Doctoral dissertation: FDI spillover effects on Vietnam textile enterprises

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The aim of the thesis: The thesis is aimed at reviewing theories about FDI spillover effects on domestic enterprises, indicating a number of channels through which FDI spillover effects on Vietnam textile enterprises are transferred; In addition, the thesis analyzes and deletes the reality of FDI spillover effects on Vietnam textile enterprises. As a result, several major factors affecting FDI spillover effects on Vietnam textile enterprises are pointed out.

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Nội dung Text: Doctoral dissertation: FDI spillover effects on Vietnam textile enterprises

1 INTRODUCTION 1. The essence of the thesis Foreign direct investment (FDI) plays an important role in developing the socio-economy in developing countries, including Vietnam. Vietnam has attracted and utilized FDI for 25 years, but there have been a lot of problems. The amount of FDI in enterprises, particularly in textile and garment businesses is still low. The textile industry has developed well and has become one of the major industries of Vietnam. However, textile and garment enterprises are now facing difficulties and challenges. Although the quality and models of textile and garment products have been improved, they have still proved poor. In addition, there are few overseas markets. Owing to the increasingly severe criteria, Vietnamese enterprises need to modernize technology, renovate management, improve the human recourses, improve modes and comply with international regulations and standards in order to increase their competitiveness. With the existence of FDI, Vietnam enterprises will have to improve their productivities and business performance, boosting the process of transferring modern technology, improving local workforce in all aspects. Furthermore, FDI has consolidated the relation between FDI enterprises with domestic suppliers, leading to higher productivities and better performance in textile enterprises and ultimate economic growth of the country. The FDI quantitative effects on the economy have been researched and analyzed in the world. A lot of research has found out that FDI spillover effects can be positive, negative, or mixed. In Vietnam, although a lot of research on FDI spillover effects on domestic enterprises has been conducted, no research has been made about those on Vietnam textile enterprises. Therefore, the author has decided to carry out research on “FDI spillover effects on Vietnam textile enterprises”. 2. The aim of the thesis - The thesis is aimed at reviewing theories about FDI spillover effects on domestic enterprises, indicating a number of channels through which FDI spillover effects on Vietnam textile enterprises are transferred; In addition, the thesis analyzes and deletes the reality of FDI spillover effects on Vietnam textile enterprises. As a result, several major factors affecting FDI spillover effects on Vietnam textile enterprises are pointed out. - The thesis also makes several recommendations for taking the advantages of positive spillover effects and limiting the negative ones on Vietnam textile enterprises. 3. An overall review of the research 3.1. Research in other countries A lot of researches have been done regarding FDI effects on domestic enterprises. Sgard (2001) has pointed out that FDI creates positive spillover effects on TFP. Haddad and Harrison (1993) have concluded that enterprises with high ratios of FDI create lower productivities than enterprises with lower ratios of FDI. By using network data, Begoa and Sancher-Robles (2003) have indicated that FDI creates positive spillover effects on the economy when the invested countries posse a good human resources, stable economies and free markets. According to Laura Alfaro (2003), FDI creates positive spillover effects on the productivities of processing enterprises and negative spillover effects on agriculture and mining industries. Javorcik (2004) has shown the positive spillover effects of FDI enterprises on medium of the domestic
2 enterprises in Lithuania, increasing productivities and supplies made by domestic enterprises. Bwalya (2005), in Zambia, has indicated 3 main results: (i) FDI enterprises creates negative effects on domestic enterprises via across links; (ii) Domestic enterprises may get benefits from FDI enterprises’ participation; (iii) With the assistance from FDI enterprises, domestic ones will be able to increase their productivities and change their regional investments. By using data collected in the manufacturing field in Lithuania, Smarzynska (2002) has indicated that an increase of 10% of FDI enterprises’ participation in later stages of the production leads to an increase of 0.38% of the outputs of domestic enterprises. FDI enterprises selling in domestic markets obtain higher productivities than those selling in overseas markets. The author also points out that there are no differences between state-owned enterprises and joint-ventures or foreign-owned ones. These results are corresponding to the intellectual spillover effects from FDI enterprises on local suppliers. However, these are also resulted from the increasing competition in industries belonging to the earlier production process. 3.2. Research in Vietnam In Vietnam, there has been some research on FDI spillover effects on domestic enterprises. Le Thanh Thuy (2007) determines the level of FDI effects on productivities in Vietnam enterprises and points out that the gap in technology is one of the most decisive factors. Enterprises with advanced technology are able to absorb technological transfer from MNCs. Le Quoc Hoi and Richard Pomfret (2008) have found out that FDI creates technological effects horizontally. These effects occur in private enterprises and domestic enterprises with low research and development index. Le Quoc Hoi (2008) has explored data in enterprises in the period 2000-204 and applied Cobb-Douglas equation to find out the evidence about the adverse link between FDI enterprises with domestic ones. Nguyen Khac Minh (2008) has indicated that the ratio of capital in FDI enterprises tend to increase in domestic enterprises, and does not find effects in domestic enterprises both horizontally and vertically. Moreover, the ability to absorb capital of these enterprises is lower. Nguyen Ngoc Anh (2008) has indicated the positive effects in manufacturing industries, and horizontally positive effects in service areas. Nguyen Phi Lan (2008) has concluded that there is evidence of horizontally positive effects and vertically adverse link between FDI and processing, domestic manufacturing, while vertically negative effects only occur in domestic manufacturing enterprises. Above are some researches into the effects that FDI has on domestic enterprises. Although a lot of researches have been carried out in Vietnam and in the world, there is a limited number of quantitative researches into the FDI effects on textile enterprises. In this research, to solve the problem of endogenous input variables, the study used data array and sell the estimation method parameters (the Olley and Pakes, 1996 proposal). 4. The objects and scope 4.1. The objects of the research: The thesis studies the effects that FDI has on textile enterprises in Vietnam. 4.2. The scope of the research: The research has involved textile enterprises in 8 regions in Vietnam. The data are collected from yearly Statistics according to regions in the period 2000-2011, mainly from 2000-2008.
