Finally, using the matched sample, the difference-in-differences estimation shows that target firms’ markups increase by about 7 percent after acquisition by a foreign acquiror (Columns 3 and 4). Table 10 shows that coefficients associated with the dummy variable for a firm that has been acquired by a foreign investor are positive and statistically significant, regardless of whether a Cobb-Douglas or translog production function is assumed. For consistency with the baseline results, we show estimates at levels, too (Columns 1 and 2).

_Table 10. Impact of_ _<u>foreign acquisition on markups (propensity score matching estimation)</u>_

|VARIABLES|(1)<br>Markup (CD)|(2)<br>Markup (TL)|(3)<br>ln(Markup)<br>(CD)|(4)<br>ln(Markup) (TL)|
|---|---|---|---|---|
|Acquiredi,s,t|0.089***|0.089***|0.071***|0.071***|
||(0.0244)|(0.0244)|(0.0178)|(0.04)|
|Constant|1.127***|1.125***|0.094***|0.097***|
||(0.0007)|(0.008)|(0.003)|(0.22)|
|Firm fixed effects|Yes|Yes|Yes|Yes|
|Industry-year fixed effects|Yes|Yes|Yes|Yes|
|Observations|51,011|51,011|51,011|51,011|
|R-squared|0.8632|0.8562|0.902|0.889|

Robust standard errors in parentheses. Acquiredi,t is an indicator variable equal to 1 if the domestic establishment was acquired by a foreign firm and 0 otherwise. CD and TL denote markups estimated assuming Cobb-Douglas and translog production functions, respectively. The table shows the ATT based on reweighted regressions at the firm-level. *** p<0.01, ** p<0.05, * p<0.1

# VII. Policy implications and agenda for future research

Overall, evidence from Vietnam suggests that FDI and, by extension, pro-FDI reforms are pro-consumer. Within Vietnam, greater foreign firm presence is associated with lower markups. Thus, further opening sectors to FDI is likely to be beneficial for competition and domestic consumers. Such reforms could be especially important in the current context of industries undergoing consolidation due to pandemic-driven bankruptcies. At the same time, FDI does not decrease markups as much in export-intensive sectors, one area where higher markups are more of a ‘good’ thing for the host country. These findings hold at the sector level despite individual foreign-owned firms charging higher markups than domestic-owned firms at the firm level, perhaps owing to foreign-owned firms’ ‘premium-ness’ (e.g., via brand names or reputation).

However, FDI may need to be accompanied by complementary reforms—particularly with respect to SOEs—for countries to reap the full benefits of increased competition from FDI. We find suggestive evidence that FDI intensity does not decrease the markups of SOEs as much as those of other firms, suggesting that SOEs are insulated from the competitive pressures introduced by FDI. This finding may be driven by SOEs receiving preferential financing, subsidies or other policy-related advantages. Thus, insofar as SOEs operate in areas important to domestic consumers, host-country governments may wish to package FDI reforms with efforts to level the playing field between SOEs and private firms or even privatization. Such SOE reforms could include ensuring neutrality between SOEs and private enterprises with respect to product market regulations, public procurement processes, and taxation (World Bank, 18