A QUANTITATIVE STUDY ON THE DETERMINANTS OF THE LINKAGE BETWEEN DOMESTIC SUPPLIERS AND FDI ENTERPRISES IN VIETNAM

Abstract

The paper studies the determinants of forming the link between domestic suppliers and FDI enterprises in Vietnam using enterprise survey data released by the General Statistics Office of Vietnam in 2017. The determinants include characteristics of FDI and domestic enterprises as well as government policies. Results from the Probit model show that, FDI enterprises operating in industrial parks are less likely to choose domestic suppliers; whereas domestic enterprises located in industrial parks are more likely to become suppliers for FDI enterprises. The paper also finds that technological capacity plays an important role for the linkage. Accordingly, the more domestic enterprises have high technological capacity, the more likely they are to become suppliers of FDI enterprises, and the more FDI enterprises have high technological capacity, the less likely they are to link up with domestic enterprises. This result indicates that the technological capacity of domestic enterprises remains weak and needs to be improved in terms of increasing linkages. The regression results also show that Vietnamese enterprises in the manufacturing industry are more likely to become suppliers for FDI enterprises than those in other industries. Considering the impact of government policies, the study suggests that economic integration does not create enough incentives to promote linkages between domestic and foreign firms. Past policies focusing on attracting foreign investment prioritizing FDI enterprises since 2009 have led to the reduction in the possibility of domestic enterprises becoming suppliers to FDI enterprises.