Tài liệu An analysis of foreign direct investment impact on labor productivity at firm level in vietnam luận văn thạc sĩ

UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS =====oOo===== VIETNAM- NETHERLANDS PROJECT FOR M.A. IN DEVELOPMENT ECONOMICS AN ANALYSIS OF FOREIGN DIRECT INVESTMENT IMPACT ON LABOR PRODUCTIVITY AT FIRM LEVEL IN VIETNAM IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF ART IN DEVELOPMENT ECONOMICS BO GIAO DUC DAO TAO . BY TRU'ONG D.l;\1 HQC KINH TE'TP.HCM PHAM KHAC DUY THUVIEN • ~g ACADEMIC SUPERVISOR: DR. LE THI THANH LOAN Ho Chi Minh City, November 2009 CERTIFICATION I hereby certify that the substance of this thesis has not been submitted for any degrees and is not being currently submitted for any other degrees. I also certify that, to the best of my knowledge, and any help received in preparing the thesis and all sources used have been acknowledged in the thesis. Signature amKhacDuy Date: November, 2009 ACKNOWLEDGEMENT This research is impossibly completed without the valuable guidance, encouragement and advice from numerous individuals including Vietnam-Netherlands program lecturers, friends and my family members. I am really indebted and grateful to what they have done for my thesis completion. First of all, I would like to send my deepest gratitude to my supervisor, Dr. Le Thi Thanh Loan who always gives valuable instructions, advice and comments during my completion ofthe thesis. I am grateful for Professor, Peter Calkins for his precious advice and comments from the initial ideas ofthe theme for my thesis. I also send my special thanks to Professor, Nguyen Trong Hoai for his lectures in econometrics and Mr. Truong Thanh Vu, the lecturer of Vietnam-Netherlands project, for his kind help and instructions in data analysis by Stata software. Many especially respectful thanks are sent to my parents and my dear wife for encouraging and providing me with an opportunity to pursue my desires in higher learning and for their love, affection and sympathy that have helped me to gain more strength and motive to complete this thesis. And fmally, I would like to express my special thanks to my friends in MDE class 14 for their supportive friendship from the beginning day I joined in this course and their continuous support during my research completion. Above all, please sympathize for me and do know that I would be so grateful for those who support me a lot in this thesis completion if I forget to mention their names. ii ABSTRACT This research examines and analyses the impact ofFDI on labor productivity at firm level in Vietnam through applying cross-sectional data from VES-2008 which concentrate on 4,654 firms including FDI and domestically owned enterprises in 4 sub-industrial sectors; food processing, hotels - restaurants, electronics - mechanics and textile - garment footwear. The regression model is estimated based on the Cobb-Douglas production function and the labor productivity is modeled as dependent on the variables, namely capital intensity, material input cost per labor, proportion of skilled labor and dummy variables including types of ownership and regions that FDI enterprises locate. OLS (Ordinary Least Square) and various econometric estimation techniques are employed in order to obtain reliable and appropriate results that show the findings based on the scientific analysis. As results, finding results in analysis of FDI impact on labour productivity in the case of this study consequently suggest in general that FDI in 4 subindustrial sectors plays an important and positive role in enhancing labor productivity at firm level in Vietnam. Moreover, the results seem to be appropriate to answer research's questions as well as confirm expectation for hypotheses of different impacts of FDI across regions and types of ownership, except for skilled labor that does not appear to affect on labor productivity in this research. iii TABLE OF CONTENTS CHAPTER 1: INTRODUCTION ................................................................................ . 1 1.1. Problem statement ............................................................................................. I 1.2. Objectives of the research ................................................................................ 2 1. 3. Research questions ............................................................................................ 2 1.4. Research hypotheses ......................................................................................... 3 1. 5. Organization of the research .............................................................................. 3 CHAPTER II: LITERATURE REVIEW .................................................................... 5 2.1. Introduction ...................................................................................................... 5 2.2. Concepts and definitions ................................................................................... 5 2.2.1. Foreign direct investment (FDI) ........................................................................ 5 2.2.2. Productivity and labor productivity ................................................................... 