The impact of FDI spillovers on the productivity of domestically manufacturing firms and average wage in vietnam

INTRODUCTION

Problem statement

The growing presence of foreign direct investment (FDI) is anticipated to enhance productivity by providing local companies with opportunities to observe and adopt advanced technologies, particularly through horizontal spillovers related to worker mobility, competition, and demonstration effects Additionally, vertical integration fosters positive externalities by establishing effective upstream and downstream linkages between domestic firms and their foreign counterparts Furthermore, the entry of multinational corporations (MNCs) is likely to create employment opportunities and wage increases for local workers, thereby contributing to the overall restructuring and improvement of the economy.

To enhance its appeal to multinational corporations (MNCs) and facilitate internationalization, the government has implemented various incentive policies and legal reforms to attract foreign investment Previous studies highlight the indirect benefits of these measures, which operate through channels such as increased competition, knowledge demonstration, labor mobility, and vertical linkages These factors collectively contribute to capital formation, technology transfer, managerial skill enhancement, economies of scale, the development of a skilled workforce, and ultimately lead to improved productivity and market expansion (Blomstrom & Kokko, 1998).

Research by Gorodnichenko, Svejnar, and Terrell (2014) indicates that local firms in host countries experience significant positive spillovers primarily through their roles as suppliers for foreign partners This finding is supported by various empirical studies, including those by Behera (2017), Le and Pomfret (2011), and Liao et al.

2012) The others are optimistic that local enterprises can use high-tech outputs from those foreign subsidiaries as their intermediate inputs more easily (Ahmed, 2012; Kee, 2015).

Domestic firms are compelled to invest in advanced technology to maintain their competitive edge in the host market (Hamida, 2013) Multinational corporations (MNCs) with effective management practices can significantly boost the adaptive capacity of local firms by developing a skilled workforce (Parman, 2012) However, some research suggests that the potential benefits of positive demonstration effects may be undermined by increased competition in horizontal business relationships (Halpern & Murakozy, 2007) Additionally, wage disparities may hinder the transfer of labor from foreign subsidiaries to local companies (Huang & Zhang).

The impact of foreign direct investment (FDI) is complex, as employees of multinational corporations (MNCs) may eventually establish their own businesses and train future local workers This creates an ambiguous overall effect of FDI spillover, which varies across different contexts and is challenging to quantify accurately.

Foreign Direct Investment (FDI) can negatively impact local firms in host countries by increasing competitive pressure, potentially leading to the exit of domestic companies in the same industry, a phenomenon known as the crowding-out effect (Perri et al., 2013) Additionally, weak vertical linkages and low absorptive capacity in related sectors hinder local firms from reaping the benefits of FDI (Demena & Murshed, 2018; Fatima, 2016) Local firms with limited absorptive capabilities are particularly vulnerable in global competition, as they struggle to adapt to market changes and fail to fully leverage positive spillovers from foreign entities (Anwar & Phi, 2011; Jacobs et al., 2017) Ultimately, the extent to which local firms can capitalize on the advantages of FDI is closely tied to their internal capabilities and the overall business environment shaped by financial markets, networks, policies, and regulations (Perri & Peruffo, 2016).

Recent studies highlight that Vietnam remains a compelling destination for foreign direct investment (FDI) in Asia, despite receiving somewhat unclear externalities from FDI based on outdated data from 2000 to 2010.

Since the 2000s, Vietnam's economic growth has largely relied on foreign capital inflows, highlighting the strong link between foreign direct investment (FDI) and international trade, particularly exports Various studies have presented differing views on how trade openness impacts wages Additionally, reforms focused on investment and trade liberalization have enhanced the operations of both foreign-invested and domestic private firms, promoting export and import activities in the country.

In recent years, Vietnam's wage patterns have been significantly influenced by increasing foreign presence and trade openness The origin of foreign investors plays a crucial role in shaping labor demand, skill intensity requirements, and wage premiums in the host country For instance, Chinese investors typically have a high demand for blue-collar workers, which tends to depress wages for both unskilled and skilled labor While domestic firms in Vietnam focus on low-skilled production, FDI firms from developed countries prioritize technology and capital-intensive processes, intensifying competition for high-skilled workers This foreign presence can jeopardize unskilled employees, leading to job losses due to domestic firm exits or the adoption of labor-saving technologies, ultimately resulting in an oversupply of labor, reduced average wages, and increased wage inequality Additionally, the gender wage gap persists, with female workers facing lower wages and fewer opportunities, compounded by societal biases Despite the complex effects of FDI on average salaries, there is a notable lack of research addressing this issue in Vietnam.

Vietnam has been making progress in closing the productivity gap with ASEAN countries, although it still lags behind the regional average (Nguyen, 2015) From 2016 to 2018, productivity increased by an average of 5.77% per year, surpassing the previous period's growth rate of 4.35% from 2011 to 2015 Between 2011 and 2018, domestic firms experienced an average productivity growth of 4.88% annually While labor productivity in Singapore, Malaysia, Thailand, and Indonesia was significantly higher than Vietnam's in 2011—by factors of 17.6, 6.3, 2.9, and 2.4 respectively—the gaps narrowed by 2018 to 13.7, 5.3, 2.7, and 2.2 times, indicating a positive trend in Vietnam's productivity development.

In 2019, the General Statistics Office highlighted that Vietnam's labor productivity remains significantly lower than that of other ASEAN countries, presenting substantial challenges for its economy Despite government efforts to attract foreign direct investment (FDI), evidence of productivity spillovers from FDI—both horizontal and vertical—remains scarce Additionally, research on wage spillovers related to FDI in Vietnam is limited, particularly regarding the impact on local workers' average wages Notably, positive wage spillovers may arise from increased competition in the labor market and improvements in labor productivity, as multinational corporations (MNCs) tend to offer higher wages to attract skilled workers This dynamic can compel domestic firms to raise their wages to compete for these talented individuals.

& Harrison, 1999; Driffield, 2004) Also, foreign entries may generate positive spillovers on the aggregate labor productivity of domestic firms, thereby pushing up equilibrium wages in the host country (Aitken, Hanson, & Harrison, 1997).

The productivity of domestic firms in the presence of foreign direct investment (FDI) and its impact on wages are influenced by various contextual factors in the host economy, including the type of FDI and firm characteristics (Willem, 2019) In emerging economies like Vietnam, local firms face challenges such as market competition from foreign entities, which can hinder their productivity and labor welfare (Newman et al., 2019; Nguyen & Sun, 2012) Therefore, it is essential to evaluate the effects of inward FDI on Vietnam's firms separately to uncover distinct narratives, given the country's recent integration into the global market Recent studies highlight the need for further exploration of different FDI spillover channels in developing nations, as existing research has mainly focused on horizontal externalities (Demena & Bergeijk, 2017; 2019; Rojec & Knell, 2017) Understanding vertical spillovers, particularly through supplier and customer relationships, is crucial for capturing the unique economic dynamics across countries and regions (Lenaerts & Merlevede, 2016) Additionally, examining firm heterogeneities—such as investment sectors, value chain linkages, and technological capacities—can significantly enhance the understanding of FDI spillover effects in emerging economies (Behera, 2017; Anwar et al., 2018) This thesis aims to enrich the existing literature on FDI spillover, particularly within the context of Vietnam's transitional economy.

The thesis significantly contributes to understanding horizontal spillovers and their effects on wages, highlighting how foreign direct investment (FDI) can foster sustainable development in host economies through corporate social responsibility, managerial knowledge transfer, and labor training (Huang & Zhang, 2017; Zhang & Shang, 2018) Consequently, local employees may experience enhanced labor productivity and capacity building, enabling them to negotiate for higher wages (Javorcik, 2015; Nguyen & Ramstetter, 2017) This has led researchers to focus on wage disparities between the FDI and domestic sectors, which illuminate the determinants of wage gaps in the presence of foreign investment (Nguyen, 2015; Nguyen & Ramstetter, 2017; Stoyanov & Zubanov, 2014) Furthermore, it opens avenues for investigating the horizontal spillover effects on wages within host economies, where labor competition and productivity improvements can occur simultaneously.

This dissertation seeks to address two key questions: first, it examines the impact of foreign direct investment (FDI) spillovers on the productivity of domestic manufacturing firms, exploring the channels through which these effects occur, as well as identifying any facilitators or barriers involved Second, it investigates how horizontal FDI spillovers influence the average wages of labor within the host economy Detailed specifications of these research objectives will be provided in a subsequent section.

Background to the study - FDI in Vietnam

Over the past three decades, Vietnam's open-door policy has established a comprehensive legal framework that fosters a conducive business environment for foreign investors As a result, the country has seen a remarkable rise in total registered foreign direct investment (FDI), which has surged from 735 million USD.

Between 1990 and 2010, foreign direct investment (FDI) in Vietnam surged from 19.9 billion USD to 24.4 billion USD by 2016, as reported by the General Statistics Office (GSO) The number of registered projects also saw significant growth, increasing from 211 projects between 1988 and 1990 to 500 projects in 2000 and reaching 2,500 by 2017 As illustrated in Figure 1-1, FDI remained stable from 2000 to 2003, followed by a notable increase from 2004 to 2007, peaking in 2008 However, following the global financial crisis in 2008, FDI inflows into Vietnam plummeted in 2009, fluctuating until 2016 before experiencing a slight recovery in 2017.

Figure 1-1: Number of FDI projects and inward FDI capital in Vietnam from 2000 to 2017

Source: GSO, translated by the author

Foreign Direct Investment (FDI) has seen a significant rise in its contribution to total investment, increasing from 16% during 2001-2005 to nearly 25% from 2006-2017 Notably, the manufacturing and production sectors dominate this growth, accounting for approximately 70% of total inward FDI equity.

Foreign Direct Investment (FDI) in Vietnam's manufacturing sector significantly surpasses that in other industries like services and real estate, prompting this study to investigate the spillover effects of foreign firms on domestic enterprises The integration of foreign subsidiaries fosters technology transfer, enhancing domestic production capabilities In response to increased competition from foreign entities, many Vietnamese companies have upgraded their technology and equipment, leading to the production of new products and a reduction in imports of various manufactured goods, including construction materials and consumer electronics.

FDI share across economic sectors in Vietnam in 2017

■ Manufacturing ■ Services ■ Real estate ■ Retail ■ Construction ■ Agro-fbrestry-fisheries

Figure 1-2: FDI share across economic sectors in Vietnam in 2017 Source: GSO, drawn by the author

Foreign Direct Investment (FDI) has significantly contributed to Vietnam's GDP, with total national output from FDI rising from $15 billion (15.7%) in 2011 to $35 billion (over 18%) in 2015 By 2017, FDI accounted for nearly 20% of GDP and represented 23.7% of total social investment, underscoring its crucial role in driving the country's economic growth and development.

