FDI spillover effects: do domestic manufacturing companies benefit from foreign direct investment in Vietnam?IntroductionIn the 1990s, foreign direct investment ( FDI) have become the largest source of foreign investment. financing for many developing countries. In Vietnam in particular, the Foreign Investment Law enacted during the 1986 Congress to attract FDI was seen as the first step in doi moi (renovation) reform. Cumulative FDI increased from 28 projects totaling $140 million in 1988 to 8,266 projects totaling approximately $78 billion at the end of 2006. FDI has therefore generally met expectations that it would play a key role in accelerating economic growth (GSO Statistical Yearbook, several years). [1] The most important benefit of FDI has been shown in previous literature to create a ripple effect. Lipsey (2002), for example, argued that expected FDI flows would bring new technologies and know-how and thus help increase the productivity and competitiveness of domestic industries. FDI, on the other hand, is criticized for stealing market share from its domestic counterparts and generating considerable costs (Blomstrom and Kokko, 2003). Understanding of this spillover effect in the Vietnamese context is currently quite limited. In fact, there appears to be no empirical evidence for this. The objective of this research is to focus on FDI flows and their effects on domestic firms in Vietnam using a panel of manufacturing firms between 2002 and 2006. The research questions and a review of The literature on spillover effects on developing countries is presented in the following sections. Sections 4 and 5 describe the data and methodology used for the research. Some remarks are offered in the last section. Objectives This project is proposed to empirically examine the spillover effect of FDI on the Vietnamese manufacturing sector. In particular, we will focus on two specific questions: i) Does the FDI sector have a positive spillover effect on domestic firms? ii) Do FDI companies display higher productivity than their national counterparts? It is hoped that the project will provide a first insight into the spillover effect of FDI in Vietnam, which will be useful for policy makers as well as further research in this area.FDI spillover effects: a reviewThe effect drive has been considered one of the most important benefits of inward FDI in developing countries. This knock-on effect of FDI on the host country can occur through two main channels (i) the diffusion of know-how through