Does Proximity to Foreign Invested Firms Stimulate Productivity Growth of Domestic Firms? Firmlevel Evidence from Vietnam

Inward foreign direct investment (FDI) is regarded as a key engine of industrial growth and technological progress, especially in emerging markets. Regarding the relevance of geographic proximity between foreign and domestic firms for FDI spillover effects, there is yet little clear evidence, owing to a lack of precise location specific firm-level data. This paper presents the so far spatially most detailed analysis of FDI spillover effects by geo-referencing the census of Vietnamese enterprises for the period 2005 to 2010, allowing us to measure the changing presence of foreign invested firms around each domestic firm. We apply a first-differenced two-stageleast- squares estimator to identify spillover effects from proximate FDI exposure on TFP growth of domestic manufacturing firms. We find positive and significant within-industry (horizontal) spillover effects within radii of 2 to 10 km, that decay beyond. Importantly, in particular small and medium enterprises (SMEs) gain from foreign firms in their vicinity. Furthermore, vertical spillovers through forward and backward linkages to other manufacturing firms are localized, while vertical spillovers from foreign firms in the service sector are less geographically restricted.