Spatial Spillover Effects from Foreign Direct Investment in Vietnam

This paper investigates the role of inter-firm interaction and geographical proximity in the determination of productivity spillover effects from foreign to domestic firms. We developed an estimation approach using the Spatial Durbin model and applied this to a firm-level dataset from Vietnam from 2000-2005. We found that productivity spillovers diminished when the distance between foreign and domestic firms increases and that interactions among local firms amplify the spillovers. Within short distances, the presence of foreign firms creates positive backward, negative forward and horizontal spillovers. Based on the findings, several implications are extracted regarding promotion policy for foreign direct investment in developing countries.