Back in the 1990s, foreign direct investment (FDI) became the largest source of external finance for many developing countries. In Vietnam in particular, the Law on Foreign Investment promulgated in the 1986 Congress to attract FDI was considered the first step of the doi moi (renovation) reform. The cumulative FDI increased from 28 projects of total US$ 140 million FDI in 1988 to 8266 project for roughly US$ 78 billions at the end of 2006. FDI, therefore, has generally lived up to the expectation that it would play a key role in accelerating economic growth (GSO’s Statistical Yearbook, various years). 
The most important benefit of FDI in previous literature was proved to create spillover effect. Lipsey (2002), for instance, argued that the expecting FDI inflows would bring about new technologies, know-how and hence contribute to increasing productivity and competitiveness of domestic industries. FDI, on the other hand, is criticized for stealing market share of their domestic counterpart and generating considerable costs (Blomstrom and Kokko, 2003).
The understanding on this spillover effect in the Vietnamese context is currently rather poor. In fact, there appears to be no empirical evidence on this matter. The objective of this research is to focus on FDI flows and its effects on domestic enterprises in Vietnam using a panel on manufacturing firms between 2002 and 2006. Research questions and a review of literature on spillover effect on developing countries are outlined in the next sections. Section 4 and 5 describe data and methodology used for the research. Some remarks are offered in the final section.
This project is proposed to empirically examine the spillover effect of FDI on the Vietnam’s manufacturing sector. Particularly, we will concentrate on two specific questions:
i) Does the FDI sector have a positive spillover effect on domestic firms?
ii) Do FDI enterprises exhibit higher productivities than their domestic counterparts?
It is hoped that the project will provide some first insights on the spillover effect of FDI in Vietnam, which will be useful for policy makers as well as further research on this area.
Spillover effects of FDI: a Review
Spillover effect has been considered as one of the most important benefits of inward FDI in developing countries. This spillover effect of FDI on the host country may take place through the two major channels (i) diffusion of know-how by introducing new technology and training workers who will be hired by domestic firms later; and (ii) increase of competition pressures, what will force domestic firms to increase their competitiveness by adapting new technology, improving managerial effectiveness, and spending more efforts on quality assurance and other marketing techniques (see Blomstrom and Kokko, 1998, 2003 for a review).
The spillover effect is however a potential impact of FDI on host countries. UNCTAD (2000) argues that whether spillover of FDI to be realized depends on technological capacity and policy settings of host countries. Furthermore, technology diffusion may also be limited as the number of employees who are hired at high positions in foreign-invested firms is often small. In addition, Inward FDI possibly results in significant environment costs (Ederington, Levinson and Minier, 2004). In many cases, the cost of having incentives for FDI could be high (Lipsey, 2002). Market-seeking MNCs are often criticized for stealing the market share of their domestic counterparts.
There has been growing empirical literature on the spillover effect of FDI in developing countries and the overall picture is however mixed. Blomstrom and Sjoholm (1999) reveal that foreign ownership considerably contributes to improve the productivity of manufacturing in Indonesia. Positive spillover...