Assignment fdi policy implementation, lessons and solutions china case study

Vietnam is internationally recognized as one of the most successful countries inattracting foreign direct investment FDI in the region, becoming a reliable and effectivedestination in th

MINISTRY OF FOREIGN AFFAIRS

DIPLOMATIC ACADEMY OF VIETNAM Faculty of International Economics

ASSIGNMENT:

FDI policy implementation, lessons and solutions

CHINA CASE STUDY

TABLE OF CONTENTS

LIST OF ABBREVIATIONS AND ACRONYMS 3

INTRODUCTION 4

CHAPTER I: Vietnam’s policies to attract China’s foreign direct investment 5

1 Tax Incentives 5

1.1 CIT incentives 5

1.2 Preferential import and export tax 5

2 Incentives on land use 6

3 Vietnam’s policy for "Chinese Eagle" attraction 7

CHAPTER II: The socio-economic, medical, and political outcomes 8

1 Employment and labor effects 9

2 GDP and Trade Turnover improvement, especially Export 9

3 Medical assistance during the COVID-19 pandemic 10

4 Cooperation between Vietnam and China 11

CHAPTER III: Prospects and limitations of China's FDI into Vietnam 12

1 Prospects of China's FDI in Vietnam: 12

1.1 Vietnamese market is getting more attention 12

1.2 Potentials of Vietnamese market despite the Covid-19 pandemic 12

1.3 China's economic potential has grown a lot 12

2 Limitations of China's FDI into Vietnam: 13

2.1 FDI flows are not consistent with the development planning of industries and economic regions13 2.2 Weakness in technology transfer 13

2.3 Employment issues of domestic workers 14

2.4 Transfer pricing problem 14

2.5 Political and security issues 14

CHAPTER IV: Solutions towards outstanding issues & Orientations to attract China’s FDI inflows into Vietnam in the new context 15

1 Proposing solutions to outstanding issues 15

2 Orientations to attract China’s FDI inflows into Vietnam in the new context 16

CONCLUSION 17

REFERENCES 18

LIST OF ABBREVIATIONS AND ACRONYMS

Trans-Pacific Partnership

Vietnam is internationally recognized as one of the most successful countries inattracting foreign direct investment (FDI) in the region, becoming a reliable and effectivedestination in the eyes of foreign investors owing to the stable macroeconomic andpolitical background along with commitments to facilitating a fair business environment.Over the past few years, the Government of Vietnam has constantly improved institutionsand financial incentives to attract and better manage foreign investment resources.With a series of innovations in Vietnam policies, in the past 2-3 years, FDIinvestment capital from Chinese enterprises has increased sharply, consequentlyconducting more and more effective projects, creating plenty of job opportunities andimproving citizens' living standards as a whole

However, China's FDI inflows into Vietnam still have some limitations such as theinappropriateness of the development planning of industries and economic zones, technology transfer weakness, transfer pricing related issues, etc With the aim ofsolving these problems, solutions towards outstanding issues and orientations to attractChinese FDI inflows into Vietnam in the new context are proposed as well

Under those circumstances, we chose the topic "FDI policy implementation, lessons and solutions: China case study" as the theme for our essay.

CHAPTER I: Vietnam’s policies to attract China’s foreign direct investment

Over the past, the Vietnamese government has constantly improved institutionsand financial incentives to attract and better-manage foreign investment resources.Vietnam always appreciates the role of China's foreign direct investment in contributing

to the socio-economic development of our country Vietnam has issued appropriatestrategies to welcome the wave of Chinese FDI, which are objectively and cautiouslyassessed, but not hostile so as to improve the country's sustainable production capacity

1 Tax Incentives

Financial institutions and favorable conditions for FDI appealing and capitalgovernance have always been among Vietnam's authority priorities recently In general,financial incentives focus on: (1) The standard corporate income tax (CIT) incentives, (2)Import and export tax incentives As follows:

1.1 CIT incentives

What can be implied from the table is that the statutory CIT rate for investors fromChina is about 25% (depending on the projects) while this figure for countries within theASEAN region tends to be lower, averagely more than 21% However, compared to thoselocated outside ASEAN such as India with 30% of their profits, the statutory CITincentives for investors from China are considered to be an average extent

