FOREIGN DIRECT INVESTMENT (FDI) WITH ECONOMIC DEVELOPMENT IN VIETNAM

Nguyễn Bảo Quốc Thắng – D04 TIỂU LUẬN MÔN KINH TẾ PHÁT TRIỂN FOREIGN DIRECT INVESTMENT (FDI) WITH ECONOMIC DEVELOPMENT IN VIETNAM GIẢNG VIÊN HƯỚNG DẪN Th s TRẦN MẠNH KIÊN SVTH Nguyễn Bảo Quốc Thắng 03.

TIỂU LUẬN MÔN KINH TẾ PHÁT TRIỂN

FOREIGN DIRECT INVESTMENT (FDI) WITH ECONOMIC

DEVELOPMENT IN VIETNAM

GIẢNG VIÊN HƯỚNG DẪN: Th.s TRẦN MẠNH KIÊN SVTH :Nguyễn Bảo Quốc Thắng - 030632162096

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ABSTRACT

The process of globalization and modernization are boosted the integration of these countries into the world economy Today, foreign direct investment has been recognized as one of the "pillars" of Vietnam's economic growth The role of FDI is clearly expressed through the contribution of important factors of growth as well as the addition of investment capital, export promotion, employment generation, and budget revenue Other that it has brought to Vietnam Thanks to the important contribution of FDI, Vietnam has achieved high economic growth in the past several years, thereby enhancing Vietnam's position in the international arena as well as contributing to Vietnam Many opportunities for new development FDI is a vital factor, it makes a big step in the procession of developing economy and society This is also the reason I choose the subject “Foreign direct investment (FDI) with development economic in Vietnam”

Due to the limited knowledge and time allowed, it is important to make sure that

my assignment is inevitable So, I look forward to receiving your repair contributions Thank you!

CHAPTER 1: OVERVIEW OF FDI

1.1. The concept of FDI

Foreign direct investment (FDI) is an investment made by a company or individual in one country in business interests in another country, by the act of buying that company or by expanding some existing business in the country That individual

or foreign company will take control of production facilities in this business

This does not include foreign investments in stock markets.Instead, FDI refers more specifically to the investment of foreign assets into domestic goods and services FDIs are generally favored over equity investments which tend to flow out of an economy at the first sign of trouble which leaves countries more susceptible to shocks

in their money markets

The Vietnam investment law in Paragraph 1, Article 2 of the Law on Foreign Investment: “Foreign investment means the organization or individual foreign countries give capital into Vietnam by in cash foreign or by any government property Vietnam approved for business cooperation on the basis of a contract or established joint ventures or enterprises with 100% foreign capital under the provisions of this

1.2. Characteristics and forms of FDI

1.2.1. Characteristics

- Income earned by investors depends on the business results of the enterprises in which they have invested their capital, it's the nature of business income rather than income

- The foreign investors make their own decision on investment, production and bussiness operation and take responsible for profits and losses The have the right to select forms

of invesment, scale of invesment, investment market, technology,…to do the best for themself

- The foreign investor must contribute a minimum amount of capital to the legal capital, according to the foreign investment law (In Vietnam, the joint venture of foreign capital must be greater or equal to 30% of legal capital)

- Enterprise management rights depends on the level of capital contribution

- FDI not only associated with the movement of capital but also in association with transfer of technology, knowledge and management experience to create a new environment for both the investor and the investee

1.2.2. The form of FDI

- Based on the nature of FDI investments can be divided into two 2 types: investment concentrated in industrial zones, export processing zones and dispersed investment

- Based on the reproduction process can be divided into investment FDI in research and development, investments in supply of raw materials Beside, Investments in production and investment in product sales

- Based on the investment motive, FDI can invest according to search engine resources, markets and strategic assets

- With the law of foreign investment in Viet Nam, the Viet Nam form of FDI to include the following 4 forms:

 Business cooperation contracts (BCC): Business co-operation contract (BCC) means the investment form signed between investors in order to co-operate in business and to share profits or products without creating a legal entity

