Less than expected—The minor role of foreign firms in upgrading domestic suppliers—The case of Vietnam

Abstract

Vietnam is an important case for studying the impact of foreign firms’ backward linkages on local firms’ productivity. As an emerging economy Vietnam became the second most popular FDI destination after China in Pacific Asia since 2014. Our empirical analysis for Vietnam as a whole demonstrates a significant difference in the productivity growth between domestic suppliers who have a direct linkage with foreign firms and non-suppliers. This is also true for the Southeast Region (SE) with Ho-Chi-Minh City as economic center. However, in the Red River Delta (RRD), that difference is not statistically significant. Based on in-depth interviews with domestic suppliers, we reveal that in the RRD, effects of foreign firms on the productivity upgrading of domestic suppliers are indirect and limited while internal factors like absorptive capacity are more important for the productivity growth. These regional differences can be traced back to different regional specializations which still persist from the pre-reform era.