# I. Introduction

Robust competition is core to well-functioning markets that work for development. Pressures from existing and prospective competitors force firms to lower prices, increase quality, and innovate new offerings, in turn benefitting consumer welfare. At the macroeconomic level, competition boosts productivity growth, fosters labor reallocation, and favors high-productivity firms. In the absence of such competition, firms are able to extract economic rents by leveraging their market power to raise prices, in turn hurting consumers and decreasing demand for labor (De Loecker, Eeckhout, & Unger, 2020).

Concerns over market power and competition have increased in recent years. Over the past several years, scholars have documented an increase in the firms’ market power across countries and regions. For instance, De Loecker and Eeckhout (2020) find that the aggregate global markup has increased from close to 1.15 in 1980 to around 1.6 in 2016, leading to distributional consequences in terms of larger profits and lower labor shares. Moreover, recent challenges posed by the rise of digital platforms and a wave of pandemic-driven bankruptcies by smaller firms may also worsen the trend of increased market power in the future (Akcigit et al., 2021). Enriching policy makers’ and researchers’ understanding of the drivers of and barriers to competition is thus critical to development.

Given that foreign investment is a key driver of economic growth in developing economies and the recent trend of rising global markups, it is critical to evaluate the effect of FDI on the markups of host economies and the consequences for consumer welfare. Theoretically, the impacts of FDI on market power are ambiguous because the presence of multinational enterprises (MNEs) could have conflicting effects on incumbent firms' market power: FDI could lower prices due to increased competitive pressure, but MNEs themselves may possess higher market power if they possess significant economies of scale to undercut local firms, force firm exit, and eventually reduce competition. To date, data availability has limited existing studies to advanced economies, and conclusions have been widely heterogeneous based on the country of interest.

To address this gap, this paper evaluates the effect of FDI on market power within industries using firmlevel panel data for Vietnam. We first apply the methodological work by De Loecker and Warzynski (2012) to estimate firm-level production functions and compute markups. Then, we estimate the impact of FDI on markups via a difference-in-differences estimation. We also analyze the impact of foreign ownership on individual firms’ markups by looking at differences in markups between foreign- and domestic-owned firms and analyzing the impact of acquisition and divestment by foreign investors.

Our findings suggest that the presence of MNEs in a given industry decreases markups in that industry. We find that a 10 percent increase in foreign-owned firms’ share of output within a given two-digit manufacturing sector is associated with a 0.4 to 1.2 percentage point decrease in the ratio of price to marginal cost. This pro-competitive finding holds despite MNEs charging higher markups on average than domestic competitors. Furthermore, the results show that, while the markups of both foreign- and domestic-owned private firms tend to decrease with greater FDI presence, state-owned enterprises (SOEs) may be relatively insulated from FDI-driven competitive pressures.

Our contribution is twofold. First, our work contributes to the scarce literature that evaluates the effects of FDI on market power in host countries, especially low- and middle-income contexts. Most country-level studies on this topic rely on accounting-based price-cost margins, concentration, or entry and exit dynamics to measure market power and focus on high-income settings (Abolhassani & Danakol, 2019; 2