Figure 1-3: Total output accounted by the FDI sector from 2011 to 2015 Source: GSO, drawn by the author

The Foreign Direct Investment (FDI) sector has significantly boosted Vietnam's exports, as illustrated in figures 1-4 Between 1998 and 2015, Vietnam experienced a robust increase in export levels, with FDI playing a crucial role, contributing a substantial share to the nation's total export volume, starting from approximately 20 percent.

Foreign Direct Investment (FDI) significantly influenced export trends, peaking at over 40% in 2000, around 57% in 2006, and nearly 70% in 2016 Notably, the presence of FDI has also contributed to an increase in the export volume of domestic companies over the years.

Figure 1-4: FDI share of total export in Vietnam from 1998 to 2016 Source: VCCI, translated by the author

Foreign-invested enterprises significantly impacted the labor market, increasing employment from 500,000 workers in 2000 to 2.8 million in 2017, despite representing less than 5% of total labor usage Their presence not only provides direct jobs but also generates millions of indirect positions through supporting industries and local partnerships Workers in FDI enterprises benefit from standardized training and high discipline, resulting in higher qualifications, productivity, and income compared to those in domestic firms, alongside enhanced job stability and competition for skilled labor.

FDI and domestic sector which contribute to enhancing worker's compensation and bargaining power.

Number and labor share of FDI sector in total country’s labor 5

™ (thousand peo°pir - o/o of FDI labor share/ total countiy ’ s labor

Figure 1-5: Number and labor share of the FDI sector in the total country's labor from 2000 to

2017 Source: VCCI, translated by the author

The World Economic Forum has ranked key indicators that reflect the ability of transition economies to absorb positive foreign direct investment (FDI) spillovers for the periods 2014-2015 and 2017-2018 This ranking includes factors such as the provincial competitiveness index (PCI), availability of new technology, firm's absorptive capacity, FDI and technology transfer, and the quality and number of local suppliers Among Vietnam, China, and Thailand, Vietnam lags behind its neighbors in all spillover indicators, although there has been notable improvement in 2017-2018, with the exception of local supplier quality Vietnam's weakest areas remain the availability of new technology, absorptive capacity, and value chain width, with rankings around 120th.

16 position) Overall, figure 1-6 indicates that Vietnam has not well prepared for absorbing FDI spillovers.

Figure 1-6: Ranking in some indicators of FDI spillover (Note: the lower the column is, the better the performance is) Source: World Economic Forum WEF (2014, 2017), translated by the author

Although Vietnam has achieved high economic growth and is known as a relatively dynamic country under foreign presence, FDI's overall effect is very complicated The role of

Foreign Direct Investment (FDI) is highly valued by host countries for its potential to provide investment capital, promote exports, facilitate technology transfer, develop human resources, and create jobs However, while FDI can yield positive outcomes, it also brings about negative impacts and unavoidable indirect effects, known as spillovers, on the economy Many economists and scholars acknowledge that these spillover effects are unpredictable and vary significantly based on factors such as firm characteristics, sectoral dynamics, regional contexts, and even the broader national environment.

The recent influx of Foreign Direct Investment (FDI) in Vietnam has led to unexpected challenges, particularly in technology and knowledge transfer Many investors tend to introduce outdated technologies, leveraging the country's low labor costs and available resources Furthermore, the process of foreign technology transfer is regulated by state management agencies, making it challenging for Vietnam to accurately evaluate the true value of various technologies, especially in high-tech sectors Additionally, while direct technology transfer is significant, the potential for technology and knowledge spillovers from FDI presents a more appealing and less formal avenue for growth.

FDI and No of local Quality of Intra-industry Value chain technology suppliers local suppliers distribution width transfer

PCI rank Availability Firm 3 of new absorbtiv technology e capacity

Significance of study

This dissertation presents a conceptual framework that illustrates the direct and indirect impacts of inward foreign direct investment (FDI) on both firm productivity and wages, incorporating relevant theoretical concepts and the relationships among these elements, culminating in a research model.

Recent meta-analyses on FDI spillovers have emphasized the importance of separating spillover effects through different transmission channels (Demena & Bergeijk, 2017; Demena

Rojec and Knell (2017) emphasize the need for future research to distinguish between horizontal and vertical spillovers in foreign direct investment (FDI), particularly focusing on backward and forward spillovers arising from established vertical linkages between local firms and foreign affiliates They argue that prior studies have predominantly analyzed horizontal spillovers, which are less common than vertical ones Consequently, the primary objective of this research is to address this gap by investigating FDI spillovers through various mechanisms, including horizontal spillovers and both vertically backward and forward spillovers This study aims to enhance the understanding of FDI by employing multiple indicators, unlike many previous studies that relied on a single measure.

Measuring FDI spillover effects requires a multi-dimensional approach, which allows for a comprehensive assessment through various indicators Additionally, employing a combination of Fixed Effects Model (FEM), Random Effects Model (REM), and Generalized Method of Moments (GMM) enhances the robustness of the research findings.

Recent studies by Behera (2017) and Anwar et al (2018) highlight a lack of substantial evidence regarding firm heterogeneity, which can lead to biased estimations of spillover effects, often underestimating or overlooking negative spillovers This may not accurately reflect the reality, as many multinational corporations (MNCs) actively protect their technological secrets and intangible assets from competitors (Demena & Bergeijk, 2017) Furthermore, not all MNCs are inclined to share their knowledge, nor are all local firms prepared to leverage foreign investments Key issues contributing to biased spillover estimations include the failure to distinguish between horizontal and vertical spillovers and insufficient consideration of the absorptive capacity and heterogeneity of host firms (Demena & Bergeijk, 2017; Rojec & Knell, 2017) To address these gaps, Rojec & Knell (2017) and Jacobs et al (2017) advocate for further research into firm heterogeneity, which could provide better insights into spillover outcomes influenced by factors such as geographical distance and the absorptive capacity of domestic firms Accordingly, the dissertation's research objectives 2, 3, and 4 focus on examining moderating variables—such as human capital, technology gaps, financial development, and regional proximity—that interact with FDI spillover proxies to identify key facilitators or barriers to positive spillover effects.

Foreign investment in emerging countries not only provides capital but also enhances productivity, creates jobs, and builds skills for local workers This presence can improve labor productivity, positively impacting employees' wages and bargaining power Research indicates a notable wage disparity favoring the foreign direct investment (FDI) sector compared to the local sector, highlighting the economic benefits of foreign presence (Javorcik, 2015; Nguyen & Ramstetter, 2017; Nguyen, 2015).

Research from 2000 to 2009 indicates that wages offered by multinational corporations (MNCs) and joint venture/state-owned enterprises (SOEs) in Vietnam are significantly higher than those from domestic private firms, even after accounting for factors like size, capital intensity, education, and gender ratio (Nguyen & Ramstetter, 2017) Despite existing studies highlighting wage disparities between foreign and domestic sectors, there is a lack of research on the benefits that foreign presence brings to local worker wages and how these wage externalities differ by ownership type The objectives of this research aim to address these gaps, revealing that productivity and wage diffusion vary considerably across firms and regions with distinct characteristics The latest panel data from 2007 to 2015 offers current empirical findings on FDI spillover effects in Vietnam, which are valuable for managers, policymakers, and researchers interested in inward FDI impacts Notably, the exploration of wage spillovers represents a critical gap in the literature on FDI spillovers in emerging economies.

Based on the above justifications and significance, the dissertation attempts to fulfill the following research objectives by employing a large panel of Vietnamese manufacturing enterprises from 2007 to 2015:

1 First, investigating the effects of FDI spillovers through both vertical and horizontal channels on domestic firms' productivity.

2 Second, exploring the moderating effects of absorptive capabilities in terms of human capital, technology gap and financial development on productivity spillovers from FDI firms to Vietnamese manufacturing firms.

3 Third, examining whether productivity spillovers through vertical and horizontal channels are associated with regional effects.

4 Fourth, examining whether local firms in provinces located within 100 square kilometers (sq km.) of eight cities/ provinces with the highest FDI concentration receive greater FDI spillovers than those located outside 100 sq km of these areas.

5 Finally, investigating the effect of horizontal (intra-industry) FDI spillover on the average wage of domestic employees and whether ownership types influence wage spillovers from FDI.

Based on the above research objectives, the dissertation aims at answering the following research questions for further hypotheses testing:

1 Is there a positive/negative relationship between the productivity of Vietnamese domestic companies and horizontal/ vertically backward/ vertically forward technology spillovers from FDI firms?

2 Whether the relationship between FDI spillovers and productivity of domestic firms is improved with a higher level of human capital?

3 Whether the relationship between FDI spillovers and productivity of domestic firms is lower at the top 25 th and bottom 25 th percentile of the technology gap and is enhanced at the middle 25 th -75 th percentile of the technology gap?

4 Whether the relationship between FDI spillovers and productivity of domestic firms is improved with a higher level of financial development?

5 Whether FDI spillover effect on domestic firm productivity vary significantly across geographical/ economic regions and higher in more FDI-intensive regions?

6 Is there a positive relationship between horizontal FDI spillovers and the average wage of local firms? And whether this relationship varies across ownership types?

The findings of the thesis are expected to help the policymakers to review the policies and other institutional factors on national investment and domestic firms, given a backdrop for

Vietnam's open economy and rapidly evolving international trade landscape present opportunities for enhancing the benefits of foreign direct investment (FDI) through effective policies Research highlights the existence of FDI spillover effects, offering crucial insights for policymakers regarding the outcomes and mechanisms of FDI, as well as the factors that facilitate or hinder these benefits The intensity of FDI can significantly influence local productivity and economic growth both in the short and long term Therefore, timely policy interventions are essential to improve domestic production factors and strengthen local firms' capabilities, enabling them to adapt to ongoing economic changes It is vital for Vietnam to recognize the potential and challenges of knowledge spillovers and to prepare comprehensive policies for sustainable industry and regional development Understanding these dynamics is crucial for supporting local firms and the economy amid increasing FDI inflows.

Research highlights the significance of firm heterogeneity in influencing the extent of productivity and wage spillovers Therefore, it is essential for companies in domestic manufacturing industries to adopt effective strategies and establish clear priorities.

Positive FDI spillover is not automatic; it significantly depends on the absorptive capacities of local firms and their ongoing efforts to enhance competitiveness and build vertical linkages with foreign partners, particularly for emerging global players from developing countries Therefore, it is crucial for the top management of local enterprises to comprehend the channels and mechanisms through which spillover effects are transmitted.

22 maximize the positive effects by enhancing their strengths, recognizing and taking advantage of the relevant strategies and policies.