 Establishment of joint-venture enterprises between domestic and foreign investors: This one is now in general use in the world However, disadvantage of this form is conflict in operation, management bussiness because of the different traditions and customs, culture,language, legal,political regime

 Enterprises with 100% foreign capital : This is traditional and popular form of FDI.This form is not only common to small scale of invesment, investors also use it in large-scale project Nowadays, transnational corporations often invest

in the form of enterprises with 100% foreign capital and they set up subsidiaries

1.3. The role of FDI for economic development

The key benefit of FDI is the foreign capital and funds that it brings to the country where the investment is made Besides, it enables the exchange of skill sets, information and expertise, job opportunities and also leads to an increase in the productivity levels

- Supplement for domestic capital:

In the theories of economic growth, factors which have always been mentioned

is capital When an economy that wants to grow faster, it needs more capital If insufficient domestic capital, this economy will want to have both foreign capital, including FDI

- FDI provides new technologies for development:

FDI is considered an important source for the development of technological capabilities of the host country This role is reflected in two aspects of technology transfer is available from the outside in and the development of technological capabilities of research institutions, the application of the host country These are important goals are expected from the host country for foreign investors

- Participate in global production networks:

When attractive FDI from multinational companies, not only invested factories

of multinational companies, which even other domestic enterprises have business contacts with enterprises will also participate in division of labor the regional Therefore, domestic investment will have the opportunity to participate in global production networks conducive to boosting exports

- FDI accelerates the process of economic restructuring:

FDI is an important part of economic activity for the throne, through which countries will participate in the process of increasing economic integration between the countries of the world, requiring each to change the structure domestic economy in line with the international division of labor The economic restructuring of each country in line with the general level of development in the world will create favorable conditions for FDI activity In contrast, FDI has contributed to accelerating the process of economic restructuring in the host country

CHAPTER 2: FDI ATTRACTION IN VIETNAM

2.1. Factors attracting FDI

The socio-political environment The unstable political situation is especially political institutions which are associated with changes in law So that the benefits of foreign investors are reduced and gain their truth In the other hand, when the political situation is unstable, the Goverment can not control investors' activities Consequently, the investors will operate under the own purpose They will not follow the orientation of the investment recipient country For this reason,the capital will not be used efficiently

Macroeconomic Stability It’s the pre-conditions for invesment intensions and behaviors To attract FDI, provincial economy have to be a creat a safe market for the investment capital and this must be more profitable than the others The degree of macroeconomic stability is judged by fighting inflation and currency stabilization These criteria have been made through monetary policy instruments such as reserve requirements, interest rates, exchange rates, open market operations,…

The complete and consist regulatory system – Effective State management agencies

The problems which foreign investors care about are :

A fair competitive environment and ensured private ownership

The legal of distribution of profit, The right to repatriate profits to foreign capital

The provisions on price, taxes, the length of land leases,…

Technical infrastructure systems This is the primary concern of investors before making decisions The nation has telecommunication systems, transport and power network, providing and drainage

water system, help for FDI projects During its implementation, transportation and information costs reducing will improve the impact of those investments

In addition to the factors are mentioned, also respect for human rights is deemed to encourage incoming FDI and, obviously, the certainty of a solid government must be one of the primary targets of a country willing to attract FDI

2.2. FDI attraction in Vietnam

As a later comer as compared with other countries in the region, foreign direct investment (FDI) in Vietnam has a relatively short history of development In 1987, Vietnam for the first time issued its ever first Law on Foreign Direct Investment Despite its relative short history, Vietnam has managed to attract a substantial amount

of FDI In relative term, Vietnam has been quite successful as compared with other countries, ranking the third largest recipient in the ASEAN

Figure 1: FDI Inflows into Vietnam during 1988-2005, source GSO.