1.2 Preferential import and export tax

The policy of reducing import-export tax or customs duty has been used as apreferential measure to attract Chinese investors, especially often applied in export

processing zones where Vietnamese enterprises are not allowed to participate.Specifically as follows:

(i) The Government exempts and reduces import tax on essential goods with greatdemand for our country, such as iron and steel, metal, fabric, with tax rates Importincentives range from 0%-50% depending on the type of item In particular, the biggestdiscount for fabrics is about 0%-15% (based on the Import and Export Tariff Schedule2021)

(ii) In addition, policy makers also exempted and reduced import taxes from China'sexport processing zones and special economic zones into Vietnam's market, in order toincrease the amount of FDI in these zones, thereby increasing FDI inflows into thecountry;

For example, the Linh Trung Export Processing Zone is a joint venture project betweenVietnam and China The Chinese side is China Electricity Import-Export LimitedLiability Company while the Vietnamese side is Tan Thuan Industrial Development OneMember Limited Liability Company The trading relationship between Linh Trung ExportProcessing Zone and foreign partners will not be subject to export and import taxes.(iii) Moreover, the Government has developed a separate import tariff for different types

of Chinese FDI and set up different preferential tax rates for businesses in order to createmaximum conditions for businesses when investing in Vietnam

(iiii) Exemption from import tax on goods to create fixed assets for investment projects inareas of special investment encouragement, investment promotion and investmentprojects in the locality that have difficult socio-economic conditions…

2 Incentives on land use

Basically, there is not too much difference in land incentives offered by theGovernment of Vietnam to Chinese investors compared to other countries Nevertheless,the government has still issued certain policies such as supporting land for Chineseenterprises, for example:

(i) Reducing 50% in land rent during the period 2011-2014;

(ii) Adjusting and reducing the ratio of calculating the general land rental unit price from1.5% (specified in Decree No 121/2010/ND-CP) to 1% (specified in Decree No.46/2014/ND-CP) Also, the Provincial People's Committees do specify the rate in theframe from 0.5-3% for each area and route corresponding to different land use purposes

to apply the collection of land rent in the locality;

(iii) Applying price adjustment coefficient in determining the price to calculate land rent

3 Vietnam’s policy for "Chinese Eagle" attraction

There are many reasons to explain the acceleration of Chinese capital flows intoVietnam in the last two years, in which the US-China trade war that started in previousyears has pushed investment enterprises from China to leave the market and in search ofmoving to neighboring areas like Vietnam in order to avoid the US tax Besides, asVietnam is a neighboring country with great potential, Chinese businesses have beenlooking for opportunities to expand the scale of two-way trade and rapidly increase directinvestment projects On that grounds, Vietnam has been taking full advantage of theseopportunities by having proper policies in the direction of selecting, screening, andensuring national interests in terms of trade and investment cooperation between the twocountries

Currently, Vietnam has been developing border-gate economic zones to attractChinese investors (especially the provinces that have borders with China such as LangSon, Cao Bang, ) A typical example is Dong Dang - Lang Son border gate economiczone (Bilateral border gate pair Chi Ma (Lang Son - Vietnam) - Ai Diem (China)) Inorder to have such an impressive "return" in the work of attracting investment to DongDang - Lang Son Economic Zone, the People's Committee of Lang Son province hascontinued to implement general incentive mechanisms and policies in accordance withregulations The Government's decision also implements a number of special preferentialpolicies for enterprises investing in the SEZ Specifically, incentives for corporate incometax (exemption for 4 years and 50% reduction for the next 9 years), import and export taxexemption for Chinese enterprises investing in the EZ (free from import tax on goods tocreation of fixed assets, means of transport, technological lines to implement investmentprojects ); incentives for land and water surface rents (3 years of exemption from landand water surface rents from the date of completion of the project, for those on the list of

sectors encouraged for investment; 7 years for investment projects in areas with difficultsocio-economic conditions…); a number of policies to support investment projects such

as support for the construction of infrastructures such as roads, electricity and water;support for site clearance, support for labor training (according to Resolution No.12/2018/NQ-HDND dated December 10 2018, of the Provincial People's Council),thsupport for credit interest…

So, The lessons of success and failure in the market economy and internationalintegration, including attracting FDI, are valuable assets for Vietnam to have properpolicies in receiving international investment capital for development

