Determinants of linkages between foreign direct investment firms and domestic firms in Vietnam

Abstract

Foreign direct investment (FDI) is an important sector of many developing economies in general and of Vietnam in particular. In Vietnam, the FDI sector contributed up to 27.7% of the average economic growth rate of 6.0% per year from 2010 to 2018. Besides this contribution, operations of FDI in Vietnam reveal many limitations, the most noticeable of which is the weak linkage between FDI and Vietnamese firms. This article examines determinants of FDI-domestic firms linkage in Vietnam. This research looks at all three types of linkage, including horizontal linkage, vertical linkage, and supply-backward linkage. Factors that have a positive impact on linkages are provincial economic growth, firms’ technology level, regional factors, being located in industrial zones, and operating in the manufacturing sector. Macroeconomic instability has a negative impact on linkage. The quality of economic governance, as measured by the Provincial Competitiveness Index, is important for attracting FDI, but does not affect linkages.