6 2.3. Economic theories .................... ,........................................................................ 8 2.3.1. Production theories ........................................................................................... 8 2.3.1.1 Cobb-Douglas production function .................................................................... 8 2.3.1.2. Pindyck and Rubinfeld production theory .......................................................... 9 2.3.2. Theoretical background ofFDI impacts ............................................................. 9 2.3 .2.1. Channel effects of foreign direct investment.. .................................................. 10 2.3.2.2. Theoretical framework ofFDI impacts on labor productivity .......................... 11 2.3.2.3. Suggested research model ............................................................................... 13 2.4. Empirical studies ............................................................................................. 14 2.4.1. FDI impacts enhance labor productivity in host countries ............................... 14 2.4.2. The opposite results ofFDI impacts on labor productivity ............................... 16 CHAPTER III: AN OVERVIEW OF FDI IN VIETNAM SINCE 1988 .................. 18 3 .1. Introduction .................................................................................................... 18 3.2. Overview of FDI inflows and periods of development from 1988 to 2008 ....... 18 3.2.1. FDI inflows in period 1988- 2008 .................................................................. 18 3.2. Some characteristics ofFDI in Vietnam .......................................................... 20 3.3. The role ofFDI in national economy ............................................................... 25 3.4. The summary ofFDI sector's socio-economic affect on national economy ...... 27 iv CHAPTER IV: RESEARCH METHODOLOGY ..................................................... 29 4.1. Introduction .................................................................................................... 29 4.2. Model specification ......................................................................................... 29 4.3. Description ofvariables ................................................................................... 30 4.3.1. Dependent variable labor productivity (Labproductivity) ................................. 30 4.3.2. Explanatory variables ...................................................................................... 30 4.3.2.1. Capital intensity (Cap_intensity) ..................................................................... 30 4.3.2.2. Scale ofmaterial input cost (MI_scale) ............................................................ 31 4. 3 .2. 3. Labor quality (Skill) ........................................................................................ 31 4.3.2.4. Firm's location (Dlocation) ............................................................................. 31 4.3.2.5. Types of ownership (Fshare) .......................................................................... 32 4.3.2.6. Firm's sub-industrial sectors (Dindustry) ......................................................... 32 4.4. Data collection ................................................................................................ 33 4.5. Estimation strategy .......................................................................................... 34 4.6. Summary ......................................................................................................... 36 CHAPTER V: RESULT ANNALYSIS ...................................................................... 37 5.1. Introduction .................................................................................................... 37 5.2. Descriptive statistic analysis of regression sample and variables ...................... 37 5.2.1. Descriptive statistics of sample ........................................................................ 37 5.2.2. Descriptive statistics ofvariables ..................................................................... 38 5.2.3. Correlation matrix ........................................................................................... 41 5.3. Model estimation and finding results .............................................................. .42 5.3.1. Multiple regression results and diagnostic tests .............................................. .43 5.3.2. Interpretation ofthe fmding results .................................................................. 45 5.3.3. Analysis and discussion about the finding results ........................................... .47 5.4. Conclusion ...................................................................................................... 49 CHAPTER VI: CONCLUSIONS AND RECOMMENDATION ............................. 50 6.1. Conclusion ...................................................................................................... 50 6.2. Recommendations ........................................................................................... 