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Technology transfers, foreign investment and productivity spillovers: Evidence from Vietnam John Rand University of Copenhagen Presentation based on work done in collaboration with Carol Newman, Theo Talbot and Finn Tarp. Motivation.

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Technology transfers, foreign investment and productivity spillovers:Evidence from VietnamJohn RandUniversity of CopenhagenPresentation based on work done in collaboration with Carol Newman, Theo Talbot and Finn Tarp


  • Attracting FDI is a policy priority in many developing countries, including Vietnam.

  • Aside from providing jobs and capital, FDI firms also bring new technology and knowledge.

    • Argument is that FDI firms are likely to be technologically superior to domestic firms.

  • Through their interactions, knowledge/new technology can be transferred to domestic sector leading to productivity improvements.

  • This can happen through many different mechanisms but disentangling these empirically have been challenging.

  • While the topic has received a lot of attention in the literature there is conflicting empirical evidence on the nature of spillovers and limited evidence on the underlying mechanisms.

Interactions what do we mean
Interactions – What do we mean?

  • Recent newspaper example

  • Taiwanese company

  • Binh Duong chosen, because other Taiwanese companies located here + good business environment.

  • Produce lighting products for exports to the EU and US.

  • Machinery and intermediate inputs imported from China.

  • Interactions??? Vertical spillovers???

What we do
What we do ….

  • Use a unique data source to analyze various mechanisms for spillovers from foreign-invested firms to the domestic enterprises in Vietnam

    • We examine whether horizontal, forward and backward spillovers exist in this context

    • We disentangle contractual technology transfers from externalities associated with FDI using a measure gathered from specially designed survey data

    • We consider the extent to which competition effects dominate positive externalities from FDI.

    • We compare spillovers from joint-venture FDI firms and wholly-foreign owned firms.

Conceptual framework 1
Conceptual framework (1)

  • Horizontal or intra-sector spillovers (Caves, 1996):

    FDI firm has firm-specific asset with a public good characteristic (e.g. knowledge or superior technology)

    Cannot prevent it from being transferred to competing firms

    E.g. through worker mobility, business or other networks, etc.

  • Vertical or inter-sector spillovers (Rodriguez-Clare 1996):

    Through the supply chain

    Backward: from foreign firms to domestic input suppliers by increasing demand for specialized inputs.

    Forward: from foreign intermediate input suppliers to domestic producers by increasing the production of more complex inputs.

    To illustrate…..

Conceptual framework 3
Conceptual framework (3)

Backward spillovers:

  • Positive:

    • Deliberate knowledge transfer e.g. technical assistance, management experience, quality assurance (Moran 2001).

    • Incentives for suppliers to improve quality of inputs (Javorcik 2004).

    • Scale economies.

  • Negative:

    • Asymmetric bargaining power (Girma et al. 2008).

    • Domestic firms not suited to producing input varieties demanded by foreign firms (Rodriguez-Clare 1996).

    • Increased competition from other foreign firms supplying inputs (Aitken and Harrison 1999) or from imported inputs.

Conceptual framework 4
Conceptual framework (4)

Forward spillovers:

Forward spillovers have been very little attention in the literature.

  • Positive:

    • Embodied technologies (Girma et al 2008)

    • Accompanying services (Javorcik 2004)

    • Competition effects

  • Negative:

    • ‘Lock-in’ to using inputs purchased from FDI firms

    • Asymmetric bargaining power possible if FDI firms gain dominant position upstream

    • Cultural factors

Empirical evidence
Empirical Evidence

  • Horizontal spillovers:

    • Very little empirical evidence that they exist

    • Foreign-invested firms compete with domestic firms in the same sector – incentive to prevent their technology from leaking (Javorcik 2004)

    • Barrios et al. (2011), Blalock and Gertler (2008), Bwalya (2006), Damijan et al. (2008), Javorcik (2004) and Kugler (2006) - none find evidence for horizontal spillovers

  • Backward spillovers:

    • Javorcik (2004)- Lithuania

    • Blalock and Gertler (2008) – Indonesia

    • Kugler (2006) - Columbia

  • Forward spillovers:

    • No evidence (as far as we know)

Related issues
Related issues

  • Characteristics of foreign and domestic firms may matter:

    • Javorcik (2004) – backward spillovers only evident from partially-owned foreign firms.

    • Giroud et al (2012), Marin and Bell (2006) – spillovers more likely from firms that are technologically/knowledge intensive.

    • Crespo and Fontoura (2007) – absorptive capacity of domestic firms matters

      • Blomstrom and Sjoholm (1999) – export status of firm

      • Aitken and Harrison (1999) – firm size

      • Marin and Bell (2006) – investments in technology and training

  • Distinction between externalities and actual technology transfers:

    • Giroud et al. (2012) and Zanfei (2012) critique literature on this point

    • Smeets (2008) – technology transfers and spillovers are distinct concepts that should be considered as such in empirical analysis

    • This is one of our key points of departure…..

Common Empirical Approach (1)

  • Measurement of spillovers (Javorcik, 2004)

  • Horizontal spillovers: the proportion of total revenue, R, within each 4-digit sector, j, accounted for by k foreign-owned firms (firms denoted with subscript i and time with t).

Common Empirical Approach (2)

  • Forward spillovers: the proportion of total revenue in upstream sectors accounted for by foreign-owned firms

    utis the proportion of inputs into sector jthat are purchased from sector u in time t and Hut is the proportion of foreign-owned firms in upstream sector u.