Following Vietnam's signing of key free trade agreements with strategic partners, including the Russia-Belarus-Kazakhstan Customs Union in December 2014 and South Korea in May 2015, this thesis leverages recent panel data from 2007 to 2015 to deliver contemporary empirical insights into FDI spillover effects in Vietnam These findings are invaluable for managers, policymakers, and future researchers in international business, providing a foundation for recommendations aimed at enhancing positive productivity and wage spillovers from FDI firms to local Vietnamese enterprises and workers.

Methodology and Data

This thesis employs the Cobb-Douglas production function model to assess the influence of foreign direct investment (FDI) spillovers from foreign subsidiaries on the total factor productivity of domestic firms By focusing on technology spillover effects through total factor productivity, the study utilizes three indicators to measure horizontal, vertically backward, and vertically forward FDI spillovers, aiming to identify both productivity and wage spillovers The econometric analysis involves estimating spillover effects using extensive panel data through fixed effect and random effect models, with the Hausman test employed to determine the most suitable model Furthermore, dynamic panel data techniques (GMM) and various statistical tests are implemented to ensure the robustness of the findings.

The thesis uses secondary panel data at the enterprise level for the period from 2007 to

In 2015, data was sourced from the Enterprise Survey conducted by the General Statistics Office, resulting in a final analysis dataset comprising 385,976 observations from 2011 to 2015 for estimating productivity spillovers from Foreign Direct Investment (FDI) Additionally, 693,720 observations from 2007 to 2015 were utilized to assess the impact of horizontal FDI spillovers on average wages The research also incorporated input-output matrices from 2012 and 2015 to evaluate vertical FDI spillovers between FDI firms and their local upstream suppliers or downstream consumers.

Thesis organization

The thesis is structured into five chapters: Chapter 1 offers a brief introduction, while Chapter 2 reviews 24 relevant theoretical and empirical studies on foreign direct investment (FDI) and its spillover effects, establishing the conceptual framework, research model, and hypotheses Chapter 3 outlines the research methodology with appropriate justification Chapter 4 presents an analysis and discussion of the research results, and Chapter 5 concludes with insights and implications regarding the spillover effects of FDI in Vietnam.

LITERATURE REVIEW

FDI definition

Foreign direct investment (FDI) is a widely recognized investment strategy that has gained popularity over the decades Defined by scholars and international organizations, FDI involves long-term investments made by individuals or companies from one country (the delivering country) into another (the receiving country) This process includes the transfer of capital, property, technology, or other assets to establish or control enterprises in the host country for profit.

Foreign direct investment (FDI) enables individuals or companies to gain ownership of assets and control over business operations in the host country, distinguishing it from other financial instruments (Li & Rugman, 2007) Typically, these assets consist of business establishments that investors manage abroad, leading to the term "investors" being commonly used to refer to them.

Parent companies, often referred to as "subsidiaries" or "branch companies," play a crucial role in the formation of multinational corporations (MNCs) as they expand globally into host economies This expansion process leads to the establishment of MNCs, which will be defined in greater detail later in the article.

Vietnam's Investment Law of 2014 defines Foreign Direct Investment (FDI) as the capital or assets brought by foreign investors into Vietnam for investment purposes FDI involves direct investment, where investors not only provide capital but also engage in the management of their investments in the host economy Unlike foreign indirect investment, FDI requires substantial control, with the United Nations stipulating that a parent company must own at least 10% of the shares or voting rights of the foreign entity Additionally, FDI is characterized as a private investment channel, distinct from official development assistance (ODA) provided by governments or international organizations The law also outlines FDI enterprises, which include those established by foreign investors for investment activities in Vietnam, as well as Vietnamese companies that are acquired or merged with foreign investors.

Foreign Direct Investment (FDI) is characterized by several key features, as outlined by Brewer (1992) Firstly, it establishes the rights and obligations of investors in the host country Secondly, it grants investors ownership and management rights over their capital Thirdly, FDI serves as a means for multinational enterprises to expand their markets Additionally, it allows investors to transfer technology and techniques to local firms, fostering development Finally, FDI involves the participation of various financial markets and international trade, which will be further explored in relation to its impact on the host economy.

Multinational corporations (MNCs) definition

In his influential book on foreign direct investment (FDI) theories and practices, Moosa (2002) defines multinational corporations (MNCs) or multinational enterprises (MNEs) as companies that operate in at least two countries MNCs typically establish a parent company in their home country and then invest directly in other nations to create affiliates These affiliates can take the form of subsidiaries, which are incorporated entities with significant administrative control (ownership stake greater than 50%); associates, which are incorporated with at least a 10% stake and non-dominant voting rights; or branches, which are unincorporated and refer to the host country's fixed assets, either wholly-owned or as joint ventures.

The terminology surrounding business activities, such as 'international', 'multinational', and 'transnational', has evolved due to significant changes in global operations, including the establishment of production facilities across various countries and the facilitation of cross-border trade (Moosa, 2002; Blomstrom & Kokko, 1998; Byun & Wang, 1995) These developments have introduced new forms of transnational commerce, encompassing aspects like payment and transportation (Chittoor, 2009) As a result, these terms are often used interchangeably In this thesis, the terms "multinational corporations (MNCs)" and "FDI firms" will be utilized synonymously to denote foreign firms engaging in foreign direct investment within a host economy.

Multinational corporations (MNCs) aim to maximize shareholder wealth by increasing stock value and dividends while managing risk To achieve this, they prioritize international expansion and product diversification strategies The interconnected nature of MNCs allows for the effective transfer of technology, knowledge, resources, and management expertise between the parent company and its affiliates, enhancing their competitive advantage.

Multinational companies (MNCs) can be categorized into three main types based on their production orientation and integration in host countries Horizontal MNCs, like McDonald's, operate through horizontal foreign direct investment (FDI) to produce similar products across various nations Vertical MNCs, such as Adidas, establish subsidiaries to enhance both upstream and downstream sectors related to their core products Lastly, multi-dimensional MNCs, exemplified by Microsoft, possess production facilities that engage in both horizontal and vertical collaboration across different countries.

Temiz & Gokmen (2014) highlight the significant role of multinational corporations (MNCs) in the global economy, illustrating their extensive reach worldwide Their research reveals that the 500 largest MNCs account for over two-thirds of global trade, primarily involving transactions between these corporations and their subsidiaries or affiliates However, the distribution of MNCs is uneven, with more than 63,000 headquartered predominantly in the US, Europe, and Japan.

FDI classifications and its natures

Foreign Direct Investment (FDI) can be categorized based on diverse investor motivations and objectives (Dunning, 2000) Various classification methods exist for FDI, influenced by factors such as investment intentions, perspectives of investors and host countries, and ownership structures (Moosa, 2002; Denisia, 2010).

2.3.1 Classified by foreign investment motivations

Based on investment motivations, FDI can be categorized by four different types including resource-seeking FDI, market-seeking FDI, efficiency-seeking FDI, and strategic- asset-seeking FDI.

Resource-seeking foreign direct investment (FDI) targets the exploitation of affordable and plentiful natural and human resources in host countries, particularly in emerging markets like Southeast Asia and the Middle East, where cheap labor and oil are abundant Multinational corporations (MNCs) find low-cost labor, even if lacking in skills, highly appealing Additionally, this form of investment focuses on utilizing local assets, including popular tourist destinations and intellectual properties, to maximize returns.

2014) Besides, the dispute for strategic resources from competitors is undeniably a wise purpose of foreign investors.

Market-seeking foreign direct investment (FDI) focuses on entering new markets or sustaining current ones, as highlighted by Contractor, Kumar, and Kundu (2007) and Welch & Welch (1996) This type of investment leverages economic cooperation and trade preferential agreements between host nations and other regions, allowing investors to utilize the host country as a strategic base for expanding into regional and global markets (Ni et al., 2017).

Efficiency-seeking foreign direct investment (FDI) aims to enhance firm productivity by leveraging economies of scale and scope, while utilizing cost-effective resources in the host country This includes access to affordable raw materials, labor, and essential production factors such as electricity, water, transportation, and communication services, along with favorable legal regulations and tariff structures (Beugelsdijk, Smeets, & Zwinkels, 2008; Globerman, 1979).

(4) and Strategic-Asset-Seeking FDI: the purpose of the investment is to prevent the loss of resources to competitors and sustains the competitiveness of MNCs (Singla & George,

In 2013, it was highlighted that oil production and mining companies, despite not needing their oil reserves immediately, must implement strategies to safeguard these resources from competitors.

Figure 2-1: Classification of FDI by foreign investors' motivations/ purposes Source: author

2.3.2 Classified by host country’ orientation

According to Moosa (2002) and Li & Rugman (2007), foreign direct investment (FDI) can be categorized into three main types based on the perspective of the host country and government policies: first, FDI aimed at substituting imports; second, FDI focused on enhancing exports; and third, FDI aligned with other governmental objectives.

Import-substituting foreign direct investment (FDI) typically occurs in developing countries, facilitating the transition from importing goods to local production to meet domestic demand (Denisia, 2010; Li & Rugman, 2007; Moosa, 2002) This shift results in reduced imports for the host country and decreased exports from the investing nation Key factors influencing this FDI include domestic market capacity, raw material availability, trade barriers, and transaction costs (Demena & Murshed, 2018; Halaszovich & Lundan, 2016) For instance, despite having significant reserves of natural oil and gas, Vietnam often relies on imports due to insufficient exploitation skills and technology To address this, the Russian oil and gas corporation has partnered with Petrolimex in Vietnam to invest in local oil and gas extraction, aiming to reduce petroleum imports (Vietnam Energy Outlook Report, 2017).

Export-enhancing foreign direct investment (FDI) occurs when a host country leverages its comparative advantages in raw materials and intermediate goods to boost exports, targeting both multinational corporations' home countries and their affiliates' host nations (Li & Rugman, 2007; Moosa, 2002) This strategy aims to improve the balance of payments and is influenced by factors such as input costs, the removal of export restrictions, regional free trade agreements (FTAs), and various production incentives A notable example is the joint ventures in the Vietnam-Singapore Industrial Park.

Di An, Binh Duong are oriented to produce products that meet the demand of the Vietnamese market and export to regional countries (Saisho, 2018).

Finally, FDI toward other orientations of the government or government- initiated

Foreign Direct Investment (FDI) seeks to motivate companies to invest in underdeveloped manufacturing sectors within the host country, ultimately enhancing the balance of payments (Li & Rugman, 2007; Moosa, 2002) A notable example is the Vietnamese government's recent initiatives to attract foreign investors to green energy projects, including solar and biomass power plants These environmentally sustainable projects not only support Vietnam's long-term energy supply but also align with global sustainability goals (Wte, 2018).