50 6.3. Limitations of the research .............................................................................. 52 v REFFERENCES .......................................................................................................... 53 APPENDICES: ............................................................................................................ 56 APPENDIX 1: ....................................... , .............. ,....................................................... 56 APPENDIX 2: .............................................................................................................. 61 APPENDIX 3: .............................................................................................................. 62 LIST OF BOXES BOX 5.1: Ramsey RESET test using powers of the independent variables .................... .43 BOX 5.1: Breusch-Pagan I Cook-We is berg test for heteroskedasticity ........................... 44 LIST OF FIGURES FIGURE 3.1: Foreign direct investment projects licensed in period 1988- 2008 .......... 19 FIGURE 3.2: Foreign direct investment projects licensed in period 1988 - 2008 by region ........................................................................................................................... 23 FIGURE 3.3: Structure of investment at current prices by types of ownership from 1995 - 2008 ............................................................................................................................ 24 FIGURE 3.4: Structure of investment at current prices by types of ownership in 2008 . 24 FIGURE 3.5: Structure of gross domestic product at current prices by ownership period 1995- 2008 .................................................................................................................... 26 FIGURE 5.1: Correlation between proportion of skilled labor and labor productivity .. .42 FIGURE 5.2: Distribution of labor productivity (Labproductivity) before transforming into logarithm form ........................................................................................................ 56 FIGURE 5.3: Distribution oflabor productivity in logarithm form ............................... 57 FIGURE 5.4: Distribution of Capital intensity in logarithm form .................................. 59 FIGURE 5.5: Distribution of material input cost per labor in logarithm form ................ 59 FIGURE 5.6: Distribution of proportion or skilled labor in logarithm form .................. 60 vi LIST OF TABLES TABLE 3.1: Foreign direct investment projects licensed from 1988 to 2008 by kind of economic activity .......................................................................................................... 21 TABLE 3.2: Employed population as of annual I July by ownership from 2000-2008 .. 27 TABLE 5.1: Statistics summary of four sub-industries firms in regions according to three types of ownership ......................................................................................................... 37 TABLE 5.2: Distribution oflabor productivity in logarithm form (Lnlabproductivity) .. 39 TABLE 5.3: Distribution of explanatory variables in logarithm form ............................ 40 TABLE 5.4: Distribution of skilled labor in 4 sub-industries according to ownership .... 40 TABLE 5.5: Correlation matrix from the variables in the regression function .............. .42 TABLE 5.6: The result ofrunning regression (Model5.1) ............................................ 43 TABLE 5.7: Diagnostic test for multicollinearity .......................................................... 44 TABLE 5.8: The result of running regression (Model5.2) ........................................... .45 TABLE 5.9: Distribution oflabor productivity (Labproductivity) before transforming into logarithm form ........................................................................................................ 56 TABLE 5.10: Distribution oflabor productivity in logarithm form (Lnlabproductivity) 57 TABLE 5.11: Distribution of explanatory variables in logarithm form .......................... 58 TABLE 5.12: Descriptive statistics ofvariables in three types ofenterprises ................. 61 TABLE 5.13: The result of regression with beta number (Model5.3) ........................... 62 vii ACRONYMS ASEAN Association of South East-Asian Nations APEC Asia-Pacific Economic Cooperation BLUE Best Linear Unbiased Estimator BTA Bilateral Trade Agreement FDI Foreign Direct Investment FE Fixed Effects GDP Gross Domestic Product GECS General Enterprise's Cost Survey GO Gross Output GSO General Statistics Office IC Intermediate Cost IMF International Monetary Fund NGO Non-Governmental Organization NICs Newly Industrial Countries OECD Organization for Economic Co-operation and Development OLS Ordinary Least Square RE Random Effects RESET Regression Specification Error Test SUR Seemingly Unrelated Regression us United States USD United States Dollar VA Value Added VES Vietnam Enterprise Survey VIF Variance Inflation Factor VND Vietnamese Dong WTO World Trade Organization viii CHAPTER I INTRODUCTION 1.1. Problem Statement Since