Impacts of FDI Linkages on the Labor Productivity of Domestic Firms: The Role of Local Business Environment

This study contributes to the literature on the spillovers of foreign direct investment by presenting empirical evidence on the impact of linkages with foreign-invested firms on the productivity of domestic firms in different local business environments. Using longitudinal data in a transitional economy of Vietnam from 2012 to 2018 and applying different estimation techniques to deal with the potential endogeneity problem, the study shows that linkages with foreign-invested firms have a positive impact on the labor productivity of domestic firms. This relationship is significantly enhanced in an improved local business environment. Additionally, this enhancement effect is observed among firms with a smaller size and those operating in medium- and high-technology industries. The findings suggest important implications to support businesses through improving the local business environment in transition economies.