Abstract
This study examines how foreign direct investment (FDI) affects wage disparities between foreign-invested enterprises (FIEs) and domestic enterprises in Vietnam. Addressing the lack of comprehensive structural analysis in the existing literature, the study develops a theoretical framework that integrates two key mechanisms through which FDI affects wage inequality: labor reallocation and technology spillovers. Based on firm-level panel data from 2005 to 2015, the study empirically investigates the specific contribution of different factors to wage inequality by applying the Shapley value decomposition method. The empirical results reveal that the wage gap between foreign and domestic firms follows an inverted U-shaped pattern during the process of FDI development. In the early stage, FDI inflows significantly widened wage disparities mainly through labor mobility as foreign-invested firms attract higher-skilled workers by offering higher wages. However, as technological spillover effects gradually emerge and domestic firms improve their productivity, the wage gap begins to narrow, with a turning point observed around 2010. These findings suggest that policies should not only focus on attracting foreign investment but also emphasize strengthening technological linkages and enhancing domestic firms’ absorptive capacity. Taking such measures can maximize the positive spillover effects of foreign direct investment while effectively reducing structural wage inequality in developing economies.