Import Competition from Neighbors: Impacts on Performances of Enterprises in Vietnam

Vietnam’s exports have registered a growth of over 20% year over year during the past decade, especially since it joined the World Trade Organization (WTO) in 2007. The drastic increase in Chinese exports preceded this, starting with a great surge in 2000. What made the development in Vietnam possible was the liberalization process of the Vietnamese market which started in the mid-1980s when Vietnam decided to switch from its centralized economy. Recent studies have focused on the impact of import competition from China or other low-wage countries as a group on developed countries or geographically remote countries. In contrast, the geographical proximity of Vietnam, China and ASEAN should amplify the possible impact caused by rising competition from these countries. Moreover, in previous empirical research, trade economists have typically assumed the Heckscher-Ohlin trade model (originally proposed in 1919 and 1924, but translated, edited and published in 1991) in which the countries differ in their relative factor endowments. Thus, when two countries trade, each country will export the good or service that uses its abundant factor intensively. China and Vietnam, however, seemingly are both labor-abundant countries. Then, why do two countries like Vietnam and China, both low-wage countries, with not that much difference in technology and relative factor endowments, engage in intra-industry trade? The first question is whether the traded products are differentiated, confirming what is called the “love of variety” approach. Krugman (1979)’s model allows product differentiation, and predicts that trade will cause firms to exit in each country (selection effect) and surviving firms to expand their output (scale effect). In addition, Melitz (2003) incorporates firm heterogeneity, where firms have differing productivities. With this model, reallocation of resources from less productive firms to more productive firms triggers trade. This study tries...