the late 1980s, on the basis of Doi Moi or the government's socio-economic reforms which started in 1986, Vietnam has initially transited from a centrally planned to a market- oriented economy. Typically for this process, Vietnam has advocated economic integration, in addition to its five "tions": urbanization, globalization, industrialization, modernization and privatization to spearhead this process. Beginning with the promulgation of the Law on Foreign Investment in 1987 and the signing of bilateral and multilateral trade agreements, Vietnam became a member of the Association of South East-Asian Nations (ASEAN) in 1995 and joined the Asia-Pacific Economic Cooperation (APEC) in 1998. In July 2000, Vietnam signed the Vietnam-US Bilateral Trade Agreement (BTA) and then joined Asia Europe Meeting in the following year, 2001. The most recent and notable event was Vietnam's WTO integration in 2007. During the economic transition from after 1986 to current years, many observers, policy makers and academics contend that foreign direct investment (FDI) played a crucial role which can help jumpstart to Vietnam's economy on its way to accelerating reform and socio-economic growth, Mai (2004). In addition, FDI may affect all economic, cultural and social aspects of the economy and is an indispensable capital source to developing countries including Vietnam, especially Asia's Newly Industrializing Countries (NICs). Through FDI flows, these countries can cover the saving-investment, foreign exchange and fiscal gaps and hence promote socio-economic growth, Taylor (1993). It may seem natural to argue that FDI can convey great advantages to host countries. That is why policymakers of developing countries including Vietnam always pay much attention to effects from FDI flows to country's economic growth. However this study does not focus on FDI by examining the effects of foreign direct investment on Vietnam's socio-economic growth in a general respect, this research wants to test the impact of FDI on the labor productivity at firm level in Vietnam as a whole and to 1 identify main significant determinants of the FDI impacts to examine whether they vary due to different forms of ownership as well as different locations. Specifically, the present research aims to answer whether FDI increases the overall labor productivity which is helpful for Vietnamese policymakers in planning effective policies to improve and maximize local labor productivity that can serve to develop and monitor the effects of local labor market policies, to ensure the equitable development among regions as well as achieve sustainable development. 1.2. Research objectives The general objective of the research will investigate whether FDI increases the overall labor productivity in Vietnam, as measured by term of value added per labor, focusing on enterprises of four sub-industries; food processing, hotels and restaurants, textile, garment and footwear and electronics and mechanics including domestic and FDI firms located over the country. To meet this overall objective, the research will also target two specific objectives, to evaluate whether: (i) The impact of FDI has enhanced on labor productivity in Vietnam more than domestically-owned firms including state owned firms and non-state owned firms? (ii) Make recommendations to policy-makers in Vietnam as to how to best channel FDI so as to improve and maximize the value added oflabor. 1.3. Research questions Based on the research objectives, the study will aim to find out the answers for the following questions: 1) Does FDI significantly impact on labor productivity in Vietnam? 2) Does the impact ofFDI on labor productivity in Vietnam differ significantly across regions as well as the ownership structure of firms? 2 3) Are there any significant differences and gaps of FDI impacts on labor productivity among these four sub-industries in this research? 1.4. Research hypotheses As mentioned in the beginning, the econometric model is expected to confirm the sign and statistical significance of following results: 1) The determinants on the labor productivity in Vietnam has significantly positive relation and depend on the terms of industry's capital intensity, proportion of labor skills and frrm's scale of material input purchases. 2) The impact of FDI on the labor productivity significantly enhances on labor productivity in Vietnam but differs significantly across regions and among four sub-industries in the research. 3) The determinants on the labor productivity m Vietnam vanes based on the ownership structure of firms and amongst, FDI firms make the most productive in increasing labor productivity compared with state owned firms and non-state owned firms. 