3 5. Methodology The thesis has applied various research methods including document analysis, consulting, etc. In addition, such methods as economic analysis, comparisons, statistics, logics have been used in order to clarify the issue. Preliminary data have been collected from surveys into expenses made by the General Statistics Department during the period 2000-2008. 6. New points in the thesis 6.1. New theoretical contributions The thesis distinguishes and emphasizes 8 channels through which FDI spillover effects on domestic enterprises in general and textile enterprises in particular. The thesis has pointed six channels transfer FDI spillover effects horizontally (i.e. spillover effects within an industry): (1) creating competition urging domestic enterprises to increase their business performances; (2) Presenting and Imitating; (3) Technological transfer and Research and Development activities within one industry; (4) Investing and developing human resources, and shifting workforce between FDI enterprises and domestic ones; (5) Connecting FDI and domestic enterprises in one industry; (6) Learning industrial managerial skills; In addition, there are two channels transferring FDI spillover effects vertically (i.e. inter-industry FDI spillover effects): spillover effects through backward linkages and spillover effects through forward linkages 6.2. Findings and recommendations: By applying the econometric model, the two methods: (i) sale of parameters, (ii) the estimated effect and random effect estimates, the thesis shows experimental evidence for that have negative spillover effects of the presence of FDI firms in the sample of firms. This is reflected in the negative coefficients and statistical significance of each variable in the Horizontal DN. This result implies that the presence of FDI firms have reduced productivity growth of domestic firms Textile due to competitive effects. However, for each group of enterprises of all sizes will have different effects. Specifically: (i) For the group of micro-scale enterprises are strongly influenced by the effect of competition; (ii) The group companies are small and medium scale, the spillover effect is positive vertically down dimensional and have a negative spillover effect horizontally; (iii) as for large-scale enterprise group, there is no horizontal spillovers and no vertical spillover effects, are not affected downsize business by FDI enterprises, can simultaneously be active materials, not to cooperate with companies that may Textile FDI direct cooperation with overseas parent companies to buy raw materials. 4) Specify and analyze a number of limitations and the main reason affecting the spillover effect of FDI to Vietnam Textile enterprises. Take advantage of the views of spillover effects and limit the negative spillover effects of FDI into Vietnam Textile companies, which emphasizes the breakthrough point 3, that: (i) must be screened FDI projects, selection, no FDI at all costs, technology factors have placed top and requires a commitment to technology transfer relevant to each sector and projects, (ii) attract Priority foreign investors in the world's largest MNCs in Vietnam and (iii) enhance the sound, and post-test inspection FDI enterprises. On the basis of 3 break point, the thesis offers systems solutions following: (1) Group solutions utilize positive spillover effects and (2) limited Solutions, preventive impact negative spill brought by FDI enterprises Textile Vietnam. At the same time, the thesis proposes a number of recommendations for Government , Vietnam Textile and Garment association. 7. Organization of the research
4 Apart from the Introduction, the Conclusion, the Appendix and References, the thesis includes 3 chapters as follows: Chapter 1: This chapter discusses some theories about FDI effects on domestic enterprises. Chapter 2: This chapter analyses the reality of FDI effects on Vietnam textile enterprises Chapter 3: This chapter provides some viewpoints and suggestions for exploring positive effects and limiting negative effects that FDI creates on productivities and business performance in Vietnam textile enterprises.
5 CHAPTER 1 SOME THERIES ABOUT FDI EFFECTS ON DOMETIC ENTERPRISES 1.1. Theoretical framework 1.1.1. Concepts: There are a lot of concepts about FDI, most of which indicate that FDI refers to the case when investors, individuals or organizations, invest an amount of capital that is big enough for the receiving countries to carry out business activities and services for profits and socio- economic benefits; This is a type of international investment that receiving countries expect not only large capital but also positive effects generated by FDI. It is a type of international transfer of capital through which capital owners expect to maximize the benefits of investments or to obtain profits from the receiving countries. In addition, FDI produces effects on invested countries. 1.1.2. Characteristics: (1) FDI is long-term and is conducted in various forms; (2) Investors directly manage, regulate and are responsible for projects and divide business output according to their capital. Parties participating in FDI projects must have different nationalities, speak different languages and are from different cultures. (3) FDI is a way to prolong “a production lifecycle”, “a technical lifecycle” and “internal migration of technical” and accompanied by three factors: import-export activities, technology transfer and international labor migration; (4) FDI projects are subject to various laws according to the regulation of “mutual benefits”; (5) Moreover, in construction, there are such forms as BOT, BTO, BT, BCC, etc. 1.1.2. Some theories and FDI stimuli: The author discusses Theory of International Lifecycle of Products; Theory about the market powers, etc. Those theories supplement one another in explaining the spillover effects that FDI creates on domestic enterprises. 1.2. Theoretical framework 1.2.1. Concepts and types of FDI effects. FDI “spillover effects” can be understood as indirect effects that appear when FDI enterprises generate effects on the local economies and cause domestic enterprises to change their behaviors such as changing their technology, changing their business strategies. Spillover effects can be considered as the performance of FDI enterprises that take place at the same time as the domestic enterprises’ changing their behaviors. 1.2.1.2. Types: (i) Horizontal spillover effects (that takes place within a sector); (ii) vertical spillover effects (i.e., inter-sector spillover effects) 1.2 . Rationale of spillover effects of FDI on domestic firms 1.2.1 . Definition and forms of FDI spillovers 1.2.1.1. Definition The concept of “spillover effects” (also known as crossover effects) of FDI can be interpreted as an indirect impact which occurs when the presence of FDI firms brings about influences on the economy of the country in general and forces domestic companies to change their behavior, as well as their technology and business strategies in particular. Spillover effects can be considered as the performance of FDI companies carried out simultaneously with the process domestic firms adjust their behaviors. 1.2.1.2. Forms: (i) horizontal spillover effects (spillover effects within an industry), (ii)
