Bridging the productivity gap: A comparative analysis of foreign-owned and domestic firms in Viet Nam

This study investigates the productivity gap between foreign-owned and domestic Arms in Viet Nam. Using quantile regression estimation for the period of 2011-2020, the study first examines the impact of Arms' specifics and of provincial governance quality on firms' total factor productivity at different points of the productivity distribution. The results show that labour productivity, market share and return on assets appear to significantly affect firm productivity regardless of firm groups or quantiles. To understand the productivity gap between foreign and domestic firms, the study uses the quantile decomposition approach to differentiate the factors that contribute to the gap at different quantiles. Our findings reveal that across quantiles most of the productivity gap is explained by firms' specifics, especially labour productivity. To address the productivity gap between foreign-owned and domestic firms in Viet Nam, policymakers should focus on enhancing domestic firms' access to technology, firms' experience and human capital development, as firm-specific factors appear to be major contributors to the productivity differential. In addition, improving provincial governance quality and creating an enabling environment for both foreign-owned and domestic firms can further stimulate productivity growth and foster healthy competition in the manufacturing sector. Keywords : domestic firms, foreign direct investment, quantile decomposition, total factor productivity gap, Viet Nam JEL classification codes : F63, L25, L60, O53
1. Introduction Foreign direct investment (FDI) has played a pivotal and transformative role in shaping the economic landscape of Viet Nam throughout the past few decades. Viet Nam is known [...]