1.5. Organization of the research The thesis consists of six chapters. The frrst chapter is Introduction, which presents the problem statement of the research, the objectives of the research, research questions as well as hypotheses, and the organization of this thesis. The next chapter is Literature review. This chapter discusses concepts; reviews theoretical arguments and examines empirical studies relating in the research field. An overview of FDI in Vietnam since 1988 is discussed mainly in chapter 3 which introduces a general view about FDI characteristics, roles and inflows in national economy, FDI enterprises' activity as well as socio-economic effectiveness of these enterprises in Vietnam. Following, chapter 4: Research methodology concentrates on model specification and the justification of variable selection as well as dig deeply econometric problems. The practical results of FDI impact on labor productivity at firm level in Vietnam are analyzed and presented in chapter 5: Result analysis. Finally, chapter 6: Conclusions and recommendations, 3 provides the summary of main fmdings and drawings on the past analysis to suggest implications for policy. 4 CHAPTER II LITERATURE REVIEW 2.1. Introduction This chapter aims at reviewing literature related to the topic to make sure that the study is conducted based on a scientific background. The chapter is developed into three major parts. Firstly, core concepts and defmitions relevant to the research topic such as FDI, productivity as well as labor productivity will be discussed clearly. In the second part, economic theories supporting for the research are presented. I n addition, theoretical background of FDI impacts that give overview about channels of FDI effects as well as empirical analysis models ofFDI impacts on labor productivity is also stated. Especially, the research model is also suggested in this part. Finally, empirical studies regarding FDI impacts on labor productivity in some countries are discussed and commented in the last part. Through this chapter, the analysis of FDI impact on labor productivity at firm level is generally figured out on the basis of economic theories and empirical studies. 2.2. Concepts and definitions 2.2.1. Foreign Direct Investment (FDI): There are several ways to define FDI such as International Monetary Fund's FDI definition or United Nations' FDI defmition. However one of the clear and popular definitions comes from Organization for Economic Co-operation and Development (OECD). According to OECD (1996), FDI is defined as follows: "Foreign direct investment reflects the objective of obtaining a lasting interest by a resident entity in one economy (''direct investor'') in an entity resident in an economy other than that of the investor (''direct investment enterprise''). The lasting interest implies the existence of a long-term relationship between the direct investor and the enterprise and a significant degree of influence on the management of the enterprise. Direct investment involves both the initial transaction between the two entities and all 5 subsequent capital transactions between them and among affiliated enterprises, both incorporated and unincorporated." The OECD (1996) also recommends in its Benchmark definition that for the existence of a direct investment relationship the "full consolidated system" should be followed. In other words, it means that when there is a cascade of participations, the percentage of the parent company in any affiliated companies should be calculated assuming the 100% of the subsidiaries and the corresponding percentage of the associates. However, this criterion does not correspond with the consolidation concept in the accounting statement. Besides OECD's FDI definition, Vietnam's GSO (2007) also explained Foreign Direct Investment as the bringing of capital into Vietnam in the form of money or any assets by foreign investors for the purpose of carrying on investment activities in accordance with the provisions of the law on foreign investment in Vietnam. 2.2.2. Productivity and labor productivity Also according to OECD (2001), Productivity is commonly defmed as a ratio of a volume measure of output to a volume measure of input use and labor productivity is defined as output per unit of labor input. Labor productivity is a useful measure because it relates to the most important factor of production labor and it is relatively easy to measure, Ngoc (2008). In addition, Circular No. 06/2001/TT-BLDTBXH states that the labor productivity to be determined by enterprises must be equal to the number of wage unit prices they formulate for expertise in January 29, 2001 in guiding the calculation of the average labor productivity growth rate and the average wage increase rate in State owned enterprises. Although labor productivity can be measured in physical terms or in price terms for a frrm, a process or a country, measured labor productivity will vary as a function of both other input factors and the efficiency with which the factors ofproduction are used. The three most commonly used measures of input are: hours worked; workforce jobs; and number of people in employment. Meanwhile, output per worker corresponds to the "average product of labor" and can be seemingly contrasted with the marginal product of 6 labor, which refers to the increase in output resulting from a corresponding marginal increase in labor input. Economists argue that the output produced is generally measurable in the private sector; it may be difficult to measure in the public sector or in NGOs. Therefore, measured labor