In an effort to unlock the black box of mixed empirical evidence for productivity spillovers
from foreign direct investment in host countries, this paper, using the case of Vietnam, examined
the role of geographical proximity and inter firm interaction in determining productivity
spillovers of FDI. The spatial productivity model specified based on the empirical spillovers
literature and spatial econometric model. This paper confirms negative effect of horizontal
spillovers. The distance and interaction are confirmed to be two determinants of the significance
of spillover effects. The paper finds the positive backward and negative forward spillovers.
Indirect effect (or the inter-regional spillovers) is found about twice to four times higher than the
direct effect (or the intra-regional spillovers) but such kind of indirect effect is quickly attenuated
for a certain distance. The paper also finds the evidence of the effect arising from the social
interaction among local firms in productivity spillovers. The testing results suggest that local
firm’s productivity is substantially driven by the agglomeration effect and the presence of interand
intra-regional FDI.