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Vietnam Today

To the next step

Released at: 15:42, 21/02/2018

To the next step

Photo: Viet Tuan

The story of FDI in Vietnam is largely one of peaks and troughs and now that foreign investment is generally stable there are certain changes required.

by Dr. Nguyen Mai / Chairman of the Vietnam Association of Foreign Invested Enterprises (VAFIE)

Dr. Nguyen MaiThirty years have now passed since the National Assembly introduced the Law on Foreign Direct Investment (FDI) in 1987; one of the best legal frameworks on FDI in the region at the time and adopted well ahead of similar laws in Indonesia and Thailand, for example, on 100 per cent FDI capital. The Committee for Investment Cooperation issued licenses using very simple administrative procedures, which attracted foreign investors. 

From 1988 to 1990, policymakers studied laws and policies that were in line with the reality of Vietnam’s economy, and investment over the three years was minimal. Total registered FDI capital reached about $1 billion in a collection of small projects, with $300 million disbursed. 
From 1991 to 1998, Vietnam began to emerge from its economic crisis. The economy in general and the domestic market in particular began to develop, as did the private sector. FDI began to grow rapidly as a result, contributing 30 per cent of total investment during the period. GDP growth averaged some 8.5 per cent per year, of which FDI contributed about 3 percentage points. This period also provided Vietnam with lessons on how to build and complete a legal framework based on a market economy and international practice, quickly identifying shortcomings in existing regulations and issuing adjustments in a timely manner to properly regulate any problems associated with economic activity.

From 1999 to 2004, following the regional economic crisis, FDI to Vietnam declined sharply. Registered capital was about $3 billion for six consecutive years and disbursed capital about $2 billion. 

FDI bounced back from 2005 to 2007, with $72 billion in registered capital in 2007, of which $8 billion was disbursed. Due to management decentralization measures from the government, registered capital increased sharply but many large projects were not implemented. When the government assigned responsibility to local authorities over appraisal and licensing, a degree of unhealthy competition emerged. Some investors were issued licenses despite lacking the financial capacity, with such projects never moving forward. 

From 2008 to 2011, Vietnam’s economic situation was greatly influenced by the global economic crisis, and disbursed FDI in Vietnam stood at $8-9 billion. From 2012 to 2017, FDI into Vietnam began to boom. Disbursed capital reached its highest level ever, of about $17 billion, in 2017, with registered capital at $35.88 billion. 

Appealing environment

The government has, in general, worked hard to create an investment environment that would attract FDI. A total of $318.72 billion in registered capital has come to the country over the last 30 years, of which $175 billion has been disbursed. 

The wide gap between registered capital and disbursed capital, of about $190 billion, is quite clear to see. Two real estate projects - Ciputra in Hanoi and Phu My Hung in Ho Chi Minh City - can serve as examples. Investors registered $3-4 billion in investment capital but only disbursed $200-300 million. I believe that, overall, investors have only disbursed about 15 per cent of registered FDI capital, with the remainder being only “on the books”. Similar projects in the range of $3-4 billion in registered investment have also seen disbursement at low levels. 

Some $50 billion of the $190 billion difference require three years to fully disburse. This is an important issue and I have proposed that the Ministry of Planning and Investment (MPI) exclude these sums from annual registered capital figures, to avoid the perception that Vietnam still has a great deal of FDI. 

Moreover, only about 10-15 per cent of the $175 billion disbursed comes from Vietnam, whether joint venture capital or as land. Actual foreign capital totals about $150 billion, which is high globally. 

Impact of FDI

The $175 billion in disbursed capital as at 2017 represents about 22 per cent of total investment capital over the past 30 years. I wish, however, to emphasize that FDI has indeed had a major impact on Vietnam’s development.

In terms of workforce, FDI has significantly resolved job problems in Vietnam, employing 3 to 3.5 million people. Salaries of workers in the FDI sector are always higher than elsewhere. For example, the average salary of workers in the northern provinces of Thai Nguyen and Bac Ninh, where Samsung is based, now stands at VND11 million ($480) per month. There are also many more managers, technicians, and researchers at FDI enterprises. This reveals the improvements made to Vietnam’s workforce by FDI. 

From 2015 to 2017, research and development centers of foreign investors in Vietnam, such as Samsung, Panasonic, and Bosch, employed tens of thousands of people, primarily as engineers or software engineers. Samsung has said that its young Vietnamese workers at these centers are highly qualified and meet quality and other requirements. In my opinion, this is the biggest success in terms of Vietnam’s workforce. FDI has created a pool of talented, young scientific staff, many of whom return to work at State-owned enterprises. A sizeable number of bank officials in Vietnam have also worked at FDI enterprises. 

Regarding technology transfer, thanks to FDI, Vietnam has imported the most modern technology found in the world. Certain industries have broad access to modern technology due to foreign investment, such as oil and gas and telecommunications. MPI has also noted that, in general, technology at FDI enterprises is superior to the technology used at domestic enterprises. 

In terms of investment and exports, in 2017, for the first time, Vietnam’s export-import turnover exceeded $400 billion, ranking it 25th in the world and second in ASEAN, after Singapore. In particular, Samsung exported more than $50 billion worth of products last year, representing 25 per cent of Vietnam’s total. Greater investment and exports are clear indicators of Vietnam’s success at international economic integration. Without FDI, it would not be involved as deeply in international markets. 

Vietnam’s biggest advantage is its political stability, followed by its macroeconomic stability. Stability in the latter includes high growth, reaching 6.81 per cent last year, low inflation, a stable Vietnam dong (VND), and foreign exchange reserves of $53 billion in 2017. The government is constantly striving to create a sound investment environment, cutting corruption and easing administrative burdens. 

Disadvantages, however, linger. Firstly, corruption remains high. Secondly, inspections and administrative procedures are still difficult for enterprises, and logistics costs are substantial. Thirdly, intellectual property laws dissuade foreign investment. And fourthly, Vietnam needs to stabilize its institutions and address tax laws, so that FDI enterprises can determine their investment situation. 

Prospects for FDI

Vietnam needs to prioritize FDI in certain industries and high-tech products creating significant value added, such as information technology, electronics, the Internet of Things (IOT), and cloud computing, especially as Industry 4.0 takes hold. It also needs to attract FDI into services, education, and scientific research. 

To attract more FDI in the time to come, changes must be made. The first is a fundamental change in orientation and policy. We should not seek FDI in fields where domestic businesses are more than capable. We wasted a lot of potential from investors last year, focusing on too many projects with investment of less than $1 million. 

The second is a change in preferential policies. We offer tax incentives but there is no financial encouragement for socioeconomic efficiency. It is therefore necessary to offer other preferential policies for foreign, and domestic, investors exhibiting socioeconomic efficiency in line with the development orientations Vietnam has adopted. 

Third, we need to have a wider choice of partners. In addition to small and medium-sized enterprises (SMEs) from Japan and South Korea, large enterprises, especially transnational corporations (TNCs) in the high-tech field, must be sought to implement new orientations as Vietnam moves in line with Industry 4.0. 

We should not underestimate the potential of SMEs, especially those working in the support industry, but we must also reach out to large enterprises. For example, Vingroup cooperated with Siemens to create the Vinfast automobile manufacturing complex with total investment capital of VND35 trillion ($1.5 billion). FDI enterprises will continue to expand further, and Vietnam will remain an attractive destination into the future.

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