6 vertical spillover effects (spillover effects between sectors) 1.2.2. Transmission channels of FDI spillover affecting on domestic firms 1.2.2.1. Horizontal spillover effects (spillovers within an industry) (1) Putting competition pressure on domestic companies and forcing them to improve business efficiency: The presence of FDI enterprises has triggered more competition and greater pressure for domestic firms, primarily for companies in the same industry. The FDI enterprises can bring adverse effects to enterprises of the country, creating negative spillovers on yields and productivity of domestic enterprises, especially in the short term when they compete with the domestic firms and "take" their markets or human resources in the country, known as the competitive effects. This then pushes domestic enterprises to operate in less efficient production scales, consequently leading to low labor productivity. In the long term, many companies can learn about technology from FDI enterprises in order to participate and compete in the markets. With competition from FDI enterprises, domestic enterprises are forced to improve, find new technology, or distribute and use their resources efficiently. Thus, under the increase of competition and pressure to fend against competitors, domestic companies are required to operate more efficiently and to improve or apply new technology sooner. (2) Performance and imitation effects: performance (of FDI enterprises)/imitation (of domestic firms ) may be the most obvious spillover channel. Spillover effects occur when domestic firms learn or copy the advanced technology (including skills, techniques or management ) from the presence of FDI enterprises. The introduction of new technology into a new market can be risky for FDI enterprises and too costly for domestic ones to implement. If technology is used successfully by FDI enterprises, domestic enterprises will be encouraged to apply this technology. Spillover channels demonstrate "imitation" or "observational learning effect" through FDI firms. The domestic enterprises can observe FDI firms’ techniques and then imitate them. Due to the superior know-how technological advantages of the FDI firms, spillover effects can occur through the application of new technologies. Technology spillover effects can occur through imitation, technology for reversing and copying products and production process of FDI firms. Then domestic companies can copy the product and production process. Imitation is the main mechanism for the transmission of FDI to domestic firms and especially reversing technology allows technology transfer of new products manufactured with new processes. Any technological upgrading of domestic companies arising from imitation can lead to productivity spillovers from FDI firms to domestic firms. (3) Technological transfer and R&D activities in the same industry This is a very important channel to generate positive spillover effects of FDI, is a highly expected impact for all local businesses in general and each in particular. Technology transfer through FDI is an inexpensive technology spillover solution, being compatible with the limited resources of developing countries. In addition to capital, FDI firms also bring advanced production technology, skills, management, which domestic companies can receive through various channels. For this reason, the technology transfer will help improve all aspects of the domestic labor force. The FDI enterprises have numerous links with domestic suppliers, which are shown at two levels of relationships: domestic companies become suppliers of parts, accessories and materials for FDI firms, that is, acting the role of industry support while FDI enterprises ordered domestic companies to produce components and sell products and then
7 transfer technology to domestic firms. Another activity, which can stimulate spillovers and technology transfer, is the effective implementation of R&D activities of MNCs which may proceed in the host country. The MNCs often carry out intensified R&D activities, but most concentrated in the parent company, which limits the scale of the spillover effects. The focus of R&D activities carried out in foreign association is usually a change of mother technologies, so it is suitable for foreign markets. The spillover effects from R&D is usually generated outside of the host country and brought in through FDI. (4) Investment in human resources development and labor movement between FDI and domestic firms in the same industry. This is the spillover channel related to the ability of domestic firms to hire workers previously working for MNCs with the knowledge, experience, and ability to master the technology and apply it to domestic firms. It is also an important channel of spillover through the presence of FDI firms and then directly affects the productivity of domestic firms. This effect can be noted in the same industry as skilled workers and managers in FDI firms - those who have been trained with managerial skills and advanced techniques - move to domestic firms or set up their own businesses. The MNCs can provide their employees a form of training that cannot be replicated for local businesses or purchased from abroad. The labor movement between FDI firms and domestic firms takes place in two dimensions: (1) labor transfer from FDI firms to domestic firms, which is considered to be an important channel to generate positive spillover effects. The spillover effect occurs if the number of employees apply the knowledge learned during their time at FDI firms to the work at domestic companies, especially companies in the same industry as FDI firms’, or if they establish their own companies; (2) a number of employees after a period working for domestic companies and accumulating some necessary experience, they will apply for a position in FDI enterprises. (5) Association between FDI firms and domestic companies in manufacturing products Production association is also one of the most important channels generating positive spillover effects in the scale of most businesses. “Reverse” impact may occur in domestic firms supplying materials or distributing FDI firms’ products. The more the amounts of distributed products and provided materials are, the higher the spillover effect will be, that is, the proportional relationship. Production association includes two forms of vertical (outputs of one company will be inputs of another) and horizontal association (companies produce the same product). The association between FDI and domestic firms is not only beneficial to both parties involved but also contributes to the soundness and stability of the business environment. When being associated with FDI firms, domestic enterprises will have more business partners and markets, as well as more manufacturing experience. On the other hand, FDI enterprises can save transportation costs (such as when purchasing raw materials from domestic companies), and can obtain cheaper production inputs than imported ones. (6) Learning and imitating industrial management skills The superior organizational managerial skills of FDI enterprises can benefit the host country greatly. If the resources are used more efficiently, local businesses are able to improve their management and enhance efficiency of investments in their businesses. In addition, FDI can play an important role in introducing marketing and advertising techniques in the host countries’ economies. Paying close attention to quality is a key factor for success in international markets, and branding is an important part of successful marketing and of
8 expanding care for products from consumers. The MNCs often have better knowledge and experience in international markets, and thus can help local companies learn more about exporting activities. Through imitation or association with FDI firms, domestic enterprises can learn different managerial techniques and the importance of marketing strategy, and thus expand their domestic or international markets. 1.2.2.2 . The transmission channels of vertical spillovers (spillovers between sectors) Vertical spillovers occur as a result of the interaction between FDI and domestic enterprises in the same industry. That was the case when the MNCs function as suppliers (upstream - forward linkages) or buyers (downstream side-reverse linkages) of domestic firms in intermediate goods markets. (1) Spillovers through backward linkages: FDI can also contribute to technological improvements of local suppliers or potential suppliers by providing technical assistance and supporting these enterprises. With the increase in size, MNCs can bring benefits to local suppliers if it increases demand for local inputs. Spillover effects can be generated through a number of mechanisms. First, it is the productivity benefits of domestic enterprises directly from the technology transfer or from technology support of MNCs. Second, domestic firms require product quality and on-time- delivery of MNCs; Therefore, this encourages suppliers to improve manufacturing processes, technologies and delivery methods. Finally, spillovers can arise through the entry of MNCs with increased demand for intermediate products, which provide local businesses a better chance to get the benefits of economies of scale. (2) Spillovers through forward linkages: Forward linkages are formed when the presence of FDI enterprises leads to opportunities for domestic enterprises to access new technology, improve or reduce costs of weak intermediate inputs produced by the MNCs in the upstream sector. However, the attendance of MNCs causes difficulties for local businesses that provide intermediate the same goods as FDI enterprises, which forces these local providers to changes their business or get leave the markets. The forward linkage is the most obvious to demonstrate that MNCs offer higher quality input and/or at a lower price to produce goods for final consumers. However, we cannot exclude the possibility that upgrading the quality of production could lead to a rise in prices. If local businesses are not able to benefit from the quality improvements, they will suffer the negative effects related to increased expenses. In short, FDI enterprises may have spillover effects on the productivity of local competitors (horizontal spillovers) as well as domestic firms in upstream and downstream (vertical spillovers) . The technology transfer can take place through several channels. Local businesses can also gain benefits from the presence of new and professional services and providers as a result of the entry of MNCs . 