Spillover effects of FDI in the manufacturing sector on agricultural labor productivity in Viet Nam

Abstract In emerging economies undergoing an agrarian-to-industrial transition, a growing export-led foreign direct investment (FDI) sector often coexists with a lagging traditional agricultural economy. To explore the micro-level dynamics of this structural transformation, this study investigates the transmission channels of manufacturing FDI spillovers, specifically through supply-chain linkages and labor reallocation, on agricultural labor productivity through an empirical analysis of Viet Nam. A shift-share instrumental variable (IV) approach is applied to household-level panel data (2010–2020) to address spatial endogeneity. The empirical model incorporates an interaction term between the provincial FDI employment share and a household’s reliance on off-farm wages in a comparative analysis of livestock and crop cultivation. A starkly asymmetric spillover pattern is revealed. Specifically, a one-standard-deviation increase in the FDI employment share leads to a 1.42% increase in labor productivity within the livestock sector, highlighting the positive role of backward linkages. In contrast, the estimated effect on crop cultivation is statistically insignificant, indicating no observable FDI spillovers in this sub-sector. Furthermore, the findings show a restrictive labor reallocation channel, termed the livelihood substitution effect. As labor shifts to industrial zones, wage-reliant households appear to prioritize off-farm opportunities over agricultural reinvestment. This is evidenced by a significant negative interaction coefficient (-0.00066), indicating that these households capture fewer agricultural spillover benefits. These results suggest that FDI-driven industrialization does not automatically modernize traditional agriculture. Drawing from the Vietnamese experience, the evidence posits that achieving balanced structural change in rapidly industrializing economies requires targeted policies to foster backward linkages, supported by dual-skilling and micro-credit programs to mitigate the adverse effects of labor extraction.