FDI, Market Power, and Markups : Evidence from Vietnam

To date, the impact of foreign direct investment on market power and consumer welfare indeveloping countries has been relatively understudied. Utilizing a firm survey dataset from Vietnam, this paperfirst calculates firm-level markups for manufacturing firms and then analyzes the impact of foreign direct investmentand foreign ownership on firm markups. Overall, the findings show that increases in the presence of foreign firms in agiven industry are associated with decreases in markups in that industry, despite foreign firms individually charginghigher markups on average than their domestic competitors. The findings further show that while the markups of bothforeign- and domestic-owned private firms tend to decrease with greater foreign direct investment, state-ownedenterprises may be relatively insulated from foreign direct investment driven competitive pressures. These results arerobust to the inclusion or exclusion of potential outliers and the potential non-random selection of firms acquired byforeign investors.