Figure 2-2: Classification of FDI by the host country's orientation Source: author

Foreign direct investors have the flexibility to select their desired level of control in new ventures, which can be established through either full or partial ownership The degree of ownership influences control over key business decisions, such as product development, expansion strategies, and profit distribution Companies can opt for a wholly-owned enterprise or a joint venture, with this decision significantly impacting their financial commitment and equity stake in foreign operations.

(1) Wholly owned direct investment establishes an enterprise that foreign investors hold

100 percent of their assets abroad In this way, the parent company has complete control over the operations of the subsidiary.

A joint venture is a collaborative partnership where two or more firms create a new enterprise through shared investment or resources Ownership in a joint venture can vary, with partners holding majority stakes, equal shares, or minimal ownership, which affects their level of control The distribution of voting rights and the structure of the management board are crucial in determining the actual influence each partner has within the venture.

2.3.4 Classified by foreign investors’ orientation and FDI integration level

Based on investors' orientation and the degree of FDI integration, FDI can be classified into three types of horizontal FDI, vertical FDI and conglomerate FDI (Caves, 1974; Moosa, 2002).

Vertical foreign direct investment (FDI) involves a firm's expansion into both upstream and downstream sectors of its value chain, encompassing forward and backward vertical integration Forward vertical integration focuses on enhancing sales capabilities through investments in downstream activities such as marketing and sales, although it is less common than backward vertical integration Backward vertical integration allows companies to secure inputs for their operations by investing in upstream sectors, like factories or assembly plants Foreign-invested firms, such as Honda, can engage in both types of FDI to optimize their procurement, production, and distribution processes across various countries.

Horizontal Foreign Direct Investment (FDI) refers to the strategy employed by multinational corporations (MNCs) to enter foreign markets within the same industry, producing identical products as they do in their home country For instance, Microsoft, primarily known for computer software development, not only creates operating systems and productivity software but also establishes overseas subsidiaries to manufacture various software types, such as its acquisition of a Montreal-based company specializing in cartoon creation software This strategy enables companies to invest internationally within their sector, enhancing their capabilities and scale Such investments allow firms to acquire others in the same value chain, leading to economic benefits like increased profitability, expanded production systems, and, in some cases, the elimination of competitors.

Conglomerate Foreign Direct Investment (FDI) encompasses both horizontal and vertical investments, where multinational corporations (MNCs) create foreign subsidiaries in host countries to produce goods not available in their home country (Caves, 1974; Moosa, 2002) A conglomerate is defined as a parent company with multiple affiliates across various industries, typically formed through mergers and acquisitions This structure aims to mitigate risk by consolidating businesses from different sectors in diverse countries under one corporation An example of this is the Korean Chaebol, which operates as a parent company with numerous foreign subsidiaries in various industries to fulfill the supply and service needs of its parent firm.

Inward foreign direct investment (FDI) plays a crucial role in integrating into the host country's economy, fostering significant competition and interaction between foreign and domestic firms This dynamic leads to enhanced cooperation and the development of linkage relationships, ultimately benefiting both sectors (Aitken, Hanson, & Harrison, 1997).

Moreover, during this process, the unavoidable externalities from foreign presence can be generated and affect the host economy at both the macro and micro levels (Blomstrom &

Persson, 1983; Harrison & Aitken, 1999) Therefore, in this dissertation, such types of FDI classifications are used to investigate and measure the channels of FDI spillovers from MNCs to domestic owned firms.

Effect of FDI on the host economy

As the world witnessed a huge wave of globalization and trade liberalization, MNCs

Multinational corporations (MNCs) are increasingly implementing foreign direct investment (FDI) to leverage efficient production locations beyond their home countries, thereby enhancing competitiveness and reducing production costs (Dominguez & Mayrhofer, 2015; Amber, 2014) Their growth reflects significant political and economic shifts globally, as MNCs lead in research and development of new technologies while also playing a crucial role in poverty alleviation in developing nations (Herrera-Echeverri, Haar, & Estévez-Bretón, 2014) In the context of liberalized global trade, MNCs are pivotal in trade activities and wield substantial influence in shaping international trade regulations.

Multinational corporations (MNCs) play a crucial role in enhancing the economic growth of recipient countries, particularly in emerging markets, by providing capital, transferring technology, and imparting managerial skills (Blomstrom & Kokko, 1998; Goh, 2005; Javorcik, 2004a; Wang & Blomstrom, 2002) They contribute to job creation, boost gross domestic income, and elevate living standards in host nations (Herrera-Echeverri et al., 2014) Furthermore, through their investments and business operations, MNCs facilitate structural economic changes, promote import and export activities, and enable deeper integration into the global economy (Beugelsdijk et al., 2008; Silajdzic & Mehic, 2016).

Some scholars argue that foreign direct investment (FDI) enterprises exploit natural resources and cheap labor while contributing to significant pollution in host countries, with the majority of their profits being repatriated (Chung, 2014; Decreuse & Maarek, 2015; Rugman, 2016) Consequently, an excessive proportion of FDI in a host country's total investment can lead to economic vulnerability, external dependence, and long-term instability.

Besides, FDI enterprises, by their financial and technological strengths, also exert fierce competitive pressure on domestic enterprises leading to exit or crowding-out effects (Hamida, 2013; Perri et al., 2013).

Inward foreign direct investment (FDI) significantly impacts the host country's economy, presenting both advantages and disadvantages According to Moosa (2002), FDI influences various economic factors, including growth, employment, wages, trade flows, productivity, technology transfer, and the development of linkage relationships.

2.4.1 The effects of FDI on economic growth

Investment plays a crucial role in driving economic growth, with capital for development sourced primarily from domestic and foreign investments Domestic capital arises from savings and investments, while foreign capital is generated through commercial loans, indirect investments, and foreign direct investment (FDI) In transition economies, FDI is particularly vital for economic development, especially when domestic credit markets are inefficient By facilitating capital raising and resource mobilization, FDI significantly contributes to the economic advancement of host countries.

Inward foreign direct investment (FDI) can boost capital inflows from other multinational corporations (MNCs) and enhance domestic savings, ultimately improving the host economy's balance of payments Unlike other capital sources like official development assistance (ODA) or commercial loans, inward FDI offers long-term stability and commitment The presence of MNCs not only provides capital but also facilitates the transfer of advanced technology, machinery, and valuable intangible assets, including management expertise and innovative processes This synergy of increased capital and efficient resource utilization fosters favorable conditions for rising labor productivity and output, contributing to economic growth in the host country.

2.4.2 The effect of FDI on employment and wage

Inward foreign direct investment (FDI) fosters the creation of new businesses and the expansion of existing firms in host economies, leading to job creation and positively impacting the labor market in developing countries rich in labor resources The presence of FDI enterprises enables local workers to gain valuable knowledge, enhancing their technical skills and work disciplines, while also increasing their bargaining power Additionally, management-level employees benefit from acquiring extensive cross-cultural and regional knowledge, including skills in international market access, negotiation, trade promotion, and human resource management.

Javorcik (2015) conducted a comprehensive review of existing studies to explore the impact of Foreign Direct Investment (FDI) on wages from both worker and host-country perspectives The primary question addressed is whether FDI creates quality job opportunities in host countries The analysis focuses on how the presence of foreign firms affects local workers' wages, training opportunities, and job stability, referencing works by Barnes et al (2016) and Fukase.

From the host-country perspective, key areas of focus in foreign direct investment (FDI) include knowledge transfer, productivity advantages, and externalities (Blomstrom & Kokko, 1998; Wang et al., 2012) The research analyzes various FDI-related indicators such as total factor productivity (TFP), value-added per worker, output, employment, average wages, intra-industry spillovers, and capital utilization Javorcik (2015) highlights that FDI leads to higher compensation and improved job quality, contributing to increased aggregate productivity for both workers and host countries Additionally, positive intra-industry spillovers on productivity are supported by numerous studies (Damijan et al., 2013a; Du et al., 2012).

Foreign Direct Investment (FDI) inflows significantly enhance workers' income, as wages offered by FDI firms typically exceed those of domestic companies (Nguyen, 2015; Nguyen & Ramstetter, 2017) Additionally, FDI enterprises often provide training programs for local workers, fostering a skilled workforce and building human capital in the host country (Gorg, Strobl, & Walsh, 2007) The competition between FDI and domestic firms in the labor market incentivizes workers to improve their qualifications, leading to higher wages and increased bargaining power.

Foreign Direct Investment (FDI) projects can lead to job losses in traditional sectors due to land acquisition, as these enterprises often prioritize cheap, low-skill labor and utilize a probationary system for continuous workforce replacement Additionally, host countries may experience a "brain drain," as FDI projects attract skilled professionals with competitive compensation and appealing work environments To mitigate the loss of talent to domestic firms, FDI enterprises implement various strategies aimed at retaining skilled workers.

2.4.3 The effects of FDI on trade flows

The relationship between Foreign Direct Investment (FDI) and trade can vary based on the characteristics of host countries and specific industries Differences in factor endowments influence foreign investors' decisions to pursue either vertical or horizontal FDI strategies Horizontal FDI, which involves the production of identical products, typically results in a decrease in imports for host countries Conversely, vertical FDI, which focuses on complementing production, tends to increase imports of intermediate goods and exports of finished products.

Moreover, inward FDI is often motivated by the goals of market and export expansion.

Leveraging the comparative advantages of host countries in production inputs enhances their effectiveness in the international division of labor Developing nations often struggle to compete on costs, hindering their ability to enter global markets (Wang & Blomstrom, 2002) Multinational corporations (MNCs) significantly contribute to export expansion due to their established reputation and influence in the international arena Consequently, fostering export-oriented foreign direct investment (FDI) is a key strategy in the FDI attraction policies of these countries Through FDI, local firms gain access to global markets, improving their competitiveness and international experience over time.

2.4.4 The effect of FDI on productivity

Previous sections highlighted the significance of export-enhancing foreign direct investment (FDI) in fostering positive trade flows, economic growth, and productivity gains This section further underscores its ability to optimize economies of scale, resulting in reduced unit costs and increased productivity Conversely, import-substituting FDI can hinder local businesses from achieving optimal production scales, leading to lower productivity levels, particularly in small markets where production inefficiencies may arise.

Foreign Direct Investment (FDI) influences the productivity of domestic-owned enterprises, which is affected by various host determinants at the firm, industry, and country levels Key factors include a firm's absorptive capacity, resource efficiency, and industry characteristics, such as whether the sector is labor-intensive or capital-intensive, along with government regulations or incentives Additionally, the process of technology diffusion facilitated by FDI is crucial for understanding the relationship between FDI and productivity, a topic that will be explored further.

The theories of FDI

Moosa (2002) systematically synthesizes foreign direct investment (FDI) theories, highlighting their key assumptions and limitations while presenting empirical evidence The book categorizes FDI theories into three main groups: (1) theories based on the assumption of perfect markets, (2) theories that consider imperfect markets, and (3) alternative theories that offer diverse perspectives on why firms choose to invest in foreign countries.

