This paper investigates the relationship between foreign direct investment (FDI) and the productivity of domestic firms in Vietnam. We find evidence of productivity externalities through vertical linkages with joint venture foreign investors in both upstream and downstream sectors. We also identify productivity effects associated with technology transfers from upstream wholly foreign-owned firms. This is the first time that evidence of productivity effects due to forward linkages has been identified in a developing country context. Spillovers from fully owned foreign firms through backward linkages are also detected but only for firms that innovate and change what they produce in order to benefit from such linkages. Our findings provide new evidence on the interaction between foreign investors and private domestic firms that can help inform the debate on how best to design policy to attract FDI in Vietnam and other developing countries.
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