productivity can depend on many ways; the purpose of measurement or the availability of data about factors affecting performance. In a survey of manufacturing growth and performance in Britain and other countries of IRS (2003), it was found that the factors affecting labor productivity or the performance of individual work roles are ofbroadly the same type as those that affect the performance of manufacturing firms as a whole. They include: (1) physical-organic, location, and technological factors; (2) cultural belief-value and individual attitudinal, motivational and behavioral factors; (3) international influences - for instance, levels of innovativeness and efficiency on the part of the owners and managers of inward FDI companies; (4) managerial-organizational and wider economic and political-legal environments; (5) levels of flexibility in internal labor markets and the organization of work activities - for example, the presence or absence of traditional craft demarcation lines and barriers to occupational entry; and (6) individual rewards and payment systems, the effectiveness of personnel managers as well as others in recruiting, training, communicating and performance-motivating employees on the basis of pay and other incentives. Prior to IRS (2003) survey, Pindyck and Rubinfeld (1997) stated labor productivity is also tied to natural resource of an economy. As oil and other resources began to be depleted, the output per worker fell somewhat. Especially, environmental regulations magnified this effect as the public became more concerned with the importance of natural resources (for example, the need to restore land to its original condition after strip mining for coal as well as cleaner air and water). In this thesis, value added per labor is the term which is used to measure labor productivity. Depending on each field of four sub-industries; Food processing, hotels and restaurants, electronics and mechanics or textile, garment and footwear respectively, GSO (2007) set up suitable methods to calculate labor productivity that will be explained in details in later chapter: Research methodology. 7 2.3. Economic theories 2.3.1. Production theories Cobb-Douglas production function 2.3.1.1. According to Cobb-Douglas (1928), production function is the functional form used to represent the relationship of an output to inputs. It was the first time that an aggregate production function which was estimated econometrically by Cobb and Douglas in 1928 and the results presented to the economics profession. Today, it is known as "CobbDouglas production function" that is the most ubiquitous form in theoretical and empirical analyses of growth and productivity. The estimation of the parameters of aggregate production functions is central on much of today's work on growth, technological change, productivity, mid labor. Empirical estimates of aggregate production functions are a tool of analysis essential in macroeconomics and microeconomics as well as important theoretical constructs, such as potential output, technical change, or the demand for labor. The production function has the form as follows: (1) Where: • Y denotes output , L: labor input, K: capital input • A is a constant depending on the units in which inputs and outputs are measured • a and ~ are the output elasticities of labor and capital, respectively. These values are constants determined by available technology. Output elasticity measures the responsiveness of output to a change in levels of either labor or capital used in production, ceteris paribus. For example if a= 0.1, a 1% increase in labor would lead to approximately a 0.1% increase in output. The Cobb-Douglas production function is usually expressed in logarithmic form: logY= log A+ a log L + log K which is useful and easy when performing a regression analysis. 8 ~ 2.3.1.2. Pindyck and Rubinfeld production theory Pindyck and Rubinfeld (1997) stated that the relationship between the inputs to the production process and the resulting output is described by a production function indicating the output Q that a firm produces for every specified combination of inputs. They assumed that a production function consists of two inputs, labor Land capital K and it can be described as Q=F(K,L) (2) This equation that applies to a given technology relates the quantity of output to the quantities of the two inputs capital K and labor L. For instance, the production function might describe the crop that a farmer can obtain with a specific amount of machinery and workers. Because production function describes the maximum output feasible for a given set of inputs in a technically efficient manner, it allows for inputs to be combined in varying proportions to produce maximum output in many ways through labor-intensive or capital-intensive choice. Furthermore, production functions show what is technically feasible when a firm or an economy works efficiently; this explains that a given knowledge might be used to transform inputs into output. When technology is improved and the production function changes, a firm can get more output for a given quantity of inputs. Although the Cobb-Douglas