Theories of perfect markets posit that neither producers nor consumers can influence market prices, ensuring high economic efficiency through perfect competition This concept forms the foundation for supply and demand theory, with key assumptions defining a perfectly competitive model.

All exchanged goods must be of identical quality and quantity, ensuring that there are no differences in specifications, qualities, or designs Buyers can purchase these goods without concern for the seller, as all units are treated equally.

• All sellers and buyers have a full understanding of the information related to trading and exchanging.

There is nothing to prevent a buyer or seller from entering or exiting from the market.

To sustain competitive advantages, firms in a perfect market must explore diverse strategies to minimize costs related to foreign direct investment (FDI) or to differentiate their products from competitors However, since these conditions seldom exist in reality, the concept of a perfect market remains an idealized model The table below outlines various FDI theories grounded in the assumptions of a perfect market.

Table 2-2: FDI theories assuming perfect market

1 Differential Rates of Return (Watkins,

- Perfect substitute: the intentional movement of capital from low rate of return (RR) country to high RR country to equate marginal return on investment and marginal cost.

-The importance of human capital as a facilitating factor for a higher rate of return in both rich and poor countries.

To mitigate risks with a high probability of occurrence, FDI firms should consider diversifying their investments across various industries and countries, as this strategy can help secure a favorable rate of return.

- FDI is more attractive for MNCs than portfolio diversification in terms of the degree of control which determines the ability to reduce risk.

3 Market Size (Balassa, 1966) -The host country's market size is an important determinant of inward FDI volume in that country as it reflects the MNCs' revenues there.

-The larger the market size is, the more the capacities are provided to foreign firms to optimize production factors and minimize costs.

Source: synthesized by author 2.5.2 Theories assuming imperfect markets

The theory of imperfect markets indicates that inefficiencies hinder business performance (Li & Rugman, 2007) Consequently, Foreign Direct Investment (FDI) entry modes are anticipated to help Multinational Corporations (MNCs) navigate these market imperfections and enhance their overall performance (Denisia, 2010).

Gorg & Greenaway, 2004) There are two main types of market imperfections: trade barriers and special knowledge.

• Trade barriers: A form of market imperfection is trade barriers such as import duties or quotas.

• Special knowledge: This kind of knowledge includes the expertise of techniques, technology, marketing, managerial skills, etc It can undeniably create the extraordinary competitiveness of a company against its competitors.

The following table summarizes FDI theories based on the assumptions of imperfect market.

Table 2-3: FDI theories assuming imperfect market

-A firm expanding globally suffers from liability of foreignness (language, culture, legal regulations, etc.) and find difficult to compete with local firms.

Foreign firms possess several key advantages, including strong brand recognition, advanced technology, superior managerial skills, substantial capital, effective marketing strategies, access to essential raw materials, economies of scale, and significant bargaining and political power These factors contribute to their competitive edge in the market.

When a company embarks on international expansion, it faces challenges such as high transaction costs, lengthy timelines, and market failures, including shortages of intermediate inputs, skilled labor, and specialized knowledge in its home market.

- There are many alternatives for FDI such as

No Hypothesis Contents export, licensing, franchising, subcontracting. Choosing FDI as the mode of entry may be a result of thoughtful consideration and preparations.

-The internationalization efforts contribute to reducing uncertainties, including both export and import choice.

Multinational corporations (MNCs) are driven by the immobility of production factors when making foreign investments, as proposed by Horst (1972b) By targeting specific regions with abundant low-cost labor and natural resources, MNCs can establish locational advantages that enhance their operational efficiency and profitability.

-Labor productivity, skill and labor disputes may affect the cost of production (wage) and FDI decisions.

-The combination of industrial organization, internationalization, and location hypothesis to some extent to clarify the following ideas.

(1) whether demand for a specific product in a country could be met by local supply and importing of that product.

(2) There are many different channels for production expansions instead of FDI.

+ The existence of comparative advantage (firm-specific advantages).

+ The choice between using advantages or selling/leasing them must be driven by benefits.

+ The existence of preferential production factors in the host economy.

-Explain the changes in the development trend of internationalization over time The theory of the product life cycle is built based on successive product innovation and promotion.

-The product life cycle is divided into 4 stages:

(1) Stage 1: Launch of new products -> the

The initial consumption country is typically the same as the manufacturing country due to the strong link between innovation and demand Manufacturers often originate from advanced industrial nations and begin exporting their innovative products to other high-income countries.

(2) Stage 2: The production process begins to take place in other leading industrial countries and gradually replaced the exports of launched products to these markets.

In Stage 3, the demand for new products from other countries grows significantly, enabling producers to benefit from large-scale outsourced production As a result, these producers transition into net exporters, where their export volume surpasses their import volume, effectively replacing the exports from the original innovative country to nations that lack the capability to produce these new products.

In the final stage, as technology and products become standardized for unskilled workers, low-cost developing countries begin exporting these goods, gradually overtaking the exports of the original producing nations Consequently, the countries that initially created these products shift their focus to developing new offerings, preparing to initiate a new product cycle.

The theory posits that when a firm engages in foreign direct investment (FDI) to expand its market presence, competitors within the industry may respond by undertaking similar initiatives to preserve their market shares.

- In this way, there is an increase in intra- industry competition level and entry concentration; however, a decrease in product diversity.

The other theories of FDI reflect the different perspectives of MNCs such as internal financing, entry mode decision, and host country's characteristics and fiscal and legal regulations.

Table 2-4: Other FDI theories from different perspectives

(Barlow and Wender, 1955) -The theory describes the situation that

MNCs use foreign affiliate's profit in one country to reinvest in the process of FDI expansion and business activities in that country in the long run.

- It is more appropriate to interpret FDI in emerging countries due to barriers to funds transfer as well as inefficient institutions and financial markets in the host economies.

2 Currency area (Aliber, 1970, 1971) -FDI decisions depend on the currency strength of the origin country.

-Taking the exchange rate into account, firms in country with a powerful currency are motivated in investing their capital abroad and vice versa.

3 Diversification with barriers to international capital flows (Agmon and

-The theory emphasizes two conditions of FDI implementation:

(1) FDI is a more attractive channel with lower barriers and costs in comparison with portfolio investment.

(2) Investors' awareness of MNCs' exceptional diversification chances.

The global presence of multinational corporations (MNCs) is significantly indicated by their stock prices, which tend to favor those MNCs that boast a robust and well-established subsidiary network.

-FDI as a source of factor endowments in kind of capital, technology, and skills transfer from home countries to host countries.

-Two kinds of FDI is mentioned:

(1) Trade-orientated FDI: enhancing trade, welfare and industrial restructuring in both countries

(2) Anti-trade-orientated FDI: adverse effects

5 Political Risk and Country Risk (Simon,

In emerging countries with significant political vulnerability, frequent changes in the legal and fiscal systems pose substantial challenges for foreign direct investment (FDI) firms, as these uncertainties can greatly impact business outcomes and investment returns.

(Hartman, 1985; Jun 1989) -Tax policy in both home and host country is an important determinant of FDI.

-The elimination of trade barriers such as tariffs, quota, etc in home economies may discourage outward FDI.

-The theory describes two sides of government regulations in response to MNCs' presence:

(1) Encourage inward FDI by providing incentives on fiscal (tax exemption/ reduction, depreciation, etc.); financial (subsidies, grant, etc.); market; information and flexible legal framework.

Definition of FDI spillover effect

Blomstrom, Kokko, Sjoholm, Wang, Aitken, Harrison, and Caves are recognized as pioneers in establishing foundational theories and providing empirical evidence for the spillover effects of Foreign Direct Investment (FDI) Their extensive research highlights both the direct and indirect impacts of FDI on host economies, emphasizing the significance of spillover effects They discuss how advanced technologies, best practices, and management expertise are transferred from multinational corporations and foreign subsidiaries to local firms in the host country.

Foreign Direct Investment (FDI) enterprises significantly influence domestic firms by intensifying competition, which compels local companies to enhance their operational efficiency This foreign presence facilitates knowledge diffusion and technology transfer, bolstering the technological capabilities and competitiveness of domestic enterprises Additionally, spillover effects may arise when FDI firms struggle to protect their intellectual assets, leading to information leaks through employee training and turnover Moreover, FDI enterprises can intentionally share valuable information and transfer technology and managerial skills to domestic firms within their supply chain.

Spillover effects are defined as foreign influences derived from intentional or unintentional interactions between economic entities over time (David & Rosenbloom, 1990).

The FDI spillover effect refers to the impact of multinational corporations (MNCs) on the performance of domestic firms in host countries, despite the lack of direct integration between their operations This phenomenon encompasses both intentional and unintentional externalities resulting from foreign investment, which can enhance local firms' competitiveness through market expansion, access to new resources, and the adoption of advanced technologies However, the presence of MNCs may also drive out less efficient domestic companies that cannot compete effectively within the industry.

Foreign Direct Investment (FDI) generates two primary types of spillovers: productivity spillover and market access spillover Productivity spillover allows domestic firms in the host country to observe, imitate, and enhance their technology, thereby adopting advanced business practices that lead to improved productivity at reduced costs.

Channels of FDI spillovers

To assess the externalities of foreign direct investment (FDI) enterprises on domestic businesses, spillover effects can be categorized based on various delivery channels and the direction of integration within production supply chains (Blomstrom & Kokko, 1998; Blomstrom & Sjoholm, 1999; Damijan, Rojec, Majcen, & Knell, 2013b).

2.7.1 Transmission mechanisms of FDI spillovers

FDI may spill over through four primary channels including imitation/ demonstration, labor turnover, competition and inter-linkage relationships with foreign subsidiaries.

Imitation and demonstration serve as key channels for technology spillover, particularly when a country adopts new technology without prior experience, which can lead to significant costs and risks (Damijan et al., 2013a) Successful implementation of technology by multinational corporations (MNCs) enhances accessibility and efficiency for domestic companies (Hamida & Gugler, 2009) Through foreign direct investment (FDI), MNCs introduce advanced technologies by establishing subsidiaries in the host country, fostering an environment that encourages domestic firms to innovate through joint ventures or technology transfers (Blomstrom & Sjoholm, 1999; Irsová & Havránek, 2013) However, the effective utilization of this technology is contingent upon the absorption capacity of local firms (Sourafel Girma, 2005; Jacobs et al., 2017; Marin).

