Trade and competition have been extensively studied in Vietnam and abroad. There has been a large and increasing number of theoretical and empirical studies devoted to investigating the effects of trade liberalization and competition from foreign imports on the performance of firms. These studies have provided empirical evidence on different channels through which trade and competition improve economic efficiency at the firm levels. Tariff reduction and import competition have been shown to induce firms to raise productivity, invest in technology upgrading, and innovate. Import competition forces the exit of less efficient firms, thus leading to the improvement of industrial performance through within-industry resource allocation.

This paper examines a different channel through which tariff reductions and import competition contribute to the improvement of the performance of firms. In this paper, I analyse the links between regional economic integration on quality upgrading in Vietnam’s manufacturing firms. This paper makes use of Vietnam’s enterprise surveys and estimates the effects on product quality of the tariff liberalization under the ASEAN Economic Community (AEC) and ASEAN+1 free trade areas (FTAs).

This paper employs newly proposed methods to estimate the quantity-based production function and product quality. These methods make it possible to estimate product markups at the firm-product level and allow for the variations of product markups across firms and over time. The estimated markups, in combination with the available information on product quantity and prices, are used to calculate the measure of unobserved product quality. I use the preferential tariff margins under ASEAN and ASEAN+1 FTAs and imports from ASEAN countries and their dialogue partners under the ASEAN+1 FTAs to represent the degree of import competition. 

The empirical results indicate the positive effects of regional economic integration on product quality upgrading in Vietnamese manufacturing firms. Vietnamese firms are found to raise product quality and speed up quality upgrading in response to rising competition from foreign imports. I also observe a complementarity between import competition and the competition condition in the domestic market. Tariff reductions and imports from FTA partners exert a stronger impact on product quality in industries with a low industrial concentration and a higher level of competition. By contrast, the effects of tariff reductions and import competition are considerably lower and largely statistically insignificant in the industries with a high level of industrial concentration.

Product quality is essential for the competitiveness of firms and industries as well as for economic development. The empirical evidence suggests that, by inducing firm to improve product quality, free trade and regional economic integration in particular can promote industrial competitiveness and industrial development in Vietnam. Besides, it is evident from the empirical results that the establishment of a competitive environment in the domestic market is also important to materialize the potential effects of regional economic integration. 

Originated from

Nguyen Tien Dzung (2022). Regional Integration and Product Quality Upgrading: The Case of Vietnam Manufacturing Industries. The Journal of International Trade and Economic Development, 31(4).

https://www.tandfonline.com/doi/full/10.1080/09638199.2021.1990374

Author from VNU University of Economics and Business

Dr. Nguyen Tien Dzung is the lecturer at the Faculty of International Economics and Business, VNU University of Economics and Business. Nguyen Tien Dzung teaches International Economics and International Finance. His main research areas include regional economic integration, financial integration, economic development and income distribution in Vietnam. He has published several articles in international academic journals.