FDI Inflows and Domestic Firms: Adjustments to New Export Opportunities

We investigate the long-term interaction between multinational affiliates in a host country, domestic firms, and new export opportunities. The 2001 US-Vietnam Bilateral Trade Agreement dramatically reduced US tariffs applied to imports from Vietnam. We find significant entry responses to tariff cuts, driven by foreign and private domestic firms. Conventional data, which focuses on firms above certain size cut-offs, would significantly understate tariff-induced entry of private domestic firms and overstate the relative entry response of foreign firms. Second, entering firms–rather than incumbents–account for much of the tariff-induced employment growth, particularly foreign entrants. Despite tariff-induced private domestic entry, these firms do not contribute to employment growth, while state firms stall this growth through lower exit rates. Third, longer-term cumulative effects of trade policy matter. About half of the tariff-induced employment share growth among foreign entrants is due to post-entry growth. Fourth, post-entry employment growth is driven by exporting foreign firms, further highlighting the link between foreign affiliate entry and new export opportunities. This employment and export growth is not driven primarily by intra-firm trade of U.S. multinationals. Focusing solely on the response from U.S. multinationals would miss how FDI generally respond to trade policy in Vietnam, highlighting the importance of studying the longer-term effects of FDI from multiple sources in a lower-income host.