The second spillover channel arises when domestic firms employ workers with experience in multinational corporations (MNCs), who bring valuable technological knowledge to local enterprises (Blomstrom & Kokko, 1998; Fosfuri, Motta, & R0nde, 2001) The spillover effect is particularly pronounced when these skilled individuals leverage their MNC-acquired expertise in their own startups (Damijan et al., 2013a) However, measuring the impact of these workers on domestic productivity poses challenges, especially when they lack the environment to fully utilize their skills According to Moosa (2002), various firm and industry-specific factors—including market size, capital intensity, financial development, and industry concentration—can influence labor productivity Consequently, the relationship between labor mobility and firm efficiency remains a topic of ongoing debate (Bellak, 2004; Gorodnichenko et al., 2014a; Peri & Urban, 2006).

The third spillover channel is driven by competitive pressure from foreign companies within the same industry To thrive in this highly competitive environment, domestic firms must enhance their operational efficiency by optimizing resource utilization, adopting innovative technologies, and boosting productivity (Blomstrom & Sjoholm, 1999; Malik, Rehman, Ashraf, & Abbas).

While foreign direct investment (FDI) can introduce new technologies and innovative products to the domestic market, it may also negatively impact local businesses The introduction of these new products can threaten the survival of domestic enterprises, particularly if they significantly substitute existing offerings Additionally, the market share gained by FDI enterprises can diminish the production efficiency of local firms, highlighting the competitive challenges faced by domestic industries.

Regarding competition, Salim & Bloch (2009) used firm-level panel data of 568

A survey conducted by the Central Board of Statistics on Indonesian chemical and pharmaceutical firms from 1988 to 2000 utilized FEM and REM methods to analyze the relationship between productivity growth and spillover effects The study employed the maximum likelihood method of stochastic production frontier and the Malmquist index to estimate productivity growth, revealing evidence of horizontal spillover Additionally, it identified competition and R&D as key factors influencing these horizontal productivity spillovers Expanding on this topic, Fatima (2016) examined the connection between local firms' productivity growth and FDI spillovers across different productivity quantiles This analysis utilized quantile regression on panel data from Turkish manufacturing enterprises spanning 37 industries from 2003 to 2010, categorizing TFP growth into five distinct quantiles.

The study examines the impact of absorptive capacity on local firms' productivity relative to industry best practices, specifically focusing on various quantiles (10th, 25th, 50th, 75th, and 90th) Findings reveal that local firms experience varying effects from horizontal spillovers, which stem from multinational corporations (MNCs), and forward spillovers Notably, firms positioned in higher quantiles tend to experience less negative impact from competition due to horizontal spillovers while benefiting more from forward spillovers.

2.7.1.4 Inter-linkage relationships with foreign subsidiaries

The FDI theory on the product life cycle highlights the gradual shift of production from the home country to more advantageous locations worldwide (Vernon, 1960; Moosa, 2002) In the third and fourth stages of this cycle, multinational corporations (MNCs) leverage specific advantages of host countries to scale up production and enhance the export of their innovative products initially launched in the first stage.

MNCs' export activities in host countries often involve establishing local production facilities, distribution networks, transportation infrastructure, and adapting to local tastes Their extensive operational experience and significant international influence enable MNCs to better identify factors that enhance exports and maximize profits compared to local businesses.

The collaboration between foreign direct investment (FDI) enterprises and local businesses within the supply chain creates significant spillover effects for domestic firms in host countries A key spillover channel is the interaction between local companies and foreign subsidiaries in both upstream and downstream sectors Downstream linkages occur when domestic firms purchase production inputs from FDI enterprises, while upstream linkages involve local businesses supplying intermediate inputs to foreign entities These backward linkages enable domestic firms to scale up production and enhance product quality to meet the stringent standards set by foreign subsidiaries.

Multinational corporations (MNCs) provide supplementary services alongside their products, which can create opportunities for domestic firms to adopt innovative processes and best practices (Mariotti et al., 2015) However, improving the quality of intermediate inputs may lead to increased production costs Consequently, domestic enterprises must invest in internal capacity building to effectively absorb technology and knowledge spillovers from foreign direct investment (FDI) firms (Jacobs et al., 2017; Mariotti et al., 2015).

In his pioneering study on the indirect effects of Foreign Direct Investment (FDI) in Vietnam, Giroud (2007) conducted semi-structured interviews with managers of multinational corporations (MNCs) in Vietnam and Malaysia, utilizing statistical methods for analysis The research focused on Vietnamese firms in the electronics and textiles subsectors, employing a five-point rating scale to assess 19 transfer practices related to MNCs, including input supply and training activities Findings indicated that while backward linkage spillovers to local firms exist, their impact is somewhat limited, with Malaysia outperforming Vietnam in absorbing management know-how and technology The study also highlighted the weaknesses in Vietnam's vertical linkages and lack of strategic orientation, leading Giroud to propose recommendations for enhancing linkages and building capacity in the host country.

■ Local firms sell inputs to FDI firms

Figure 2-4: Mechanisms of FDI spillovers Source: author

2.7.2 Horizontal and vertical channel of FDI spillovers

In the production supply chain, integration can occur through spillover channels, which involve either horizontal interactions between foreign direct investment (FDI) enterprises and domestic firms within the same industry or vertical interactions among upstream and downstream companies in the supply chain.

Horizontal spillovers refer to the intra-industry externalities generated by the activities of multinational corporations (MNCs) in the domestic market, as noted by Irsová & Havránek (2013) and Wang & Blomstrom (2002) These spillover effects arise from foreign direct investment (FDI) and can manifest through the imitation of foreign technology, labor mobility from FDI firms to local enterprises, or increased competition within the same industry (Blomstrom & Kokko, 1998; Carluccio & Fally, 2013; Damijan et al., 2013a; Khachoo & Sharma, 2016) However, distinguishing these effects can be quite challenging.

Inter-linkage relationships in the supply chain

Local firms buy inputs from FDI firms k—— 4

Foreign Direct Investment (FDI) in domestic markets enhances competitive pressure within industries, prompting domestic firms to boost their productivity, including total factor productivity (TFP) and labor productivity This increased competition can lead to improved competitiveness among local enterprises or may result in the exit of less competitive firms from the market.

Theoretical framework

Foreign Direct Investment (FDI) generates significant spillover effects that impact domestic firms in the host country, as highlighted in various discussions and theories surrounding FDI This dissertation seeks to bridge the existing research gap by presenting a theoretical framework that elucidates both the direct and indirect influences of FDI on local enterprises By concentrating on firm-level spillover effects, the framework aims to detail the relevant theories and mechanisms through which these benefits are transferred from foreign firms to domestic counterparts.

Neoclassical growth theory, as developed by Solow and Swan (1956) and later extended by Solow (1957), posits that wealthy countries, facing high labor costs and a shortage of production factors, tend to relocate production to poorer, labor-intensive nations This shift can result in a positive impact on economic growth through foreign direct investment (FDI), which provides capital and facilitates technological advancements Numerous studies and empirical evidence support the direct correlation between FDI and economic growth, particularly in transition economies (Balasubramanyam et al., 2006; Forte & Moura, 2013; Murthy, 2015; Silajdzic & Mehic, 2016; Temiz & Gokmen, 2014) and specifically in Vietnam (Anwar & Nguyen, 2010).

Foreign Direct Investment (FDI) theories at the firm level highlight the existence of spillover effects from foreign firms to domestic ones Blomstrom & Kokko (1998) elaborate on how these externalities spread, emphasizing several key theories The strategic and long-term factor theory suggests that a foreign firm's commitment can lead to intra- and inter-industry spillovers by facilitating imitation, demonstration, and the transfer of strategic production inputs The eclectic theory combines industrial organization, internationalization, and location theories, identifying three motivations for FDI: comparative advantages, favorable entry modes, and preferential production factors in the host economy Industrial organization theory highlights the ability of multinational corporations (MNCs) to mitigate the liability of foreignness through partnerships with local firms, resulting in spillovers via linkages The product life cycle theory outlines four stages of product development, leading to increased standardization for low-skilled workers in developing countries, thereby impacting trade dynamics Oligopolistic reactions theory posits that a firm's FDI aimed at market expansion can provoke competitor responses, influencing domestic firms through varying spillover effects Finally, Kojima's theory frames FDI as a conduit for transferring capital, technology, and skills from home to host countries, further enhancing trade and labor welfare.

The six initial theories explore the mechanisms through which foreign spillover effects influence domestic firms' productivity, trade flows, and employee wages Key spillover channels include vertical linkages (forward and backward) and horizontal channels such as imitation, competition, and worker mobility, as discussed in various critical reviews of Foreign Direct Investment (FDI) theories Additionally, existing literature highlights the significance of absorptive capacity, shaped by specific firm and industry characteristics, in determining the direction and magnitude of FDI spillovers.

Figure 2-5: A theoretical framework of relevant theories illustrating the presence of FDI spillovers Source: author

Productivity spillovers from FDI

Productivity spillover refers to the impact that foreign direct investment (FDI) has on the productivity of local firms in the host country, which can be both positive and negative (Blomstrom & Kokko, 1998) This phenomenon occurs through various channels, such as when foreign companies showcase their advanced technologies or provide training to local employees (Hamida & Gugler, 2009).

Standardized technology and products for low-skill workers in developing countries to replace home exports

Strategic and long-term factors theory (Reuber, 1973)

A set of strategic factors, long-term effects through spillover channels

A source of human, capital, technology transfer Enhancing trade and labor welfare or vice versa

Collaboration to relieve foreignness liability Transfer of foreign firms' specific factors

Product life cycle theory (Vernon, 1966)

An increase in intra-industry competition level and entry concentration ỷ

Advantages of location and production inputs

Direct effects on economic growth through the capital provision and technological QfkriiTV'AQ

Relevant theories on absorptive capacity

In Vietnam, local firms can enhance productivity by imitating successful practices of multinational corporations (MNCs) or offering higher wages to attract skilled workers (Fosfuri et al., 2001) Joint ventures with foreign partners provide local companies with significant advantages in learning and upgrading processes, which bolster their competitive edge (Blomstrom & Sjoholm, 1999) Additionally, the competitive pressure from foreign entities drives domestic firms to continually improve productivity through technology upgrades and enhanced human capital (Hallin & Holmstrom Lind, 2012) Furthermore, productivity gains can be achieved through vertical business linkages, as local firms serve as suppliers or customers for MNCs, facilitating knowledge and resource exchange (Giroud, 2007; Mariotti et al., 2015).

Blomstrom & Kokko (1998) significantly advanced the theoretical framework on FDI externalities in both home and host countries, providing a foundation for subsequent research Their work has inspired recent studies that refine estimation models and delve deeper into the complexities of the topic Utilizing case study methodology and limited empirical evidence on MNC activities and their spillover effects on local firms, the authors developed a conceptual framework that distinguishes between productivity spillovers and market access spillovers.