1.3 . Factors affecting spillover effects of FDI on domestic firms 1.3.1 . Internal factors of the business 1.3.1.1. Organizational and managerial competence, which is expressed though: (i) levels of managing staff, (ii) levels of organization and management of the enterprise to improve the competence of managing and operating the enterprises, through which new positive spillover effects can be made use of and negative spillover effects of FDI can be limited. 1.3.1.2. Human resources, absorptive capacity and technology gap of local businesses. To
9 obtain technology spillovers, businesses must get their human resources ready to adapt themselves to requirements of the technology, with the ability to quickly acquire production processes and new technology. When new technology is introduced into the host country by FDI firms, the ability to observe, learn and absorb new technology of local businesses rests on the competence of their human resources. The decisive factor of FDI spillover is the absorption of domestic companies along with the impact of the technology gap between domestic and foreign enterprises. If the technology gap is too small, benefits will be transferred from FDI to domestic firms. However, the technology gap must not be too large as this will hinder the domestic firms to absorb technological advantages of FDI enterprises. 1.3.1.3. Export capacity of domestic firms. The domestic export enterprises face significant rivalry pressures in the foreign market and, therefore, FDI enterprises operating in domestic market will put additional pressure. If export capacity of domestic firms is boosted, the stress from domestic markets is reduced and positive impact associated with the competition from the MNCs is of less importance. In contrast, domestic companies which have been exposed to competition from FDI enterprises may have the capacity not only to absorb foreign technology but also to deal with competition by MNCs in the domestic market, thus preventing negative impacts through channels of competition. 1.3.1.4. Sizes of domestic firms. Competition from small businesses against FDI firms is unpronounceable, but the loss they suffer is considerable. Furthermore, companies lack sufficient production scale to mimic a number of technologies introduced by FDI enterprises. Therefore, the larger companies will probably gain more benefits from the participation of FDI enterprises. In addition, enterprises with different capacities will receive different benefits from spillover effects. 1.3.1.5. Financial strength: This factor is important for the operation of technological innovation. Enterprises with capital allow such activities as R & D and technology transfer to be carried out easily, and facilitate spillover effects from FDI. If companies know how to raise capital quickly, and how to use capital efficiently for technological innovation, the efficiency it brings is enormous, helping companies prove their position in the market . 1.3.2 . External factors of the business 1.3.2.1. Strategy of MNCs: If the sole purpose of FDI firms is to serve local markets, the transferred technology transfer must be in line with the domestic markets, creating opportunities for local business to receive technology from MNCs . If FDI enterprises only aim at exploiting cheap labors, their role and the training practice is limited in the host country. The result then will be unremarkable and technology spillovers from training can hardly be seen. 1.3.2.2. Institutional factor: Regulations, laws and institutions will determine the possibility that each agent can react to market signals. Copyright owning can limit the leakage and spread of technology from FDI to domestic firms, but it may stimulate technology transfer from the parent company to its subsidiaries. Incentive policies on tax and credits encourage investment in technological innovation, while other government supports also have a positive impact on technological innovation. Another factor that also affects the occurrence of the spillover effects is the use of multiple intermediate inputs of FDI enterprises, because this is an important condition for the occurrence of the spillovers through backward linkages. What motivates FDI enterprises to decide on overseas investment also influences the existence of FDI spillovers.
10 1.3.2.3. Competition in domestic markets. The stronger the competition is, the more advanced technology will be introduced into domestic markets. With a less competitive environment, the domestic companies will make fewer efforts to acquire and exploit technological spillovers from FDI enterprises. 1.3.2.4. Characteristics of FDI and ability to learn new technology of FDI enterprises FDI from different countries has the ability to create different spillover effects for domestic firms. Joint ventures are more likely to benefit from spillover effects than enterprises with 10% of foreign investment. The domestic firms benefit from positive horizontal spillovers from FDI enterprises LD with, but are faced with negative spillover effects from the 100% foreign- invested enterprises. Technology productivity gaps between FDI and domestic enterprises can stimulate spillover effects. If domestic firms have lower productivity than FDI firms, within a scope for them to be able to catch up, technology by imitating leading foreign technology. Another factor affecting the emergence of spillover effects is the accessibility of the new technology of FDI enterprises. The higher the ability of FDI firms operating in the host country to access new technology, the better the process generates positive spillover effects through technology leakage. 1.3.2.5. Regional effects. The scale of spillover effects is restricted by geographical distances or, at least, its effect is reduced proportionally to the distance. The reason is that the technology diffusion channel is intensified at the regional level; labor productivity and the performance impact is limited in distance, vertical linkages are mainly restricted according to different areas due to transportation costs. Finally, competitive efficiency is stimulated by the limitation of its scale of size. Productivity of domestic firms can be positively impacted by the emergence of foreign firms in the same region. 1.3.2.6. The development of supporting industries and related sectors: A system of developed supporting industries can provide enough raw material and components needed for FDI enterprises, helping them easily choose product supplies and reduce costs which is cheaper than when they purchase imported supplies. Therefore, the development of supporting industries in the country is also an important factor for the emergence of spillover effects. On the other hand, investments from FDI firms also provide an opportunity to develop supporting industries in the country, to meet the needs or raw materials and production parts of the FDI enterprises. 1.3.2.7. Information on the market. The market factors may also affect the choice and technology innovation. The lack of opportunities for interacting, capturing new technologies and cooperating with foreign S&T organizations will be the major obstacles to the process of technological innovation. 1.4. Model testing and evaluating the effect of FDI spillovers to domestic firms To test the spillover effects of FDI firms to domestic firms, the estimated model is defined as follows: LnYjit = α + β1LnKjit + β2LnLjit + β3Lnmjit + β4FSjit +β5Horizontaljt + β6Backwardjt + β7Forwjt + β8Herfjt + β9R&Djt + β10Gownshipjt + β11Fownshipjt + αtyear + αiindustry + αrregion + εit (1.1) j j In particular: Yit - output of firm i, industry j year t, K it capital of firm i, industry j year t, j measured by the value of total asserts from the beginning of the year; Lit - qualified labor of j firm i; industry j year t, represented by total salaries and bonuses on workers; mit - intermediate j inputs of firm i, industry j year t, measured by the value of intermediate inputs; FSit - the rate
