Industrial Zones and Private Formal Sector Job Creation in Vietnam

• In Event: International labor market outcomes: The Role of Public Policy

Abstract

Industrial zones, similar to Opportunity Zones in the US, offer incentives such as tax breaks, infrastructure improvements, and regulatory relief to attract investment. Industrial zones are increasingly popular: 5400 zones in 147 countries in 2018.  Despite their prominence, the effectiveness of industrial zones in generating formal sector employment remains an open question. Additionally, the existing literature only captures spatial spillovers in a very simple way: they don’t take into account when two zones are close together and as nearby zones fill up. 

This paper studies the causal impact of industrial zones on the creation of formal sector employment in Vietnam. Our dataset integrates location-level employment and firm registration data from 2000 to 2017 with a comprehensive database of industrial zones, including their location and year of establishment. Our event-study framework employs the recent advanced staggered difference-in-differences estimator suggested by Wooldridge (2022) in conjunction with measures of time-variant nearby zones’ economic activity to examine the influence of spatial spillovers.

Our results show that industrial zones significantly increase employment and firm creation. Four years after the establishment of an industrial zone, formal sector employment in treated locations increased by approximately 900 workers, representing an 84% rise compared to pre-zone employment levels. This translates to an annual employment growth rate of 17%, double the national average of 8.4% during the same period. We also observe a substantial increase in the number of firms, an average rise of 12 firms four years post-treatment. While foreign firms drive most of the employment growth, domestic private firms contribute most to the increase in firm count. Furthermore, about one-third of the employment gains and two-thirds of the firm growth occur outside the industrial zone but within the same location, suggesting some degree of positive spillovers.

Preliminary results suggest an important role for spatial spillovers as many treated and untreated locations are geographically close to multiple industrial zones. We find evidence that high economic activity nearby casts a shadow on local employment, whereas high economic activity a little further away is associated with positive spillovers on own-location employment. Furthermore, the effectiveness of zones is influenced by the density of economic activity nearby, with greater employment effects in dense economic areas.

The effectiveness of industrial zones varies considerably both across and within the same cohort. Zones established between 2003 and 2006 experienced significant employment growth, whereas those that opened in 2007 and 2008 showed little to no employment effects. However, there was also a substantial variation even within a single cohort. Some zones exhibit significant employment growth, while others do not. Several factors may explain this heterogeneity. The Global Financial Crisis of 2008-09 negatively affected global manufacturing and investment flows, which may have weakened the effectiveness of zones established during this period. There is also evidence that zones were overbuilt in anticipation of a surge in investment following Vietnam’s WTO accession, leading to lower occupancy rates and reduced effectiveness in later years. We continue to investigate how these factors interact to influence the success of industrial zones.

Author

• Anh Pham, George Mason University
  Presenting Author