Foreign direct investment and productivity spillovers: a firm-level analysis of Bangladesh in comparison with Vietnam

Abstract

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.

Prospective Accelerating Sectors to Attain Sustainable Development in Bangladesh Economy: Findings from a Sectoral Approach Using Input-Output Analysis

“…Khan [40] explained that by backward linkage we could learn about the demand-driven connections to upstream sectors, while forward linkage shows supply-driven connections to downstream sectors. We use the I-O table of 2017 of Bangladesh to identify Backward and Forward linkage using Equation (2). We identify the top 10 sectors with highest Backward and Forward linkages in Bangladesh and showed result in the Table 2 as an example.…”

“…They also finalized that Asian LIDCs, including Bangladesh, have very weak linkage among their sectors and should enhance their backward and forward linkages for sustainable development. Arif and Inaba [2] compare FDI spillover effect on the productivity of firms in Bangladesh and Vietnam. They found Bangladesh firms gain productivity through intra-industry linkages, while Vietnam firms increase their productivity through backward linkage.…”

“…A comparative figure is shown in Figure 1, which shows within this time period that the Bangladesh economy is depending more on manufacturing growth, while the service sector was constant and the agriculture share declined. In the competitive international market, many buyers are now choosing Bangladesh as their destination for the manufacturing production because of available cheap labor and low production cost [2]. Bangladesh has been enjoying duty free entry in the EU and some advanced economies, it also has a favorable geographic condition and huge domestic market; all of these have attracted foreign investors [2].…”

“…In the competitive international market, many buyers are now choosing Bangladesh as their destination for the manufacturing production because of available cheap labor and low production cost [2]. Bangladesh has been enjoying duty free entry in the EU and some advanced economies, it also has a favorable geographic condition and huge domestic market; all of these have attracted foreign investors [2]. Despite Bangladesh's amazing growth for the last few years, the diversification of manufacturing is not yet present in the economy.…”

Does foreign direct investment benefit local firms? Evidence from a natural experiment study

“…We use an instrumental variable (IV) estimator to account for the potential endogeneity of FDI presence in a particular district. The literature on FDI and spillover effects reveals that many studies often employ a fixed effect estimator, ignoring time‐variant factors that may affect both FDI and its spillover effects (Arif‐Ur‐Rahman & Inaba, 2021; Damijan et al, 2013). Some employ an IV approach using some characteristics of firms as instruments (Damijan et al, 2013; Dimelis & Louri, 2004), while others utilise the General Method of Moment estimator with the lagged differences as instruments (Damijan et al, 2013; Newman et al, 2015; Van et al, 2022).…”