11 of capital of foreign investment in firm i, industry j year t. Horizontaljt is to know the level of foreign participation in this sector and is calculated by the average proportion of FDI enterprises in all sectors, weight is measured by the proportion which taken by each enterprise output in industry output:  FS Y i j ijt ijt H orizontal jt  (1.2) Y i j ijt Therefore, the value of variables is increasing as well as the increasing in the FDI firms ouput and FDI share in this company. Backward variable represents the degree of foreign participation in the industry sectors that provide inputs to the companies they are working, and so it will reflect cooperation level between the domestic supplier and the clients which calls as MNCs. It is calculated as follows: Backward jt   a jk Horizontalkt k j (1.3) In particular: ajk is the proportion of sector j output supplied to industry k, it is derived from the matrix of the IO table. Forw Variables (forward) is defined as follows: Forw jt    jlt Horizontallt (1.4) l khi l  j In particular, the rate δjlt of industry j output purchased from sector l at time t . The inputs purchased inside the industry were excluded, because it was included in the Horizontal variable. Herf Variables (index of industrial concentration Herfindhal) is defined as follows: 2    X  H e r f it    gt  (1.5) g J   g J X gt  In particular, Xgt denotes the output of enterprises g at time t, g is the index of companies (domestic or FDI) in sectors J that have firm i. R & D variable is approximately equal to the Solow residual. Gownship and Fownship represents the state-owned enterprises and foreign ownership. Finally, the model also includes year dummies, industry and region. The fixed effects for time, sectors and regions to control the uncontrollable factors that influence changes in the attractiveness of a particular industry or region. Thus, the model estimates indicated the following thesis: ∆LnYjit α + β1∆LnKjit + β2∆LnLjit + β3∆Lnmjit + β4∆FSjit +β5∆Horizontaljt + = β6∆Backwardjt + β7∆Forwjt + β8∆Herfjt + β9∆R&Djt + (1.6) β10Gownshipjt + β11Fownshipjt + αtyear + αiindustry + αrregion + εit Production function to calibrate the Levinsohn - Petrin is estimated will measure total factor productivity. It is the difference between the actual output and the predicted output.
12 Chapter 2 SITUATION OF SPILLOVER IMPACT OF FOREIGN DIRECT INVESTMENT NOW TO VIETNAM TEXTILE INDUSTRY 2.1. Overview of foreign direct investment in the textile sector in Vietnam 2.1.1. Capital projects: The number of projects and total FDI capital in the Vietnam textile sector has increased over the years, which is the highest number of projects in 2008 with 360 projects and the capital nearly $ 2.2 billion. According to MPI, in 1998-2011, there were 2,049 FDI projects from 30 countries and territories investing in the textile sector, with total registered capital of over 10.7 billion. The period 2001-2011, there are 1,834 projects with total registered capital of $ 8.8 billion. 2.1.2. Type of Investment: Vietnam has attracted significant foreign investors in any form investing to the Vietnam Textile industry, particularly corporate form 100% foreign-owned and joint venture enterprises. In addition, FDI in the industrial zone and export processing zones producing textile exports has also increased. 2.1.3. Investment structure: The structure of FDI between the textile and garment sector imbalanced because almost all FDI projects invested in the garment industry, textile industry and then, finally, raw. Investors do not have a strong focus on this area because of low profit in the garment industry. 2.1.4. Areas of investment: Investment of FDI enterprises in the textile sector mainly focusing on the larger provinces and major cities such as Hanoi, Ho Chi Minh City, Binh Duong, Khanh Hoa. Due to the support policy is weak, only the industrial zones, export processing zones in major cities can meet the requirements of foreign investors. Moreover, the imbalance in investment areas that promote FDI has not been its best advantage. This involves unskilled focus too much in one place, while the other areas which need to address not being developed. 2.1.5. Investment partners: The majority partner investment in the textile sector of Vietnam is the business of fashion, apparel business in Asia and a number of investors in Europe, the Americas. The cause of this situation is due to the Western countries tend to develop to the sector which have high science and technology levels and high gray matter. On the other hand, Asia is the place where labor is cheap and abundant natural resources. The product produced is consumed in the domestic market and exported to foreign countries. Besides, in recent years, many manufacturers textiles from Europe and the United States have invested into Vietnam in many different forms. 2.2. Current status of the spillover effect of FDI to Vietnam textile enterprises 2.2.1. Current status of the spillover effects of FDI in horizontal (spillover effects within the textile sector, Vietnam) 2.2.1.1. Creating competitive pressures, forcing domestic firms enhance business efficiency. The appearance of the Textile FDI enterprises, with new and more efficient business methods and better quality products has forced the domestic textile enterprises to innovate to enhance competitiveness, stimulate business domestic change business methods. According to the survey, 39.66% Textile business maintaned their advantage by the price products factor , 53.82% companies take the advantage of search marketing. The discovery of new market segments, the potential demand of the consumers is the first advantage of many companies
13 entering the international arena. This is a positive move in the process of improving the competitiveness of enterprises. Increasing competition has forced Vietnam businesses to adjust and responded by moving to a higher quality product, which requires more advanced technology, more investment and require more highly skilled labor. According to the VCCI (2011), 68.16% Textile business has made efforts to improve the quality of product design. The Vietnam bussiness now faces fierce competition from FDI enterprises in all market segments, at the same time they having to deal with contraband and counterfeit goods from China dominate the bargains market segment. This situation has created an unhealthy competition, making difficulties for local businesses. Vietnam enterprises are weak in fashionable goods design, especially fashion items. Many businesses still have not built the brand and concentrate processing exports. FDI enterprises are considered the brand as the property and an important weapon to compete. They have invested a lot for your brand. Turning to the Vietnam business, there are many difficulties in building and developing brand. Many businesses underestimate the role of brands in competition; therefore, they have not focused on investing and building their brands. Features such as cost, research-oriented, production capacity, marketing and distribution networks are key factors for a successful enterprise and can compete effectively with the FDI enterprises. The domestic companies are at a disadvantage on those factors. They are forced to work harder to catch up the marketing capabilities of FDI enterprises. Enhancing competition has made the difficulty for small-scale enterprises Textile, leading to the decline of inefficient enterprises, and in short, the inefficient enterprises are easily excluded from the market. Besides, many domestic companies are strong enough to face the increasing competition in the new context. In the long term, through competition, the Vietnam Textile industry can develop better and allocated resources better. 2.2.1.2. Copy and demonstrate effects Vietnam garment and textile sector is fundamentally based on imitation and demonstration effects through models and developed technologies by foreign countries. The FDI firms entering Vietnam market is bring new product designs with advanced technology, allowing domestic companies copying and dissemination of technology from FDI enterprises. Product innovation, easily copied and technology can leak out through the replacement employee or the codified method. The mimic existing product choices lead to production know-how and technology for the development of enterprises in Vietnam. Hence, the spillover effects from the imitation of technology and knowledge of FDI enterprises in Vietnam Textile industry are quite large. Most Textile enterprises in Vietnam today is the small and medium. Many larger businesses owned advanced technology and can spillover effects from imitation is not as strong as before. However, there is still scope for spillovers through imitation if the MNCs introducing new technology. With the strong patent regime to protect intellectual property rights, spillovers through imitation are less likely to be created in the future. Vietnam has creative ability and the number of domestic firms increasingly investing in R & D activities to develop new products. The spillover effects through imitation may be reduced, but with the emergence of many FDI enterprises, new technologies are gradually introduced into the country, through collaboration, demonstration effects can still occur. Furthermore, the effect of