Common empirical approach 3
Common Empirical Approach (3)

  • Backward spillovers: the proportion of total revenue in downstream sectors accounted for by foreign-owned firms

    dtis the proportion of output from sector jthat is sold to sector d in time t and Hdt is the proportion of foreign-owned firms in downstream sector d.

Common empirical approach 4
Common Empirical Approach (4)

Y: value added

L: total labor input

K: capital inputs

i: firm fixed effects

sj: 4-digit sector fixed effects

t : time fixed effects

  • How is productivity of firm related with foreign dominance within sectors (H), in upstream sectors (F) and in downstream sectors (B)?

Baseline model (Javorcik, 2004): detecting spillovers

Our empirical approach 1
Our Empirical Approach (1)

tech_back: firm received a technology transfer from a downstream firm

tech_for: firm received a technology transfer from an upstream firm

Two Marginal Effects of interest:

B: backward FDI spillovers due to direct technology transfers

F: forward FDI spillovers due to direct technology transfers

B: backward FDI spillovers due to externalities

F: forward FDI spillovers due to externalities

Detecting technology transfers:

Our empirical approach 2
Our Empirical Approach (2)

  • OLS estimation biased.

  • Standard “endogenuos” OP approach using Wooldridge’s (2009) one step GMM estimator.

    • Allows us to simultaneously address the problem of measurement error in the capital input which will place further downward bias on the estimate of capital.

  • Identification challenge: many potential confounding factors that impact on the change in the amount of FDI into a sector and the change in the productivity of the firm. We try to address most of the concerns.


  • Technology and Competitiveness Survey (TCS) 2009 and onwards

  • Sample of more than 7,500 firms

  • Vietnamese Enterprise Survey (various years)

    • Population of all registered enterprises in Vietnam with 30 employees or more and representative sample of smaller firms

  • TCS implemented by GSO as part of Vietnam Enterprise Survey and so data can be combined.

  • Supply Use Tables (SUT) for Vietnam in 2007 to measure proportion of inputs/outputs traded between sectors.

  • Export and import data at 4-digit level taken from COMTRADE – control variables.

Summary statistics 2
Summary Statistics (2)

Note: Time-varying sector level controls also included: concentration, imports and exports.

Results 1
Results (1)

  • Positive forward spillovers - Negative backward spillovers - No horizontal spillovers

    • Consistent across all models

  • There is a clear distinction between externalities and directtechnology transfers

    • even after controlling for technology transfers a large part of FDI spillovers remains unexplained.

  • But we find that:

    • Forward spillovers:

    • OLS: JVs create productivity externalities that filter along the supply chain. Wholly foreign-owned projects only enhance the productivity of domestic customers where there is a contractual obligation to transfer knowledge.

    • IV: Cannot conclude anything about whether upstream spillovers come from JVs or 100% foreign owned FDIs. Forward linkages generally positive through the externality effect.

Results 2
Results (2)

  • Backward spillovers:

  • Negative spillovers are found and are due to wholly foreign-owned firms.

  • Part of this is explained by negative competition (crowding out) effects. Controlling for sector concentration we also find negative spillovers from JVs in competitive sectors.

  • Raises a key question:

    • Are there any knowledge spillover benefits to domestic Vietnamese firms from being directly linked with FDI firms?

  • Are there any direct benefits from engaging with fdis
    Are there any direct benefits from engaging with FDIs?

    • No evidence that direct supply chain linkages are productivity enhancing.

    • No evidence that direct technology transfers are productivity enhancing.

    • Some evidence of negative productivity effects associated with having FDI customers once interaction with tech transfers is controlled for.

    Conclusion 1
    Conclusion (1)

    • Contrary to other empirical studies we find for Vietnam that forward linkages lead to positive productivity spillovers, but the main part of these are unexplained (through externalities).

    • Backward linkages negatively impact the productivity of domestic firms, and increased competition from imports explains most of the negative backward spillover from downstream FDI firms.

      • Absorptive capacity can maybe cushion firms from negative backward spillovers

    • Additional supportive evidence.

    Zooming in on the direct tech transfers
    Zooming in on the Direct Tech Transfers

    • Purpose sampling using a methodological triangulation approach

    • 7 countries including Vietnam

    • Data collected based on an identical semi-structured interview guide. The sample of firms were selected as follows (purpose and sequential/snowball sampling):

      • Semi-structured interviews with country IPAs. Should lead to the identification of the 15 most influential MNCs/FDIs with majority foreign ownership. FDIs/MNCs that produce intermediates for the domestic market (if present) should have high priority.

      • Semi-structured interviews with identified MNCs/FDIs. The interview should lead to the following identification : (i) three domestically owned industrial firms which are customers of the MNC/FDI. (ii) three domestically owned industrial firms which are suppliers to the MNC/FDI. (iii) three in-country direct competitors to the MNC/FDI.

      • The interviews above could lead to the identification of relevant (i) competitors , (ii) domestically owned industrial suppliers of FDIs/MNCs and (iii) domestically owned industrial customers of FDIs/MNCs. Semi-structured interviews carried out.

    Conclusion 2
    Conclusion (2)

    • Preconditions for vertical spillovers (within country) are relatively weak in the African countries considered due to less developed customer/supplier chains and networks (Economic Complexity).

    • However, for a given business network structure direct spillovers (especially forward linkages) are more likely to occur in the African sample.