Foreign Direct Investment, Productivity and Crowding-out: Dynamic Panel Evidence on Vietnamese Firms

This paper investigates the direct effect of FDI on productivity of firms with foreign capital in Vietnam; and whether the presence of firms with foreign capital has a crowding-out effect on domestically-owned firms. We utilize a rich dataset compiled by the Vietnamese General Statistical Office (GSO) from 2001–2010. An unbalanced panel consisting of 168,493 firms with a total of 504,643 observations in 28 industries is utilized in 3 different estimators: OLS, Fixed Effects and Generalized Method of Moments (GMM). The dynamic panel data approach GMM proposed by Arellano and Bond (1991) and Blundell and Bond (1998) is employed to control for firms’ unobserved heterogeneity, inputs and ownership endogeneity as well as measurement errors. We report that the share of foreign capital in firm equity has a positive and significant effect on productivity of foreign-owned firms in Vietnam. With respect to crowding-out/crowding-in effects, we identify opposing dynamics at work. On the one hand, we observe a firm-level crowding-out effect due to higher shares in turnover as the level of foreign capital increases. On the other hand, we observe an industry-level crowding-in effect as the share of foreign-owned firms in turnover is lower when the industry-level of foreign capital intensity increases. The findings indicate that domestically-owned Vietnamese firms tend to lose market share to their foreign-owned competitors when they compete head to head; but they also tend to benefit from higher levels of foreign capital invested in their industry. When evaluating crowding-in/crowding-out effects at both firm and industry level simultaneously, we conclude evidence of crowding-out effect of FDI on turnover share of domestically-owned Vietnamese firms. Finally, we report that the crowding-in/crowding-out effects do not differ as the level of foreign capital share differs between firms and industries.