14 spillover effects from imitation and performance can also be found in the stages of marketing and management. 2.2.1.3. Dissemination channels and technology transfer to domestic firms The FDI enterprises receiving technology from the parent company, deployed in management and production processes, which may stimulate the emergence of spillover effects. The spillover effect of FDI in technology transfer from MNCs conditions in the textile sector, Vietnam took place in the early stages through modern management skills, knowledge and know-how with high technology. The MNCs contribute to the technological advances primarily through creative imitation, and the enhancement of technology from FDI enterprises allow domestic firms to increase labor productivity and competitiveness building in new areas. A number of FDI firms in Vietnam technical assistance to their suppliers in the country to improve Product Quality. And thus, technology transfer takes place between a number of FDI firms and their suppliers. Some suppliers can be able to upgrade the production facilities according to international standards. This is beneficial for the economy and technology providers than by producing. However, production for FDI enterprises requiring higher standards. They provide incentives for providers to improve quality and keep the technology to be able to compete. The spillover effect in terms of perceived quality for products and manufacturing processes thus created. Considering the textile sector, we can see the limitations of technology transfer. Through the survey, the majority of businesses choose the form enclosed at the exchanges and cooperation with foreign countries. The method is most applicable technology from foreign buyers and designers to mimic the form. In fact, investment in research and technological innovation of enterprises Vietnam is very low compared with the world. Common Investment in R&D, which has invested in technological innovation accounts for only 0.4-0.5% of GDP (compared with 2% in the country). The most innovative activity is concentrated in the SOE sector. In the third stage of absorption and technological development are: to acquire technology; mastering technology and innovation, technological innovation, the new domestic firms stopped at an early stage is receptive but passive technology through imports of machinery and equipment, investment ratio is very low for the software, to reach less than 20% of the total investment. 2.2.1.4. Research and development R&D activities of the textile sector is the main idea, research and product design, and this is a channel of positive spillover effects. However, the level of R&D in the textile sector in Vietnam is quite low and spillovers from FDI enterprises is negligible. R&D activities of the textile sector, mainly deployed outside the host country and are brought into the country through FDI enterprises. Investing for unique products, novelties, meet consumer tastes is a path created many advantages for businesses. 32.77% companies surveyed considered that it is their competitive advantage. Currently, between Vietnam enterprises and FDI enterprises have a huge gap in R&D. Vietnam firms rarely introduce a new product based on new technology was discovered. Cooperation with FDI firms can help Vietnam in business R&D process, and so a number of potential spillover effects of R&D appears. On the other hand, the cooperation will bring benefits for local businesses while FDI enterprises to financial means and at the same time helping Vietnam enterprises to gain international credibility.
15 Spending on R&D activities between domestic firms and FDI firms have low discrepancy. This may be due to textile products of domestic companies have higher competitive pressure, thus forcing companies to constantly innovate and improve products to adapt to the market. In global value chain of the textile sector, R&D stage is the stage with the highest profit margin, but it is the weakest stage and have not yet been interested investment properly by Vietnam Textile industry. Public enterprises proactively offer products with their own designs, the profit earned will be higher. However, at present only about 30% of the export value of Vietnam's textile are in FOB form, with the participation of R&D stage, the rest is in the form of outsourcing manufacturing to FDI enterprises. Number of enterprises with the ability to design and produce fashion products is still not much. The export garment companies in Vietnam still have to produce the designs of the foreign orders, VAT from design to fashion garments belonging to foreign firms, making the value of textile exports Vietnam garment limited. Designs of products is one of the factors contributing to the competitiveness of products in the market, especially in international markets. However, the design of enterprise products are monotonous, lacking creativity and sophistication. Besides, Vietnam's fashion industry is still a big gap with the world fashion industry. Including coloring fabric design, styling products in Vietnam is poor, monotonous and slow to change, not in line with market requirements. 2.2.1.5. Labor flows between FDI enterprises and domestic firms and strengthen the training of employees in the domestic corporate. Skilled labor migration from FDI to domestic firms is considered as an important channel to create positive spillover effects through the transfer of advanced technology and management experience from business production FDI to domestic firms, capacity and qualifications of the workforce. Through FDI, employees are trained, improved skills, acquired skills, advanced technology, trained industrial behavior and adapted to the new working mechanisms... According to CIEM (2006), the share of workers movements relative to the total labor force in the 3-year average (2001-2003) in the textile sector is 53.4% from 5.8% from FDI enterprises and domestic enterprises. Among workers move out of the area of FDI firms, about 37% are skilled workers. However, 32% of respondents said that FDI companies have moved away from labor largely moved to other FDI firms, 23% said that the number of employees in this open company and 18% said work for labor transfer domestic companies. Thus, although the flexibility of the labor movement's high FDI sector enterprises, but one third of the labor movement within the area of FDI firms. In the labor movement, although we have not sufficient data to analyze the system, the information gathered in recent years shows that the transfer efficiency is very weak because: (i) The majority of Vietnam partners in the joint venture are state-owned enterprises. The representative of Vietnam in the joint venture is often officers at state-owned enterprises or ministry of state enterprises. They have not fully committed and operated to the joint venture development, (ii) FDI enterprises in Vietnam tend to establish 100% foreign equity joint venture instead. The joint ventures in the past tended to be transferred to the form of 100% foreign owned. Thus, there is the phenomenon of labor migration between FDI firms and domestic firms, but at very low levels and the possibility of spillover effects is very low in this channel. In fact, FDI enterprises barely exploit low labor costs, not make a lot of technology transfer-high technology and manpower training to develop local industry. Because of the
