Nguyen Thi Canh

TECHNICAL EFFICIENCY
Minh Le OF VIETNAMESE
Khoa Cai
MANUFACTURING
Michel Simioni
FIRMS: DO FDI
VEAM 2019
SPILLOVERS MATTER?
Research project No B2018-34-01
 Outlines

– Introduction
– Literature review
– Methodology and data
– Research results
– Conclusions

2
 Introduction

– Why TE?
– Why FDI firms? 30 years: USD184 bn of FDI
– Theoretical views: horizontal and vertical linkages
– Evidence of spillover effects of FDI firms on total factor productivity (TFP) of local firms in
Vietnam (Newman et al., 2015; Ni et al., 2017).
– Total factor productivity (TFP): gY − α ∗ gK − (1 − α) ∗ gL
– Research gap:
– One production function (CB and related versions) for all industries?
– These studies have not answered whether the spillovers are robust across different regions and
types of ownership in the country

3
 Introduction (cont.)

– We
  employ the translog production functions to capture technical efficiency via a
meta-frontier model (Huang et al, 2014):
– firms in different industries face different production opportunities, available stocks of
physical, human and financial capital, resource endowments
– => # technologies => using one production function is appropriate?
– This paper is a pioneer in employing the meta-frontier approach to estimate the
impact FDI presence on firm efficiency in the literature
– Using 26,152 unique firms with 118,506firm-year observations => spillover does
exist: lagged forward and horizontal linkages have a consistent and significant
influence on the (in)efficiency, but backward linkage does not

4
 Literature review

– Innovation (Schumpeter, 1912):

– Innovation increases sales and market shares by different their products from those of rivals (Wang
& Wei, 2005).
– Innovation also changes production technology and thus reduces the cost of producing an
additional product (Peters, 2008).
– Innovation can come together with foreign direct investment (FDI): help local firms to catch
up with the international technology frontier.
– How?
– Via establishing of the new operation, mergers and acquisition, joint-venture with a local partner,
FDI can have a positive impact of externalities or productivity spillovers: interactions (backward and
forward linkages) with local firms (Markusen and Venables., 1999).

5
 Literature review (cont.)

– Spillovers have been investigated in the literature via two

mechanisms:
– Horizontal (or intra-industry), knowledge and technology
transfer can bring in spillovers in FDI firms to compete with
their rivals in the same industry.
– Vertical (or inter-industry), the supply chain from and to
between FDI producers and local ones can result in positive
spillovers.

6
 Literature review (cont.)

– In transitional economies:
– Ownership effect (direct effect): consensus conclusion on a
positive effect of foreign ownership on firm performance has
been verified using systematic views and meta-analysis
(Brown et al., 2006; Iwasaki, 2007; Iwasaki and Tokunaga,
2016).
– Productivity spillover effect (indirect effect): Iwasaki and
Tokunaga (2016); Javorcik (2004); Lin et al. (2009)

7
 Literature review (cont.)

– In Vietnam
– Newman et al. (2015):
– 4000 manufacturing firms in Vietnam
– There are productivity gains associated with direct linkages between foreign-owned and
domestic firms along the supply chain: forward linkages
– Ni et al. (2017):
– Using firm-level panel data from Vietnam in 2002–2011
– Crackdown into origins of FDI: A positive association between the presence of Asian firms in
downstream sectors and the productivity of Vietnamese firms in supply industries, but no
significant relationship in the case of European and North American affiliate.
– Horizontal spillover effects are in general negative and statistically significant.
8
 Introduction (cont.)