From 1988 to 1996: FDI inflows to Vietnam increased continuously and rapidly

in project number, and newly - registered capital which reached the peak of nearly 8.9 USD billion in 1996 The amount of registered capital peaked in the 1995 and 1996 and dropped sharply subsequently when the Asian economic crisis began to seriously impact on Vietnam1

From 1997 - 2005: this period was characterized by the sharp fall in FDI inflows

to Vietnam, mainly as a result of the Asian financial crisis and the unattractiveness of Vietnam's investment environment2 relative to other countries in the region, especially

to China Since 1999, implemented capital has always exceeded registered capital Total registered capital increased by 30% comparing to 2003 Total implement capital,

1 Although Vietnam remained a relatively closed economy during the financial crisis, a large portion of FDI came from the region resulting in a drop of FDI from this region.

2 From 1997 - 2005: this period was characterized by the sharp fall in FDI inflows to Vietnam, mainly as a result

of the Asian financial crisis and the unattractiveness of Vietnam's investment environment relative to other countries in the region, especially to China

however, increased by only 7,6% The high increase in FDI inflows in this resulted partly from improvement in investment environment provided by revising the Law on Foreign Investment

Figure 2: FDI Inflows into Vietnam during 2007-2014, source GSO.

Together with the number of investment projects, the amount of registered capital for licensed projects increased rapidly in the first half of the 2000s, which is generally referred to as the investment period in Vietnam The amount of registered capital peaked in the 2008 and continue to increase

In 2007, the registered FDI capital of service branch was 47.7% total FDI in some projects such as port construction Up to 2013, there are 807 projects in services branch with nearly USD 17 billion registered capital and USD 22.3 billion USD actual inflow

In 2014, FDI registered capital was estimated at 20.23 billion USD, which was equal to 93.5% compared to 2013 and increased 19% in comparison to the 2014 plan

2.2.1. Local of FDI

Up to now, FDI has been invested in 64 provinces in Vietnam, However, inflow FDI is concentrate in main local which have complete constructions such as Ho Chi Minh, Vung Tau, Ha Noi, Dong Nai and Binh Duong that contribute in the local economy‘s development and nearly provinces

Figure 3: Top 10 provinces attracted FDI up to 2013, source: The Planning and

Investment portal dated December 26, 2013

In the end of 2013, the Northern region had 4.913 projects in force as more than registered about 63 billion USD and nearly 20 billion USD charter capital The highest

in Northern is Hanoi with 2.677 projects, nearly USD 23 billion registered capital and USD 8 billion charter capital as 54 percent of total projects, 40 percent of total registered capital and 40 percent of total charter capital in the Northern The following rank in turn is Hai Phong with 396 projects as nearly USD 10 billion registered capital, Hai Duong with 290 projects as more than USD 6 billion registered capital, Bac Ninh

104 projects as USD 4.3 billion registered capital

2.2.2. Sectoral distribution of FDI

Foreign investors began to choose Vietnam as key areas for investment strategy, the establishment of enterprises, promoting the brand extension Aware of that, the government of Vietnam has made great efforts to encourage foreign investment by establishing a foreign investment law in 1987 KPMG said since then, at the end of

2010, 12 236 expected foreign investment projects licensed with total registered capital

of $ 193.4 billion On the other hand, foreign investors contribute to strengthen Vietnam's economy KPMG level information demonstrated in 2010, the foreign-invested sector accounted for 21.5% of total investment in Vietnam, contributing to 18.3% of GDP

Figure 4: FDI inflow of Vietnam, 2000 – 2010, source MPI

As can be seen from the chart by the Ministry of Planning and Investment (MPI) and produce processing industry accounted for half of the registered capital and the number of projects

However, the tourism industry should be considered a high level of investment.

