FOREIGN DIRECT INVESTMENT AND INTER-FIRM WAGE DISPARITIES IN VIETNAM: AN ANALYSIS OF HORIZONTAL AND VERTICAL SPILLOVERS EFFECTS

Abstract

Using micro-level data from Vietnam's manufacturing sector spanning 2005 to 2015, this study systematically examines the pathways through which Foreign Direct Investment (FDI) affects the wage disparity between foreign-owned and domestic firms, with particular attention to both horizontal and vertical spillover effects. A two-way fixed effects panel model was constructed to empirically assess how FDI-induced technology spillovers influence firm-level average wages. The analysis simultaneously evaluates the intensity of three distinct spillover channels: horizontal spillovers, forward vertical spillovers, and backward vertical spillovers. Additionally, the study investigates the mediating role of these spillovers in driving wage growth by enhancing firms’ total factor productivity (TFP). To address potential endogeneity and ensure the robustness of the results, a Heckman two-stage model was applied. A heterogeneity analysis was also conducted along the industrial chain to identify marginal variations in the effects of FDI. The results indicate that FDI substantially elevates firm wage levels. In particular, horizontal spillovers and backward vertical spillovers exert the most significant influence on wage growth, with these effects being especially pronounced among domestic firms. FDI also indirectly stimulates wage increases by improving firm productivity, supporting the mechanism whereby technology diffusion enhances efficiency and subsequently raises wages. This effect is particularly evident in firms situated in the downstream segments of the industrial chain. The findings offer policy guidance for Vietnam regarding the coordinated development of FDI alongside local enterprises and strategies to reduce the wage gap between foreign-invested and domestic firms.