44.Dinh_Binh.presentation.Agglomeration_Economies_and_location_choices_by_foreign_firms

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					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 2000-2005


             Regions (%)            2000   2001   2002   2003   2004   2005
             Red River Delta        22.7   20.5   20.7   20.5   20.7   20.2
             Northeast               2.0    1.9    2.5    2.9    3.2    3.0
             Northwest               0.3    0.2    0.2    0.3    0.3    0.4
             North Central Coast     1.1    0.8    0.8    1.0    1.0    0.9

             South Central Coast     3.7    3.4    3.4    3.4    3.0    2.7
             Central Highlands       2.2    1.7    1.5    1.6    1.6    1.9
             Southeast              64.5   68.5   68.1   67.6   67.7   68.8
             Mekong River Delta      3.5    3.0    2.8    2.8    2.6    2.3

                           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 2000.
   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                          New firm              New mnf firm
Variables                                  1                     2

Foreign firm                         0.0086**                   -

Foreign manufacturing firm               -                   0.0140**
Vietnam manufacturing firm               -                   -0.0004

α                                     1.4781                  1.5355

Obs (provinces)                         61                     61
Pseudo R2                               0.18                   0.17
Chi square                           53.01****              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 Πij:
                                                 α: the characteristics of provinces
       ij   j   ' X ij   ij               X: agglomeration variables
                                                 ε: an investment location specific
                                                 random disturbance.

   The investor i prefers the location j if:
                  ij   ik         k ≠ j, and j, k € M.


   The probability of choosing the location j is thus:
                    Pr(  ij   ik )             k ≠ j.


   The probability that i yields the highest profitability when choosing j
    among the choice set M is :
                                         exp( j  ' X ij )
                         Pr(ij) 
                                     exp(
                                     M
                                                  m     ' Xim )
                     Empirical results
                   Conditional logit model
                                    Dependent variables: location choice
Independent variable
                              1           2                   3                   4
                       0.0042****   0.0038****         0.0039****          0.0033****
Foreign firm
                       (0.0006)     (0.0007)           (0.0006)            (0.0006)
                       0.0015****   -0.0005            -0.0004             -0.0004
Vietnamese firm
                       (0.0004)     (0.0005)           (0.0004)            (0.0004)
                                    0.0226****         0.0207****          0.0195****
Same industry          -
                                    (0.0032)           (0.0031)            (0.0031)
                                                       -0.0073***          -0.0081****
Neighboring firm       -
                                                       (0.0026)            (0.0026)
                                                                           0.0032****
Same country           -                               -
                                                                           (0.0008)
Log-likelihood         -1203.2      -1175.21           -1171.4             -1163.8
Pseudo R2              0.37         0.39               0.39                0.40

                   (****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
Thanks for
 your attention!

				
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