As of this research, in recent years, Vietnam has witnessed the development of a large number of spas and luxury hotels including Six Senses Con Dao Ninh Van Bay and However, Haley has shown that in 1996, Vietnam had 51,000 hotels, half of which reach international standards Therefore, Vietnam has built too many 5-star hotels, are

at risk of redundancy Wall, suggested instead to build 5-star hotel, large, Vietnam should develop small guesthouse need less capital and create jobs for laborers

Figure 5: Proportion of FDI in sectors in November, 2014

Source: Foreign Investment Agency and Ministry of Planning and

Investment

In 11 months of 2014, the total amount of newly registered capital and the increasing capital of processing and manufacturing industry in Vietnam reached 13.15 billion dollars, which accounted for 76% of the whole country In which, the average capital of a processing and manufacturing industry's project is 14.7 billion USD, which

is higher than the average size the country's FDI project

It can be clearly seen that majority of licensed projects in 11 months of 2014 is

in fields of processing and manufacturing industry

2.2.3. Country of origin

Many sources show that FDI inflows in Vietnam increase significantly Asia news network (2013) reports that in the first five months of 2013, Vietnam witnessed a rise in FDI which was US$8.51 billion, increasing 8.9% at the same period of time last year

Figure 6: Major FDI sources flow in Viet Nam, 2012, source: General

Statistics Office of Vietnam

With high technology application, Japan is one of the global leading countries in

IT industry In Vietnam, there are many Japan-owned companies in IT services such as website development, integration system, and hosting, also, Vietnam was chose to be business partner of Japan software outsourcing

However, South Korea has overtaken Japan as the biggest foreign investor in Vietnam in the first eight months of 2015 In both 2012 and 2013, South Korea was the second largest foreign investor, behind Japan

Figure 7: FDI in Vietnam 2015, source: FIA

According to the Foreign Investment Agency (FIA) under the Ministry of Planning and Investment, businesses from South Korea, Malaysia and Japan poured the largest sums into their projects in Vietnam in 2015, with their commitments and disbursements totaling $11.04 billion, accounting for 48.5% of the total South Korean

authorities have repeatedly released positive assessments of Vietnam’s investment environment, and many major South Korean groups are also considering expanding operations in the nation Samsung has invested nearly $8 billion in its Vietnam operations thus far Retail giant Lotte Mart has also planned to hike its Vietnam store count to 120 from the current number of 60 by 2020

2.3. The role of FDI in Vietnam’s economic development

2.3.1. FDI and economic growth

The FDI sector is an economic component that contributes to the overall growth

of the economy On the one hand, FDI complements capital for investment in economic development, promotes economic growth on the demand side (labor demand, inputs, etc.) On the other hand, through the form of investment, FDI has formed a system of FDI enterprises, increasing the production capacity of the economy, promoting economic growth on the supply side (products, services, etc )

From 1991-1995, GDP increased continuously over the years with an annual average growth rate of 8.2% and the share of realized FDI in average annual GDP was 4.7% In the five years from 1996 to 2000, the average annual GDP increased by 6.96% and the share of realized FDI in annual GDP was 10.4% In the period

2001-2005, GDP increased by 7.5% / year and the proportion of FDI / GDP was 14.6% / year In 2006 and 2007, GDP grew by 8.3% and the FDI / GDP ratio was 17.3% per year In 2008 and 2009, GDP increased 5.78% per year and the proportion of FDI / GDP was 18.14% per year

FDI has contributed to impressive economic growth in a number of developing countries FDI not only provides a large amount of capital investment, create more jobs for the society but also to promote increased productivity and competitiveness of the domestic industry From 2% share of the contribution of FDI in GDP in 1992, by 2004, this number grew to 20% outstanding In recent years, FDI inflows have played an important role, not only in providing investment capital but also I stimulating export growth

Figure 9: FDP structure by ownership, 2000 – 2010, source: GSO

Production and business have improved in 2014 and the economy has been back

on the growth path This year’s GDP is projected to grow 5.8% compared to the previous year, higher than the 5.25% in 2012 and 5.42% in 2013

FDI not only injected badly needed capital but also expanded the size of the private sector In overall terms, the expansion of FDI in Vietnam can be viewed as the