16 highly technical processes need not labor to Vietnam by taking limits of positive spillovers from FDI firms to domestic firms. 2.2.1.6. Spreading advanced management skills The companies stressed the advantages of advanced management skills of FDI enterprises. Marketing, advertising performance and strong distribution network affect the results of Textile enterprises. The FDI enterprises in Vietnam has developed marketing techniques and can dominate the market due to the activities of their aggressive marketing. By introducing new marketing ideas and new management techniques in Vietnam, spillover effects for domestic firms thus created. The presence of MNCs have contributed learn marketing techniques, directly through marketing partnerships and indirectly through imitation and competitiveness of domestic firms. The largest domestic companies have received skills development and management of MNCs in Vietnam. The presence of FDI enterprises have contributed to raising awareness about quality standards in the textile sector in the country. The FDI enterprises require large quantities of products with high quality and good manufacturing practice, they indirectly put pressure on local suppliers to increase their standards and deliver large quantities of good quality. Spillover effects on quality standards thereby creating industry. Many businesses state capital associated with FDI companies to get "free" access to international markets. Many companies make the work of popular marketing medium businesses that do not have the resources to reach international markets. The largest companies in the country with the development of industry management and thus generate spillover effects to the big companies may be limited in the future. 2.2.2. The situation of FDI spillover effects of vertical (inter-industry spillover effects in Vietnam Textile sector) 2.2.2.1. Spill through backward linkages The spillover effects of FDI occurs when firms use intermediate goods by domestic production enterprises. According to CIEM survey results, only 35% textile material production that FDI firms use purchased from domestic companies, the rest bought or imported from FDI enterprises. For the apparel industry, the upstream products are yarn, cotton with loosing vertically relationships. The import of foreign investment plus much quality of raw materials leads to poor water relationship links in the country is not firmly established. FDI firms tend to use materials and semi-manufactured or imported by other companies manufacturing FDI. The reason is because domestic companies did not meet the requirements for garment exports, both in terms of quantity and quality. Through the survey showed, 50% cloth interior does not meet the requirements of garment enterprises, 80% of companies surveyed that the relationship between enterprises producing upstream materials and apparel is currently open mining low and ineffective. Quality materials upstream in local countries are very low. Demand high but very few of these countries do not meet the textile enterprises. Most of the fabric of enterprises producing only for domestic main engine operations of enterprises and domestic demand in products with lower average quality. The textile enterprises also claim that they are not proactive in finding customers and new design, especially in SOEs. Many companies are very passive in marketing activities, not even seen all the benefits of marketing activities.
17 2.2.2.2. The spillover effects through forward linkages Spillover effects can occur if domestic firms using intermediate goods of FDI enterprises. Survey data shows that the majority of FDI firms producing for export. Even if sold in the domestic market is their main customers are individuals or businesses and FDI. According to CIEM (2006), only 8-13% of the total value of domestic materials that companies use are bought from FDI enterprises. According to VITAS, apparel companies have built relationships inextricably linked with many importers, consuming large corporations around the world. However, most of the export garment processing method, the sample design, fashion undeveloped, business rates manner FOB low, low production efficiency. Moreover, most companies operating in the garment industry are small and medium enterprises. The small size makes the DN not achieve economies of scale, and can only supply a certain market. Loose linkages between FDI and domestic enterprises with the popularity of this form of 100% foreign invested investment that Vietnam does not gain a lot of intangible benefits of technology transfer and management skills. Activity patterns of many FDI enterprises import only-assembly-exports. Thus, the benefits of FDI will only be short term as Vietnam capital deficiency, excess labor. But the role of FDI in Vietnam contributed to become a dynamic economy, creative and capable of sustainable development is very limited. 2.3. Applying econometric models assess the spillover effects of FDI to Vietnam Textile enterprises 2.3.1. Describe data The data is the data used by the textile sector inVietnam is taken from the investigation of the GSO enterprise in the years from 2000 to 2008. There is a change in ownership type of firms included in the sample... Thesis using the 2000 IO table to structure the relationship impact of vertical and horizontal FDI through Backward, Forward, Horizontal variables. 2.3.2. The estimation results The estimation results show that there is a negative spillover effects of the presence of FDI enterprises to enterprises in the sample. This is reflected in the negative coefficients and statistical significance of the variables Horizontal. This result implies that the presence of FDI firms have reduced output growth of the domestic textile enterprises. However, for each group of enterprises of all sizes will have different effects. Specifically, the group of micro-scale enterprises, the spillover effects of FDI spillovers only negative horizontal and vertical impact, this is not a positive impact. In contrast, for the group of companies with small and medium scale, the spillover effect of FDI is vertical and horizontal impact, but very weak. This indicates that the spillover effect of FDI on small groups of enterprises are small and positive, this means that the companies will develop and produce in depth. Thus, small businesses and medium-scale production will boost but mainly focuses on improving technology and Product Quality, this is a prerequisite for sustainable development of enterprises. As for large-scale enterprises, due to ownership competitiveness should not be affected downsized production by FDI enterprises. At the same time, companies with large-scale Textile, may be active materials, not to cooperate with the Textile FDI enterprises to purchase raw materials, which the companies can directly cooperate with overseas parent companies. 2.4. General assessment of spillover effects of FDI to Vietnam Textile enterprises 2.4.1. The positive results:
18 (1) To improve the competitiveness of Vietnam Textile firms, (2) facilitate and promote innovation and technological capacity of domestic enterprises Textile (3) Enhancing level management and labor skills of the Vietnam Textile companies, (4) Contribute to promoting links between enterprises and the development of supporting industries in Vietnam. 2.4.2. Limitations: (1) Competitiveness of the Vietnam Textile enterprises are limited in receiving spillovers from FDI, (2) spillover effects through common channels and Textile technology transfer from foreign companies to the DN domestic textile is limited; (3) the Vietnam textile companies limited autonomy in the raw materials and inputs, (iv) the spillover effects of activities from fashion designer FDI firms to domestic firms is limited; (5) Method of production and export of domestic Textile companies did not meet the conditions required in the fierce competition for FDI enterprises Textile. 2.4.3. The cause of the limitations: (1) Investment in technological innovation of enterprises Textile which can not be properly concerned, (2) Human resources of enterprises Textile is still weak; (3) The R&D of enterprises Textile which can not development, (4) support Textile industry is undeveloped; (5) the construction, development and brand protection has not been enough attention; (6) the alliance of enterprises linked textile and textile in foreign countries is limited.
