Crosscountry financial flows are fundamental to international economics. There are hot debates among policymakers and academicians on the pros and cons of the current cross-border financial integration. In principle, financial integration enables an economy to borrow from foreign sources for financing domestic investment and also to increase access to advance technology and management skills, thus promoting productivity growth. However, this integration can also be blamed for being an important transmitter through which economic vulnerability spreads across economies. It also causes macroeconomic instability even financial crises. Recent financial turmoil directs policymakers to rethink appropriate financial opening policies for growth. A vital issue in the debate of financial integration is whether openness to foreign capital has significant growth benefits and whether these benefits compensate for the

Foreign direct investment (FDI) is expected to generate external effects—usually termed FDI spillovers—for a host country, and these spillovers are thought to have consequences on the productivity of domestic firms. Despite this strong expectation, the empirical findings on FDI spillover are still indecisive. This study examines firm-level panel data to determine the effects of FDI spillover on firms’ productivity in Bangladesh in comparison to Vietnam. We consider both the horizontal and vertical (backward and forward) spillover effects of FDI. We find evidence that Bangladeshi firms gain productivity improvement through intra-industry or horizontal linkages, whereas Vietnamese firms gain through backward linkages. Our findings suggest that increases in foreign presence in the same industry for Bangladesh and in downstream industries for Vietnam are related with increase in output of domestic firms.

Foreign direct investment (FDI) is expected to generate external effects—usually termed FDI spillovers—for a host country, and these spillovers are thought to have consequences on the productivity of domestic firms. Despite this strong expectation, the empirical findings on FDI spillover are still indecisive. This study examines firm-level panel data to determine the effects of FDI spillover on firms’ productivity in Bangladesh in comparison to Vietnam. We consider both the horizontal and vertical (backward and forward) spillover effects of FDI. We find evidence that Bangladeshi firms gain productivity improvement through intra-industry or horizontal linkages, whereas Vietnamese firms gain through backward linkages. Our findings suggest that increases in foreign presence in the same industry for Bangladesh and in downstream industries for Vietnam are related with increase in output of domestic firms.JEL Code: F2, O1, O3