This thesis examines factors affecting aggregate total factor productivity (TFP) growth in developing countries. While the first two essays are devoted to exploring trade-embedded foreign R&D spillovers, the last two essays are more concerned about firm dynamics and misallocation of resources across firms. Although foreign R&D spillovers have been studied intensively since the emergence of the innovation-led growth models in the early 1990s, little research has been conducted on the impact of Free Trade Agreements (FTAs) on North-South diffusion processes. Also, few studies have incorporated domestic R&D and trade liberalisation to examine North-South R&D spillovers at industry level. The first two essays fill these gaps. The last two essays contribute to the literature by partly addressing the long-lasting puzzle of why productivity dispersion in developing countries is large and persistent, even within narrowly-defined industries. In particular, these essays explore the role of firm dynamics, including entry and exit, and reallocation of resources across firms in reducing TFP gap in the manufacturing sector of a transitional economy, namely Vietnam.
Given the recent proliferation of FTAs, the first essay investigates the impact of FTAs on North-South R&D spillovers. Using panel data covering 56 developing countries and 15 OECD countries over 1980-2008, the results show that North-South R&D spillovers are sizeable. FTAs have, however, a negative impact on this diffusion process. This finding may be attributed to decreases in the variety of goods imported, and the switching of imports from more efficient non-member countries to less efficient member countries.
The second essay employs the industry-level data in Vietnamese manufacturing over 2000-2009 to address the foreign technology diffusion from 16 OECD countries. The empirical results indicate that the domestic own industry R&D improves TFP growth in the sector, but in a much smaller scale than the foreign R&D counterparts. The foreign R&D spillovers themselves differ in diffusion channels, as Vietnamese manufacturing’s TFP seems to benefit more from the foreign R&D embedded in the inter-industrial relation through the Input-Output tables than that embedded in import from the same industries abroad. Despite experiencing several major trade liberalisations in the manufacturing sector over the study period, the sectoral TFP has seen little impact from these reforms.
The third essay studies the impact of market deregulation on the aggregate TFP of Vietnamese manufacturing. Over 2000-2008, Vietnam experienced a big market deregulation which induces a massive entry of private firms amid privatisation of state-owned enterprises (SOEs). The results reveal that during this period firms’ entry and exit makes up around a half of aggregate TFP growth. Private firms account for most of this TFP improvement as they exhibit a “growth” effect over the state entrants and a “level” effect over the foreign counterparts. Despite huge entry of private firms, SOEs face lower hazard rates than the private counterparts, even accounting for productivity differentials. This may be attributed to SOEs’ receipt of favourable treatment from the government that prevents them from exposure to the same degree of market experimentation as experienced by the private firms.
The last essay examines whether firm dynamics improves allocative efficiency in Vietnamese manufacturing over 2000-2008. Given that this is a period of unprecedented growth in domestic credit supply, the essay also investigates the impact of the credit policy on capital misallocation across firms in the sector. It finds that firms’ entry and exit contributes significantly to the allocative efficiency improvement in Vietnamese manufacturing, particularly in the second half of the study period. The across-firm TFP dispersion within 4-digit ISIC industries is large and persistent because SOEs disproportionately absorb a lion’s share of credit. In that context, providing more credit to the SOEs, relatively to their private counterparts, would yield an anti-capital distortion reducing effect rather than the desired capital distortion reducing effect of commercial and subsidised credit.