Agglomeration Economies and the Location of Foreign Direct Investment: Empirical Evidence from Vietnam

We examine the impacts of agglomeration economies on the location of Foreign Direct Investment (FDI) in Vietnam. Using a large dataset that provides detailed information about individual firms, we investigate the location choices by 920 newly created foreign firms in 2009 in about 125 different 4-digit industries. The estimates of the conditional logit model show that agglomeration benefits motivate foreign firms in the same industries and from the same countries of origin to locate near each other. However, the empirical results also reveal that there is competition among provinces in Vietnam in attracting foreign investors, and the locations of Vietnamese firms have no effects on the location decisions by foreign firms in the same industry. This is one of the few studies of agglomeration effects on the location of Foreign Direct Investment in transition economies in general and Vietnam in particular.