production function is a widely-used approach to present the relationship between an output and inputs in many analyses of economic researches, it is often replaced and developed into other more complicated functions in industry studies of growth and productivity for some reasons. One of the considerably typical reasons according to Pindyck and Rubinfeld (1997) is that the Cobb-Douglas production function is rarely able to happen in the reality. The possibility is that the firm's production process shows increasing returns at low output levels, constant returns at intermediate output as well as decreasing returns at high output levels might be real. 2.3.2. Theoretical background of FDI impacts 9 2.3.2.1. Channel effects of foreign direct investment In general perspective, FDI may effect on host countries in a number ways. According to Vahter (2004), the important channel effects of FDI on growth happen via technology transfer and spillover effects. Foreign direct investment is considered a prominent force of growth for most of developing economies. Because it brings new capital, technology and know-how from parent firms to host firms. However, Blomstrom and Kokko (1998) who explain that the spillovers from FDI to host countries may occur through three channels: knowledge shifts with skilled labor, technology transfer, and effective resource allocation due to competition. Javorcik and Arnold (2005) stated that foreign direct investment comes either in the form of a "Green field" project, where a new plant is built and therefore a new firm is born, or in the form of foreign capital inflow to an existing domestic company. In both cases, this company is typically characterized by higher productivity and competitiveness. In the previous research in 2004, Javorcik showed that besides direct effects from FDI, there are also varieties of indirect effects. The entry of any FDI-high productivity company naturally put pressure on domestic companies within the same sector to improve their performance and competitiveness. The increase in efficiency of the production process can happen by copying new technologies or by hiring trained workers and managers from foreign-owned companies. On the other hand, those domestic companies that are not able to catch up with the higher performance of other companies within the sector may be crowded out of the market. In general, these effects are referred to as horizontal spillovers. However, companies from sectors other than that of the foreign enterprise might be affected by its presence as well if they are in direct business contact with it. This includes companies that supply or provide services for foreign frrms, as well as companies that are supplied by foreign frrms. It is likely that foreign companies require higher standards from their suppliers. In other words, it is also likely that higher standards are provided by foreign companies to domestic companies as well, which might improve the domestic 10 companies' efficiency and performance. And these effects are referred to as vertical spillovers. As Lipsey (2002) mentions, one of the main reasons to examine productivity spillovers from foreign-owned to domestically owned firms is to understand the contribution of inward FDI to host country economic growth. If foreign firms at the expense of lower productivity in domestic firms achieve higher productivity, there might be no implications for aggregate output or growth. However, there might be growth effects without spillovers just from the operation of foreign frrms, which can be analyzed in terms of the impact of FDI on a country's output or growth. Moreover, because multinationals seek to minimize technology leakages to competitors while improving the productivity of suppliers by transferring knowledge, were FDI to generate spillovers they would more likely be vertical than horizontal through applying macro-level data to study overall effects ofFDI in his study. In recent research about The Impact of Foreign Direct Investment on the Economic Growth in Vietnam, Anh et al. (2006), they stated that there is still one more concern with the presence of FDI that has indirect effects on local labor productivity in Vietnam. FDI may exert the competition pressure on domestic firms so that the later have to improve business efficiency or they may promote the diffusion and transfer of technology ... etc. that are also called the "spillover effects" of FDI. They also suggested that the development should be enhanced to promote the spillover effects for FDI. However, the data available for this aspect is unclear and enough, thus this research will not test the impact of FDI on the productivity in general through the technological spillovers channel as mentioned at the beginning of thesis, but focus on analysis of FDI impact on the labor productivity at firm level in Vietnam as a whole. 2.3.2.2. Theoretical framework of FDI impact on labor productivity Based on Cobb-Douglas (1928), Tong and Hu (2003), in their current study in estimating the impact of foreign presence on Chinese domestic productivity, they represented the simple model for this relation. Y,-f(FS;, X;) 11 (3)