This paper provides new evidence on the relationship between foreign direct investment (FDI) and the productivity of domestic firms. Using a specially designed survey on a sample of over 7,500 manufacturing firms in Vietnam we uncover some of the mechanisms that explain productivity spillovers from FDI through vertical linkages along the supply chain. Our results suggest that domestic firms experience more productivity spillovers through forward linkages from foreign-input suppliers to domestic input users than through backward linkages from foreign customers to domestic producers of inputs. Productivity externalities from upstream sectors are associated with joint venture foreign investors while downstream sectors experience direct technology transfers from upstream wholly foreign owned investors.
Spillovers from FDI through backward linkages are also detected but only when competition from imported intermediates is controlled for and are associated with innovations and technology investments made by firms.