How does FDI affect domestic firms’ wages? theory and evidence from Vietnam

Dao Thi Hong Nguyen, Sizhong Sun and A. B. M. Rabiul Alam Beg

Applied Economics, 2019, vol. 51, issue 49, 5311-5327

Abstract: This paper explores the role of inward foreign direct investment (FDI) as a determinant of domestic firms’ wages, namely wage spillovers. We first construct a theoretical model to demonstrate that the presence of FDI firms affects domestic firms’ expected average wages via productivity spillovers and a cut-off capability. We then estimate FDI-induced wage spillovers by employing IV-GMM estimator with a five-year panel dataset of a growing service industry in Vietnam. Despite FDI firms on average pay 2.25 times that of domestic firms, they put a downward pressure on domestic firms’ wages. A one percent increase in FDI presence causes domestic firms to cut average wages by 2.03 percent. The estimations also find that firm-specific features are attributable to significant differences in their wages as well as FDI-linked wage spillovers.

Date: 2019
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DOI: 10.1080/00036846.2019.1610717

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