • Positive forward spillovers - Negative backward spillovers - No horizontal spillovers • Consistent across all models • There is a clear distinction between externalities and directtechnology transfers • even after controlling for technology transfers a large part of FDI spillovers remains unexplained. • But we find that: • Forward spillovers: • 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. • IV: Cannot conclude anything about whether upstream spillovers come from JVs or 100% foreign owned FDIs. Forward linkages generally positive through the externality effect.

21. Results (2) • Backward spillovers: • Negative spillovers are found and are due to wholly foreign-owned firms. • 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: • Are there any knowledge spillover benefits to domestic Vietnamese firms from being directly linked with FDI firms?

22. 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.

23. Conclusion (1) • 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). • 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. • Absorptive capacity can maybe cushion firms from negative backward spillovers • Additional supportive evidence.

24. Zooming in on the Direct Tech Transfers • Purpose sampling using a methodological triangulation approach • 7 countries including Vietnam • Data collected based on an identical semi-structured interview guide. The sample of firms were selected as follows (purpose and sequential/snowball sampling): • 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. • 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. • 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.

25. Identifying Links: Vietnam

26. Identifying Links: Kenya

27. 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.