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):
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
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
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
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
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
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 )
m ' Xim )
Conditional logit model
Dependent variables: location choice
1 2 3 4
0.0042**** 0.0038**** 0.0039**** 0.0033****
(0.0006) (0.0007) (0.0006) (0.0006)
0.0015**** -0.0005 -0.0004 -0.0004
(0.0004) (0.0005) (0.0004) (0.0004)
0.0226**** 0.0207**** 0.0195****
Same industry -
(0.0032) (0.0031) (0.0031)
Neighboring firm -
Same country - -
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)
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.
The case of Binh Duong province in Vietnam