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

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

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.

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Applied Economics

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1466-4283

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Taylor&Francis

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DOI

10.1080/00036846.2019.1610717