Inward foreign direct investment and local wages: The case of Vietnam’s wholesale and retail industry

While Vietnam’s low labour cost offers a major incentive to attract foreign direct investment (FDI) and unambiguously benefits foreign firms themselves, there is scant evidence on whether inward FDI raises local incomes in any general sense. This study contributes to filling the gap by quantifying the impact of FDI on wages paid by domestic firms in the wholesale and retail trades. Firm level data are analyzed for the period 2009–2013 using a generalized method of moments estimator with Bartik-type instruments to address potential endogeneity. The findings suggest that an increased presence of foreign firms tends to lower wages paid by domestic firms. Disaggregated estimations reveal that the negative wage impact is borne by private firms, although not state owned firms, and by firms operating in low wage activities even as those in high wage activities experience a wage boost. These findings suggest a more cautious approach to attracting FDI by capitalizing on a low labour cost position.