Discussion Paper

No. 2017-21 | May 05, 2017
Impacts of Export-platform FDI on backward linkages – Do third country size, trade agreements and heterogeneity of firms matter? Evidence from the Vietnamese supporting industries

Abstract

The paper investigates the impacts of export-platform foreign direct investment (FDI) on backward linkages. First, in a three-country model, these impacts are explained through the competition effect and the demand effect. Whenever the former is stronger than the latter, the investment has a negative impact on the level of backward linkages and conversely. Otherwise, the level of backward linkages is also affected by third country size, local content requirement, and the power of trade agreements between the host and the third countries. Second, in the case of the Vietnamese supporting industries between 2000 and 2012, export-platform FDI generates a negative effect. Moreover, local content requirement, and trade agreements between Vietnam and third countries (bilateral trade agreement with the U.S. and entry of Vietnam into the WTO) positively impact the level of backward linkages whereas third country size has an ambiguous impact.

JEL Classification:

F15, F23, O1

Assessment

  • Downloads: 296

Links

Cite As

Thanh Tam Nguyen-Huu and Minh Nguyen-Khac (2017). Impacts of Export-platform FDI on backward linkages – Do third country size, trade agreements and heterogeneity of firms matter? Evidence from the Vietnamese supporting industries. Economics Discussion Papers, No 2017-21, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2017-21


Comments and Questions


Anonymous - Referee Report 1
May 24, 2017 - 19:35

See attached file


Anonymous - Referee Report 2
May 24, 2017 - 19:38

The paper, by examining the effects of export-platform FDI on upstream industries, addresses an important research question. Existing literature assessing the effects of FDI on domestic industries via backward or forward linkages has tended to not differentiate the types of FDI (horizontal, vertical, or export-platform). The goal of this paper ...[more]

... is to show theoretically and empirically that export-platform FDI exerts both a negative competition effect and a positive demand effect on the output of upstream industries, leading to an ambiguous net impact.
While I find the question important especially for many developing countries, I am not convinced by the analysis, in particular, the empirical part of the analysis. First of all, the paper introduces too many factors (trade agreements, local content requirement, firm heterogeneity and etc.) into play, which are distractive especially when the main question is not yet answered satisfactorily. I would suggest the authors to be more focused with the research question and try to address the key question rigorously.
Second, the analysis does not appear to have actual export-platform FDI data. Using FDI in export-oriented industries as a proxy is not adequate and raises many issues. For example, it casts doubt on the interpretation of the results – are we really capturing the effect of export-platform FDI or just the effect of general FDI?
Third, I am not sure I follow the testable hypotheses listed on page 13 and subsequently the interpretations of the results. I don’t think we can draw conclusions the way they are done at the moment by comparing the coefficients (or their sums) of two different specifications. In fact, I am quite lost how we arrive at the various hypotheses. Why could not the coefficient itself tell us the net effect? I think it is unconvincing to rely on the magnitude of the coefficients to determine the sign of the net effect. More direct evidence is needed.
Fourth, there are many omitted factors on the right hand side that could potentially affect industry output, including, for example, trade. The empirical specifications need to be substantially augmented. The current version and controls are poorly motivated and even confusing.
Fifth, I am not sure the term “backward linkage” is used appropriately in the paper. The paper, in my view, attempts to examine the effect of export-platform FDI on the output of upstream industries; while the effect is indeed channeled through backward linkage, it should not be defined as the effect on backward linkage.
Overall, I would suggest significantly streamlining the theoretical analysis to focus on the key question and substantially enriching and augmenting the empirical analysis.


Thanh Tam Nguyen-Huu and Minh Nguyen-Khac - Reply to Referee Report 1
June 08, 2017 - 17:53

See attached file


Thanh Tam Nguyen-Huu and Minh Nguyen-Khac - Reply to Referee Report 2
June 08, 2017 - 17:54

See attached file