– Several issues of previous studies:

– TFP and its assumptions: same technology?
– Endogeneity
– To deal with the two issues:
– We employ the translog production functions to capture technical efficiency via a meta-frontier model
(Huang et al, 2014)
– Meta frontier model: firms in different industries face different production opportunities, available stocks
of physical, human and financial capital, resource endowments => Such differences ignite the idea of
estimating separate production frontiers for firms in different industries
– This paper is a pioneer in employing the meta-frontier approach to estimate the impact FDI linkages on
firm efficiency in the literature
– Endogenous: one-step analysis

9
 Methodology

– Horizontal linkage:
 
(1)
(1)

– Backward linkage
 
(2)
(2)

10
 Methodology

– Forward linkage:
 
Forwardjt =
(3)

(3)

11
 Methodology

– The production stochastic frontier of an industry:

 
(4)

– In this paper: There are 10 industries, namely food and foodstuff, garment and
textile, wood products, paper, printing products, chemical products,
construction materials, metal products, electric and electronic products, and
mechanics.
– Three-input, one output production function
  (9)

12
 Methodology

–  A firm technical efficiency (TE) is then defined as:

 
(5)
(5)

– The common underlying meta-frontier production function for all industries is

defined as . The meta-frontier envelops all individual industries’ frontiers ,
which is expresses with the following relation.
 
(6)

where and thus .

13
 Methodology

–  The technology gap ratio (TGR) is defined as:

 
(7)
(7)

– The meta efficiency (MTE) is an efficiency relative to meta frontier. Therefore,

the meta efficiency is a product of group efficiency and the gap ratio () as
below:

 
(8)
(8)
14
 Methodology

We specify production function into the trans-log production function:

 
 
 
. (10)
 

  follow Battese and Coelli (1995) in estimating in one step using maximum
We
likelihood:
 
(11)
15
 Data

Table 2.
Data processing for the sample of manufacturing firms over period 2010-2016
Step Description Result No. of No. of firm-
unique year
firms observations
1 Original datasets obtained from GSO are Unbalanced panel data 136,494 426,941
merged using firms’ geographical
information including province, district, and
commune, and identification
2 Exclude observations with missing and Unbalanced panel data 97,458 296,377
inconsistent values of total revenues, fixed
assets, number of employees, and material,
i.e. negative or zero values
3 Exclude observations with missing values of Unbalanced panel data 97,090 294,837
backward, forward, and horizontal linkages
4 Narrow the sample by including only firms The final unbalanced 26,152 118,506
which have consistent annual values of at panel data as described
least 5 years of consecutively operating in detail in Table 3
Source: Authors’ calculation from VAES 2010-16

16
 Data

Table 1
Definition of variables
Variable Description Type
Dependent
variables
MTE Meta technical efficiency, which is computed as the Efficiency
product of industry technical efficiency (TE) and the gap
ratio (TGR).
Independent
variables
BLK Backward linkage. Linkage
FLK Forward linkage. Linkage
H Horizontal linkage. Linkage
SIZE The logarithm of total assets Firm characteristics
EQUITY The ratio of total equity to total assets Firm characteristics
DEXP A dummy variable takes value one if the firm exports its Firm characteristics
products
DIMP A dummy variable that takes the value of one if the firm Firm characteristics
has import activities
DINDPARK A dummy variable that indicates whether the firm is Firm characteristics
situated inside an industrial park
This table presents the definitions of variables. We estimate the technical efficiency from the stochastic frontier analysis
17 (SFA).
 Data

18
 Results: baseline

19
 Results: Robustness

20
 Conclusions

– This study examines the technical spillover taking place between foreign firms and firms
in Vietnam
– We only find evidence of a positive impact of forward and horizontal linkages of FDI
firms on the technical efficiency of private owned firms in the country
– The usage of inputs supplied by FDI firms brings in greater efficiency of local private
firms. Hence, attracting foreign direct investment is essential for an open economy in
Vietnam to avoid a possible trade deficit
– Contribution:
– We employ a meta-frontier framework analysis
– There exists spillover: horizontal and forward linkages

21
 Remaining Issues

– Why: TE vs TFP?
– Endogenous? Battese and Coelli (1995) or GMM?
– Linear or nonlinear?
– Parametric or non-parametric?

22