Agglomeration Economies and Location Choices by Foreign Firms in Vietnam Dinh Thi Thanh Binh University of Trento, Italy

Theories of localization (1/2)  Agglomeration economies: positive externalities that stem from the geographic clustering of industries.  3 externalities (Marshall, 1920):  Technological spillovers  A pooled market for workers with specialized skills  A pooled market of specialized intermediate inputs  Empirical studies: foreign firms are likely near other firms in the same industry or from the same country of origin (Head et al., 1995; Crozet et al. 2004; Guimaraes and Figueiredo, 2000).

Theories of localization (2/2)  However, most papers neglect firm heterogeneity and competition among firms.  Firms are not only receivers but also sources of knowledge.  They therefore choose locations to gain exposure to others’ localized knowledge while reducing leakage of their own knowledge to competitors.  Shaver and Flyer (2000); Alcacer & Chung (2007):  Large foreign firms try to locate away from their competitors.  Technologically advanced firms choose only location with high levels of academic activity and avoid locations with industry activity to distance themselves from competitors.

Aims of the study  The study tests three hypotheses that aim to verify the existence of agglomeration economies in location choices by foreign firms in Vietnam:  Hypothesis 1: the greater the number of foreign firms already established in a province, the more likely new foreign investors are to invest in that province.  Hypothesis 2: the greater the number of domestic firms and foreign firms in a specific industry already located in a province, the more likely new foreign investors in that industry are to locate in that province.  Hypothesis 3: the greater the number of foreign firms from a specific country already located in a province, the more likely new foreign investors from that country are to locate in that province.

The geographical distribution of foreign firms in Vietnam Regions (%) Red River Delta Northeast Northwest North Central Coast South Central Coast Central Highlands Southeast Mekong River Delta Source: The GSO’s survey on firms

Data sources  The yearly survey of enterprises operating in Vietnam yearly conducted by General Statistics Office of Vietnam (GSO) since  All foreign firms in all 64 provinces and cities in Vietnam with detailed information about each foreign firm.  Obtain 568 new foreign firms in 2005 by using tax code and the year of operation.  The stock numbers of foreign investors up to 2004 are used to form the agglomerations variables.  Province’s characteristics: Vietnam Statistical Yearbooks

Empirical results Negative binomial model Independent Variables New firm 1 New mnf firm 2 Foreign firm0.0086**- Foreign manufacturing firm ** Vietnam manufacturing firm α Obs (provinces)61 Pseudo R Chi square53.01****46.29**** (****p-value<0.005, ** p-value < 0.05)

Conditional logit model (McFadden,1974)  The investor i, if it locates in province j, will derive an expected profit of Π ij :  The investor i prefers the location j if: k ≠ j, and j, k € M.  The probability of choosing the location j is thus: k ≠ j.  The probability that i yields the highest profitability when choosing j among the choice set M is : α: the characteristics of provinces X: agglomeration variables ε: an investment location specific random disturbance.

Empirical results Conditional logit model Independent variable Dependent variables: location choice Foreign firm **** (0.0006) **** (0.0007) **** (0.0006) **** (0.0006) Vietnamese firm **** (0.0004) (0.0005) (0.0004) Same industry **** (0.0032) **** (0.0031) **** (0.0031) Neighboring firm *** (0.0026) **** (0.0026) Same country **** (0.0008) Log-likelihood Pseudo R (****p-value<0.005, *** p-value < 0.01)

Conclusions  New foreign investors are likely to locate their firms near other foreign firms.  They prefer to locate near foreign firms in the same industries and from the same countries of origin.  Competition among provinces in FDI attraction.  Location of Vietnamese firms has no effect on location decisions by foreign firms in the same industries. Policy Implication  Industrial zones  The case of Binh Duong province in Vietnam

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