19 Chapter 3 VIEWPOINTS AND SOLUTIONS FOR THE EXPLOITATION OF POSITIVE SPILLOVER EFFECTS AND LIMITATION OF NEGATIVE SPILLOVER EFFECTS OF FDI TO TEXTILE ENTERPRISES IN VIETNAM 3.1. Goals and orientations to attract FDI to the textile sector in Vietnam 3.1.1. Development Goals for the textile sector by 2020 3.1.1.1. The overall goal Textile industry development has become the key industry regarding export; successfully build a number of famous brands, world market integration, oriented textile products with high added value, ensuring enterprises for sustainable development. 3.1.1.2. Specific Objectives: To achieve growth rate in the value of industrial production sector at 11.49 %/year; export growth reached 9%/year to reach U.S. $ 31-32 billion in 2020, accounting for 14,85% of national exports (2016-2020); growth rate of industrial production value of the sector is 7,5%/year, export growth reached 7%/year, reaching 62-63 billion in 2030, accounting for 11,27% of national exports (period 2021-2030); 3.1.2. Orientation to attract FDI into Vietnam Textile industry: (i) Development of textile sector in terms of size, production capacity , as well as Product Quality, (ii) Balance, closed production processes in the area where the product production , from spinning and weaving... (iii ) Develop a close relationship, both assigned and medium cooperation between production units and non-state owned enterprises , between enterprises in the country and FDI enterprises, (iv) Ensuring socio-economic efficiency of investment growth productivity, quality, price, competitiveness of products, etc. (v) Investment and balanced development between the textile and garment industry and encourage FDI upstream development and developing the textile sector, Information Technology in textile sector. 3.2. Viewpoints to take advantage of positive spillover effects and limit the negative spillover effects of FDI to textile enterprises in Vietnam 3.2.1. Take advantage of positive spillover effects and limit the negative spillover effects of FDI by improving competitiveness of domestic textile enterprises from foreign textile enterprises. 3.2.2. Take advantage of positive spillover effects and limit the negative spillover effects of FDI by increasing the scale and financial resources, organizational capacity building, and human resources management of the Vietnam Textile enterprises; 3.2.3. Take advantage of positive spillover effects and limit the negative spillover effects of FDI by attracting investment in upstream textile industry, and active in supporting industries closely associated with FDI enterprises; 3.2.4. Take advantage of positive spillover effects and limit the negative spillover effects of FDI by FDI projects screening and selection, that means no attracting FDI at all costs, to set up factors leading technology and should have the commitment to technology transfer relevant to each industry, each project; 3.2.5. Take advantage of positive spillover effects and limit the negative spillover effects of FDI attracted by prioritizing the investors of the world's largest MNCs in Vietnam; 3.2.6. Take advantage of positive spillover effects and limit the negative spillover effects
20 of FDI by improving the test inspection FDI enterprises. 3.3. Solution for the exploitation of positive spillover effects and limitation of the negative spillover effects of FDI to textile enterprises in Vietnam 3.3.1. Group of solutions to take advantage of positive spillover effect 3.3.1.1. Takeover and promote investment in developing textile human resources. Human Resource is regarded as a determinant factor to take advantage and exploit positive spillovers effect of FDI for Vietnam Textile enterprises. Therefore, improving the quality of human resources in the physical, mental and skill is an urgent requirement to Vietnam Textile enterprises in the context of fierce competition in the domestic market and international market. In order to do this, the following solutions are needed to do: a) Clarify the training of human resources as the textile sector: (i) technical and professional training, (ii) Professional training administration and management, (iii) professional training and (iv) Organization management training apprentices to train resource persons in the field of management and technology for enterprises at rural areas. b) Determine the form of training and retraining of human resources. Combining long-term training with short-term training , between formal training with on-site training, training in the country between the elected officials for training abroad. c) Develop training human resource programs in textile consistent with the characteristics of the textile sector. Innovation of objectives, training programs and focusing on suitable course with specialized training, getting practical skills are the focus. Regular system of training colleges, secondary, technical workers through the system of industry professionals need to be maintained. There should be mechanisms for monitoring the quality of teaching at all levels of education. d) To strengthen and develop the school system, human resources training center for textile industry: Continue to strengthen the vocational school in the system, in collaboration with the universities to train textile depth training on technological. Strengthening research institutions, additional forces for effective institutions, establishing the center of the design and construction of high-end fashion brand, increase investment in technical equipment for schools, the training center, built University Textile and Fashion to create facilities for deployment training classes. With the fashion design industry, there could be a solution that to invite foreign experts to work in regular schools and training centers; e) To expand joint training between the Textile enterprises with schools and training centers for the textile industry workforce: Textile companies proposed initiative needs , provide practice location and partly responsible for financing the training process, schools, training centers active in human Textile companies find understand the needs, innovative programs and curriculum in accordance with requirements of human use, quality assurance training as required; 3.3.1.2. Takeover and increase investment in science and technology development, technology transfer and improve management level. This solution is established for the purpose of improving the efficiency of technology transfer and take advantage of technology spillovers from FDI enterprises to the Vietnam Textile enterprises. Improving technology devices along with improving the quality of human resources is the fundamental condition for enhanced absorption of spillovers from FDI Vietnam Textile enterprises. a) Domestic firms have to focus on investment in research, technological innovation,