2.9.1 Channels of productivity spillovers from FDI

Recent studies have focused on the productivity spillovers from foreign direct investment (FDI), primarily examining two key channels: horizontal and vertical FDI spillovers (Damijan et al., 2013a; Fatima, 2016; Irsová & Havránek, 2013; Le & Pomfret, 2011).

Horizontally productivity spillovers occur when local competitors experience changes in productivity levels due to the presence of wholly foreign-owned firms or joint venture subsidiaries in the same industry These changes can result from positive foreign direct investment (FDI) externalities, such as technology diffusion and improved management practices, or negative externalities like heightened competition and intellectual property concerns Consequently, a higher foreign equity presence in a sector may lead to productivity gains for local firms, especially if they can access advanced technologies that become more affordable and accessible.

Domestic players can benefit from labor movement from the FDI sector, as these workers bring formal training and efficient processes, facilitating technology transfer and enhancing local firms' absorptive capabilities However, the presence of foreign firms may increase the risk of local firms failing due to intense competition and a crowding-out effect Additionally, foreign companies typically protect their technology from local competitors, making it challenging for local firms to adopt these innovations without significant effort and investment Consequently, local firms lacking resources, technology, and management expertise may struggle to compete effectively against foreign entrants.

Local firms in the host country face significant challenges in leveraging horizontal foreign direct investment (FDI) spillovers Companies with low competitiveness and limited absorptive capacity often struggle to benefit from the positive externalities provided by foreign competitors, potentially becoming victims of their market presence (Jordaan, 2013) Additionally, foreign firms excel at attracting and retaining top talent, making it difficult for domestic companies to secure high-skilled labor without substantial resources Consequently, the potential advantages of horizontal spillovers may be overshadowed by intense competition within the same industry in the host market.

Vertical spillover occurs through the backward and forward linkages established by domestic firms in collaboration with multinational corporations (MNCs), allowing local firms to participate in the supply and distribution chains of foreign entities (Halpern & Murakozy, 2007) These linkages enhance the capabilities of domestic firms and boost long-term productivity (Irsová & Havránek, 2013) Backward linkages arise when local firms supply inputs to foreign companies, generating positive externalities such as improved quality control and innovation to meet foreign market demands Conversely, forward linkages involve local firms utilizing foreign inputs in their production processes This dynamic is particularly relevant in emerging economies, where cost minimization and competitive advantages drive market expansion (Merlevede & Purice, 2016) However, the benefits of vertical spillover are often limited to firms with strong absorptive capacities, which must navigate challenges like stringent quality standards, increased operational costs, and heightened competition.

This dissertation explores the channels through which foreign direct investment (FDI) spillovers occur from foreign firms to domestic firms in host countries According to Carluccio & Fally (2013), horizontal spillovers can manifest through three primary mechanisms First, demonstration and imitation effects enhance the institutional, managerial, and technological capabilities of domestic firms Second, the competitive presence of FDI firms elevates market competitiveness, compelling domestic firms to upgrade their skills and boost productivity (Blomstrom & Kokko, 1998; Blomstrom & Sjoholm, 1999) Lastly, productivity spillovers can occur through the movement of employees from higher-technology FDI firms to domestic firms, or through complementary workers (Fosfuri et al., 2001).

Vertically backward spillover takes place in the upstream sector, involving interactions between local suppliers of intermediate goods and foreign subsidiaries Conversely, vertically forward spillover occurs in the downstream sector, where foreign subsidiaries engage with local customers.

Backward spillover describes how the activities of foreign firms impact local suppliers, prompting them to enhance their product quality and processes to meet higher foreign standards (Javorcik & Spatareanu, 2011) This proactive adaptation is essential for local providers to secure stable orders from multinational corporations (MNCs) Additionally, MNCs have a vested interest in sharing knowledge with local suppliers to improve production control (Hamida, 2013) As stakeholders in the MNC supply chain, local suppliers' practices significantly affect the performance of foreign subsidiaries Consequently, backward spillover is often viewed as the most beneficial channel for foreign direct investment (FDI) spillover.

Forward linkage refers to the external benefits that occur when the outputs of foreign subsidiaries are supplied to downstream customers in the host country The presence of foreign entities undeniably enhances the accessibility and affordability of technologically advanced foreign inputs for local producers.

In addition to the product itself, supplementary services represent a significant source of positive externalities from Foreign Direct Investment (FDI) While foreign entities may adopt varied strategies and incentives in their interactions with both upstream and downstream partners, these relationships can still foster beneficial outcomes.

Significant standards and technology upgraded

High-tech foreign inputs Supplementary services place for the existence of forwarding spillover.

Figure 2-6: FDI horizontal and vertical productivity spillovers from MNCs to domestic firms Source: author, adapted from Huynh et al (2019)

2.9.2 The effect of absorptive capabilities on productivity spillovers

Domestic host firms are motivated to enhance their internal capabilities to effectively absorb the benefits of positive foreign direct investment (FDI) externalities, particularly by fostering backward linkage relationships with foreign subsidiaries.

The absorptive capacity of indigenous firms in emerging economies is influenced by various factors, including R&D activities, innovation organization, external innovation relationships, human capital quality, family management, technological complexity, and market concentration However, in the context of transition economies, these capabilities are often limited to key indicators such as human capital, technology gaps, and financial development due to inadequate R&D investment Despite attempts to analyze R&D activities and expenditures, the findings remain inconclusive due to a lack of sufficient data.

Wages spillovers from FDI

2.10.1 The effect of FDI horizontal spillovers on wages:

Foreign Direct Investment (FDI) horizontal spillover is a well-established phenomenon in developing countries, where foreign equity from advanced nations enhances local industry performance This spillover occurs when foreign firms, through their capital, technology, and expertise, operate within the same sector as domestic companies, thereby boosting the overall industry output (Blomstrom & Kokko, 1998; Caves, 1974) Theoretical and empirical studies indicate that such horizontal spillovers create positive externalities, enabling local firms to access advanced technologies and managerial skills via demonstration, imitation, and workforce mobility (Blomstrom and Kokko, 1998; Dimelis, 2005; Gorodnichenko, Svejnar, and Terrell, 2014).

The presence of foreign firms can lead to both positive and negative effects on local industries, particularly in low-tech sectors like Vietnam, where unskilled labor is prevalent (Hamida, 2013; Le & Pomfret, 2011) While some studies suggest that foreign direct investment (FDI) enhances local workers' wages and creates quality jobs through increased productivity (Javorcik, 2015), the overall impact remains complex The literature identifies two key mechanisms through which foreign presence influences local wages: competition for labor between foreign affiliates and domestic companies, and improvements in aggregate productivity (Aitken & Harrison, 1999; Driffield, 2004; Pittiglio, Reganati, & Sica, 2015).

Under labor competition theory, foreign firms must offer higher wages than local companies to attract and retain highly skilled workers in the host market (Becker, 1975) Multinational enterprises (MNEs) typically pay above-market rates to ensure they have qualified and dedicated employees, thus reducing labor turnover (Aitken & Harrison, 1999; Driffield, 2004; Meyer, 2003) To safeguard their intangible assets and minimize trade losses, foreign companies use competitive wages as a strategy to address labor turnover challenges (Dunning, 2000; A Kokko, 2004).

Entering a developing market often presents challenges for foreign affiliates, particularly in the form of foreign liabilities that lead to a shortage of skilled workers Successfully recruiting and retaining these skilled employees is crucial for maintaining and enhancing long-term productivity, as well as ensuring the efficient operation of multinational corporations (MNCs).

2002) Besides, high payments can function as a marketing strategy highlighting the company's capital, revenue and high adaptability to the new environment.

Local workers in developing countries are well-acquainted with the business practices and wage policies of domestic firms However, highly qualified individuals increasingly recognize that foreign companies offer better compensation for their dream jobs This awareness enhances their bargaining power regarding expected wages As a result of this labor competition, domestic firms are compelled to raise wages to attract skilled workers, ultimately leading to an increase in wage equilibrium.

The impact of foreign direct investment (FDI) on salaries is influenced by various factors in the host country, including labor demand, capital intensity, firm size, skill intensity requirements, and the levels of minimum and premium wages, despite the MNC's wage policies (Stockhammer, 2008; Nelson, 2010; Ni et al., 2017).

Foreign Direct Investment (FDI) firms significantly benefit host countries by introducing advanced technology, management expertise, and productive capital Local businesses can enhance their labor productivity and reduce marginal costs by absorbing knowledge spillovers from foreign firms through observation and imitation The absorptive capacity of local labor is crucial for maximizing these productivity gains from FDI Typically, labor productivity is higher in foreign companies, leading to increased wages compared to local firms This dynamic creates favorable conditions that elevate the productivity of local businesses and raise wage levels for domestic workers The literature highlights the substantial positive impact of horizontal spillovers on wage growth and skill development in the workforce.

Foreign Direct Investment (FDI) can exacerbate wage inequality in developing countries by introducing management skills, market information, and advanced technology, which accelerate technological change and create a skill-driven economy (Figini & Gorg, 2011; Javorcik, 2015; Zulfiu-Alili, 2014) The spillover effects of FDI are particularly beneficial for industries, as they enhance production capabilities through high technology Consequently, multinational enterprises (MNEs) often seek higher-skilled labor, necessitating the development of advanced production skills within these developing nations (Feenstra).

& Hanson, 1997) Second, due to the fierce competition with MNEs, domestic firms are encouraged to adopt new technologies and enhance their research and development (Wood,

Technological advancements driven by foreign direct investment (FDI) can lead to a disparity in skill levels and elevate the wages of skilled workers in developing countries While FDI fosters economic growth through increased capital accumulation and productivity, it also contributes to rising income inequality within these nations.

Onaran and Stockhammer (2008) analyze the impact of foreign presence and trade openness on average wages in five European countries using manufacturing panel data from 2000 to 2004 Their wage bargaining model, which includes variables such as labor productivity and unemployment rates, reveals that foreign direct investment (FDI) has a positive effect on wages in the short run but a negative impact in the medium run, influenced by skill and capital intensity While international trade does not affect wages in the short run, a positive correlation between exports and wages and a negative correlation between imports and wages are observed in the medium run Additionally, Javorcik (2015) supports these findings, highlighting the overall positive effect of foreign presence on national productivity and employee salaries through job creation and training opportunities.

The relationship between trade openness and wages

Traditional trade theories highlight that trade openness positively influences a country's welfare by allowing production to align with its comparative advantages and abundant resources However, in developing countries, the specialization in unskilled labor-intensive production may lead to a decrease in the relative wage premium for skilled workers, potentially undermining their benefits.

