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- Title
Does foreign direct investment benefit local firms? Evidence from a natural experiment study.
- Authors
Nguyen, Cuong Viet; Tran, Tuyen Quang; Vu, Huong Van
- Abstract
We examine the spillover effect of foreign direct investment (FDI) on domestic firms in Vietnam. We use distance between each district center and the 17th parallel north latitude as an instrumental variable for FDI firm density at the district level. The rationale for this instrument is that districts which are closer to the 17th parallel north latitude, are more likely to suffer from unexploded ordnance (UXO) from the Indochina wars and therefore attract fewer FDI firms. We find that 1% increase in FDI firm density leads to 0.2% increase in revenue and profit per employee of domestic firms. The main mechanism for this positive effect does not take place through technology spillovers but through backward linkages where domestic firms in districts with a higher FDI firm density have more FDI customers. Our study also shows the long‐term effect of war on the efficacy of domestic firms. In particular, 1% increase in the proportion of UXO‐contaminated areas reduces revenue and profit per employee of domestic firms by 0.28% and 0.29%, respectively.
- Subjects
VIETNAM; FOREIGN investments; BUSINESS revenue; HOUSEHOLD employees
- Publication
World Economy, 2024, Vol 47, Issue 3, p1191
- ISSN
0378-5920
- Publication type
Article
- DOI
10.1111/twec.13487