109 | P age Do Direct Foreign Investments Increase Efficiency Convergence at Firm Level? The Case of Vietnam, 2000-2011 Nguyen Khac Minh 1 , Nguyen Viet Hung 2 , Pham Van Khanh 3 , Ha Quynh Hoa 4 ARTICLE INFO ABSTRACT Available Online July 2014 The objective of this study is to assess the extent to which the effect of FDI on firms’ efficiency and efficiency convergence across industries in Vietnam. Dynamic input output tables are used to construct the linkages between domestic and foreign firms. Stochastic production frontier is used to estimate firms ‘efficiency with a large panel dataset covering manufacturing firms in Vietnam from 2000 to 2011. The analysis shows that, the impact of FDI on domestic firms ‘efficiency score and convergence at firms’ level through the horizontal, backward and supply backward channels are negative and different. Key words: Stochastic Production Frontier; Eefficiency; Foreign Direct Investment Manufacturing; Efficiency Convergence. I. Introduction The literature investigating the relationship between FDI and technical efficiency has been focusing on technological spillover effects resulting from foreign direct investment firms. The question of how domestic firms benefited from the presence of FDI in terms of spillover effects? To answer this question, the literature have used a combined empirical method for studying technical efficiency using micro data (Schmidt & Sickles (1984), Cornwell & et al. (1990), Haddad and Harrison (1993), Kathuria V. (2000) and Ghali and Rezgui (2006). In some case, the contribution of FDI via spillovers have been confirmed while in others, it has been rejected, depending on the nature of the data used and also on specific empirical methodologies. Technical efficiency has been measured and interpreted in different ways. The literature offers a large choice of methodologies, each one with its strengths and weaknesses. Two important points emerged from their literature review and the comparative studies performed by Gong and Sickles (1992) about the DEA method and the stochastic frontier approach. In this paper, we focus on the stochastic frontier approach. Our objective, beyond presenting evidence of technical inefficiency and FDI’s spillover effects is to investigate whether technical efficiency convergence process occurred in the presence of FDI through spillovers to firms. Cross-country productivity convergence have received attention both at the country level (Dollar and Wolff (1988); Dorwick and Nguyen (1989), and at the industry level (Baumol (1986); Bernard and Jones (1996). It should be noted that the growth of a country results from the growth of industries, which comes from the growth of firms. Ultimately, the improvement in technical efficiency is an important aspect of the process of growth. However, there has been little empirical work at the firm level on technical efficiency convergence (Alam and Sickles, 2000. Our methodology proceeds in four steps. First, we construct an empirical representation of the frontier technology for a given set of sub- industries. This can be accomplished through econometric estimation techniques. Second, we discuss the results on a statistical base in order to see if FDI spillovers could be sensitive to any change in technical efficiency measures. Third, we analyze technical efficiency spillovers of FDI in a sample of Vietnamese enterprises. Our analysis extends the literature in the way of testing for the presence of vertical and horizontal spillovers on the firms’ technical efficiency. Finally, we estimate 1 Member of the scientific council, National Economics University (NEU), 207 Giai Phong Street, Hai Ba Trung District, Hanoi, Vietnam. E- mail: khacminh@gmail.com 2 Faculty of Economics, National Economics University (NEU), 207 Giai Phong Street, Hai Ba Trung District, Hanoi, Vietnam, E-mail: hungnv@neu.edu.vn 3 Faculty of Information Technology, Military Technical Academy (MTA), 236 Hoang Quoc Viet Street, Cau Giay District, Hanoi, E-mail: Vietnam, van_khanh1178@yahoo.com 4 Faculty of Economics, National Economics University (NEU), 207 Giai Phong Street, Hai Ba Trung District, Hanoi, Vietnam, E-mail: hoahq@neu.edu.vn