2.10.2 products (Arbache, Dickerson, & Green, 2004) It is undeniable that trade openness is often accompanied by knowledge spillovers in terms of technological upgrades and inward capital, leading to higher demand for qualified workers (Marjit, Beladi, & Chakrabarti, 2004). Compared with industrialized countries, the impact of trade liberalization from the perspective of developing countries is quite different The premises of international economics emphasize the effect of international trade on intra-industry and inter-industry wage dispersion and the change in relative wages due to unbalanced worker mobility, such as increasing demand for skilled labor in export-intensive industries and a shock to labor demand in import industries (Martins & Opromolla, 2009; Onaran & Stockhammer, 2008).

Recent studies indicate that firm-level trade openness significantly impacts wages in the formal employment sector of host countries In the short term, trade openness tends to reduce real wages for both skilled and unskilled workers, although it can create better-paying jobs for unskilled labor while leading to wage declines for skilled labor in developing nations (Onaran & Stockhammer, 2008) Economists suggest that the wage effects of trade are influenced by country and firm-specific characteristics, and may take time to manifest (Arbache et al., 2004) In the long run, trade's impact on wages is more closely tied to improvements in cost efficiency and productivity rather than short-term labor demand fluctuations (Monte, 2011) Additionally, it is crucial to analyze the effects of exports and imports on wages separately (Onaran & Stockhammer, 2008).

Importing high-quality intermediate goods can enhance efficiency and productivity for firms while also increasing wages for workers (Martins & Opromolla, 2009) However, an influx of new machinery and technologies may initially disrupt real output due to the imperfect allocation of skilled labor, leading to job losses for unqualified workers (Arbache et al., 2004) This shift tends to favor skilled workers, resulting in a temporary rise in their relative wages Nevertheless, as unskilled workers adapt to new technologies, the initial wage reductions may be mitigated Ultimately, increased imports can create competitive pressure on domestic firms, potentially leading to wage declines and greater wage inequality across industries and ownership sectors (Onaran & Stockhammer, 2008).

Exporters in developing countries typically operate in high-capital-intensive industries and depend on skilled labor, granting workers significant bargaining power to negotiate their wages As these firms seek to expand globally, they must adapt their products to meet international standards Offering higher compensation is one effective strategy to motivate workers, encouraging them to work diligently towards shared objectives.

Research model and hypotheses

2.11.1 Firm productivity spillover under FDIpresence

Based on the work of Blomstrom & Kokko (1998) and empirical findings by (Anwar

Productivity spillover occurs when local firms experience improvements in productivity and efficiency due to the presence of foreign multinational corporations (MNCs) This phenomenon can arise from the transfer of advanced technology and knowledge from MNCs' home countries to developing host nations, aimed at maintaining competitiveness Additionally, the competitive pressure from foreign firms can challenge local businesses, prompting them to adapt and innovate However, the evidence supporting the extent of these foreign direct investment (FDI) spillover effects, both inter and intra-industry, remains limited due to insufficient empirical analysis Ultimately, the authors highlight that the presence of foreign firms enhances "allocative efficiency" within the host country.

"technical efficiency" in the host country, thereby enhancing the productivity of domestic host firms More important, spillovers are positively related to the host country's internal capacity and competitiveness.

There are a wide range of MNCs' activities or consequences associated with inward

Foreign Direct Investment (FDI) can significantly impact local industries by either diminishing monopolistic power or stimulating competition among local firms It facilitates the transfer of management expertise through training and employee mobility, while also fostering strong backward and forward linkages between subsidiaries and local suppliers or customers This includes the adoption of improved techniques in inventory management, quality control, and standards Additionally, local firms adapt their management and marketing strategies to thrive in a more competitive environment (Blomstrom & Kokko, 1998) Productivity spillovers from FDI can be measured through three key channels: horizontal spillover, vertically backward spillover, and vertically forward spillover.

Hypothesis H1: The productivity of Vietnamese domestic companies is negatively associated with the horizontal technology spillovers from FDI firms.

Hypothesis H2a: The productivity of Vietnamese domestic companies is positively associated with the vertical backward spillover from FDI firms.

Hypothesis H2b: The productivity of Vietnamese domestic companies is positively associated with the vertical forward spillover from FDI firms.

2.11.2 The importance of absorptive capabilities

The presence of foreign firms in a host market enhances local firms' ability to benefit from foreign direct investment (FDI) spillovers, particularly when there is a well-trained labor force with high absorptive capacity (Ahmed, 2012) Conversely, inadequate human capital development can hinder domestic firms from capitalizing on these opportunities, resulting in lost potential benefits Therefore, acquiring human capital and ensuring access to high-skilled labor are crucial for local firms to harness positive FDI spillovers and improve productivity (Anwar & Nguyen, 2014) Notably, the movement of labor from foreign subsidiaries to local firms has emerged as a significant channel for FDI spillovers in various countries.

(Demena, 2015; Havranek & Irsova, 2011) Hence, the proposed hypothesis is as follows:

Hypothesis H3: The relationship between FDI spillovers and productivity of domestic firms is improved with a higher level of human capital.

Research indicates that the technological gap between foreign and local firms significantly influences technology transfer and productivity spillovers, with a notable inverse relationship between the gap and successful technology transfer (Carluccio & Fally, 2013; Sourafel Girma & Wakelin, 2007; Jacobs et al., 2017; Tsekouras et al., 2015) Technology upgrades are vital for enhancing productivity, and Girma & Wakelin (2007) categorize the technology gap into three subgroups: the top 20th percentile, the 20th-80th percentile, and the bottom 20th percentile A minimal gap reduces local firms' motivation to imitate, while a large gap poses challenges for low-technological-frontier firms Kounetas (2015) suggests that the middle gap is optimal for facilitating technology transfer and local firms' adoption.

Hypothesis H4a: The relationship between FDI spillovers and productivity of domestic firms is lower at the top 25 th and bottom 25 th percentile of the technology gap.

Hypothesis H4b: The relationship between FDI spillovers and productivity of domestic firms is enhanced at the middle 25 th -75 th percentile of the technology gap.

Financial development is a crucial indicator of a firm's financial health, often overlooked in empirical studies Surplus financial resources enable organizations to pursue new ventures, navigate uncertainties, and adapt to rapid changes, thereby enhancing competitiveness and fostering technology upgrades and human capital investment (Lin & Liu, 2012; Zhang, Yang, & Zhang, 2018) Additionally, firms with robust financial development are better positioned to absorb knowledge and technology spillovers from foreign direct investment (FDI) Therefore, we propose the following hypothesis.

Hypothesis H5: The relationship between FDI spillovers and productivity of domestic firms is improved with a higher level of financial development.

2.11.3 The effect of regional effects and geographical distance on productivity spillovers

The geographic distribution of Foreign Direct Investment (FDI) significantly impacts the extent of FDI spillover effects Foreign investors choose investment locations by evaluating the pros and cons of various regions Domestic firms situated in export processing or industrial zones that offer favorable foreign investment policies are more likely to experience technology spillover Research by Chen, Poncet, and Xiong (2017) indicates that local firms near multinational enterprises (MNEs) can gain from export spillover, as MNEs typically possess greater expertise in export activities.

Foreign investments are typically concentrated in well-developed regions of the host country, where a skilled workforce and lower energy costs are present (Dang, 2013) Additionally, the impact of these investments on institutional development and quality has been investigated (Demir, 2016; Krammer, 2015; Long, Yang, & Zhang, 2015; Ran, Voon, & Li, 2007) Consequently, the study formulates the following hypotheses.

Hypothesis H6a: FDI spillover effect on domestic firm productivity vary significantly across geographical regions and higher in more FDI-intensive regions.

Hypothesis H6b: FDI spillover effect on domestic firm productivity vary significantly across economic regions and higher in more FDI-intensive regions.

There is strong evidence for the negative influences of geographical distance between foreign firms and local firms on the possible productivity spillover (Halpern & Murakozy,

The distance between foreign affiliates and local firms is inversely related to the spillover effects, meaning that local companies situated near multinational corporations (MNCs) have greater opportunities to observe and emulate their foreign competitors, ultimately enhancing their productivity and performance This proximity also exposes local firms to advanced technology and management practices employed by foreign entities, facilitating technology transfer and fostering long-term productivity improvements To address the lack of data on physical distances between foreign and domestic firms in Vietnam, this study measures the provincial distance (within 100 km) from domestic firms to the eight cities with the highest concentration of accumulated foreign direct investment (FDI), namely Ha Noi, Bac Giang, Hai Phong, Thanh Hoa, Binh Duong, Dong Nai, Ba Ria - Vung Tau, and Ho Chi Minh Thus, the proposed hypothesis is established.

Local firms situated within 100 square kilometers of the most foreign direct investment (FDI)-intensive provinces or cities experience significantly greater spillover effects compared to those located beyond this distance This hypothesis suggests that proximity to high FDI areas enhances the benefits for nearby local businesses, leading to increased economic growth and development in these regions.

2.11.4 The effect of horizontal spillovers on the average wage

While extensive research has been conducted on productivity and export spillovers, there is limited evidence regarding the impact of foreign direct investment (FDI) spillovers on local workers' average wages Previous studies have shown that foreign firms tend to offer higher wages compared to domestic firms, with this wage differential being particularly pronounced in joint venture ownership scenarios (Nguyen, 2015; Nguyen & Ramstetter).

Intra-industry foreign direct investment (FDI) spillovers can positively impact local average wages by enhancing labor productivity due to the presence of foreign firms (Earle, 2017) Research indicates a notable wage gap favoring foreign-employed workers over their domestic counterparts (Huang & Zhang, 2017; Stoyanov & Zubanov, 2014) FDI firms are inclined to offer higher wages to attract and retain skilled labor, which helps preserve their intangible assets and knowledge Consequently, local companies must adapt to this wage trend to remain competitive in attracting high-skilled workers in the host market (Driffield, 2004) This leads to the hypothesis that FDI influences local wage dynamics.

Hypothesis H8: Horizontal FDI spillovers under foreign presence positively affect the average wage of local firms in the same industry with foreign firms.

Wage patterns and the adaptation to inward foreign direct investment (FDI) are significantly influenced by ownership types, including state-owned enterprises (SOEs), private firms, wholly foreign-owned firms, joint ventures, and joint-stock companies Research indicates that wholly foreign-owned firms and joint ventures with MNCs and SOEs tend to offer higher wages due to skill bias, while the private sector often provides lower compensation due to minimal skill requirements and cultural familiarity Nonetheless, the presence of foreign entities is believed to have both direct and indirect effects on the restructuring of the labor market in the host country.

Hypothesis H9: The effects of horizontal FDI spillover on average wages vary across ownership types.

The main hypotheses have been well illustrated in the figure below.

Figure 2-7: Research model Source: author

METHODOLOGY

EMPIRICAL FINDINGS AND DISCUSSIONS

CONCLUSION AND IMPLICATIONS