The spill-over effects of foreign direct investment on technical efficiency of domestic supporting industry firms in Vietnam

The relationship between domestic supporting industry (SI) firms and foreign direct investment (FDI) firms plays an important role in the development of many developing countries, including Vietnam. To better understand the impact of FDI on the domestic SI firms in Vietnam, the paper investigates two channels of FDI spill-overs: horizontal and backward spill-over effects. Utilising the approach of stochastic frontier analysis, the paper considers the impacts of FDI spill-overs on the technical efficiency of domestic SI firms for the period 2014–2018. Interacting variables are included in the models to see how the absorptive capacity of the domestic firms may influence the spill-over effects. The results show that FDI firms in both horizontal and backward linkages bring negative impacts and the domestic SI firms with higher-skilled workers may mitigate the negative backward spill-over effects. The findings suggest policy implications not only for Vietnam but also for other developing countries to better attract FDI and improve domestic SI firms' performance.