CHAPTER II: The socio-economic, medical, and political outcomes

With a series of innovations and incentives in Vietnam's FDI attraction policies, inthe past 2-3 years, investment capital from Chinese enterprises mainly distributed in thefields of processing and manufacturing industries, electricity production and distribution,high technology, These are also the leading sectors in Vietnam in terms of projectquantity and total registered investment capital

TYPICAL PROJECTS RECEIVING FDI CAPITAL FROM CHINA

No Project name Location Total capital

(USD)

Production goal

1 Radian Jinyu tire

manufacturing

Tay Ninh > 612 million Full steel TBR tires

2 Brotex Fiber Factory Tay Ninh 450 million Yarn, fabric and textile

products

3 JA Solar photovoltaic

cell technology

Bac Giang 210 million Photovoltaic panels

4 USI factory Hai Phong 200 million Electronic circuit boards

for wearable devices

5 Powerway alloy Bac Giang 50 million Alloy types: bar, fiber, strip

Source: self-aggregating from MPI data (1/2020 - 9/2021)

The FDI waves from China have covered all fields and sectors, which open up manyopportunities, and create positive impacts, as below:

1 Employment and labor effects

FDI inflows from China have indeed eased employment constraints as throughpositive spillovers and technology transfers, is likely to generate good jobs with higherwages and increase aggregate firm productivity According to preliminary statistics in

2020 of the MPI, the field attracting capital from China - Processing and Manufacturingindustry is typical with creating more than 11,300 employees (15 years and older),accounting for 21.08% of the labor structure, which ranks 2nd in the economy.Specifically, the Brotex Fiber factory in Tay Ninh with 100% investment capital fromChina is estimated to employ about 8,000 workers for the locality and neighboringprovinces such as Long An and Ho Chi Minh City after 3 phases of construction Besides,the index of industrial production of localities with Chinese investment capital generallyincreased in the first 8 months of 2021 compared to the same period last year, typicallyHai Phong (increased by 20.6%), Quang Ninh (increased by 7.4%), Bac Giang (increased

by 6.5%), as stated in the August 2021 socio-economic situation report - GSO

In addition, Chinese enterprises also focus on training high-quality Vietnamesehuman resources and fostering their exposure to access international markets underdifferent forms of coaching and mentoring A noteworthy proof is the annual JINYUYOUNG TALENT program of Chinese Jinyu company which equips future talentedSupervisors or Fresh Managers the chance to receive training at the companyheadquarters in China for 3-6 months and be subsidized with salary as well as overseasliving allowances These are all pivotal marks showing the interest from Chineseenterprises in promoting Vietnamese labor competency

2 GDP and Trade Turnover improvement, especially Export

According to the press release on the socio-economic situation of GSO, the grossdomestic product (GDP) in the first 6 months of 2021 increased by 5.64% despite theoutbreak of Covid-19 in some localities from the end of April In the general growth ofthe whole economy, the key industries receiving Chinese investment capital grew quitewell thanks to the maintenance and recovery of enterprises' production and business

activities On the value added of the industry compared to the same period last year, theprocessing and manufacturing industry continued to play a leading role in the growth ofthe economy with an increase of 11.42% and the electricity distribution increased 8.16%,which are indeed impressive figures in the current context

In another aspect, even though China is Vietnam's largest trading partner, China’sFDI to Vietnam is not high To clarify this situation, there are proposed reasons as below:

- Top 1 trade: China is a populous country, which makes its domestic labor cheap.

Therefore, it is imperative to facilitate conditions for domestic production toreduce the unemployment rate, create more added value to contribute to GDP.However, as domestic production is so abundant, China itself cannot consumecompletely, so it has to export and one of the main destinations this countryprioritizes is Vietnam

- Small investment: In fact, the average capital per project that China invests in

Vietnam is not much (only rank 6th in terms of total capital) as it prioritizesinvesting in small and medium enterprises China only invests in a few specificfields such as processing and manufacturing, energy, gas, because these areproducts of high consumption demand but the country's production capacity is notenough Therefore, it invests in other countries to import back to its own country.Indeed, the export-oriented essence of Chinese FDI into Vietnam does enhanceVietnam's export industry by providing a convenient route for "Made in Vietnam"products to be exposed to foreign markets Despite the complicated development of theCovid-19 pandemic, economic and trade cooperation between Vietnam and China dobring about positive results beyond initial expectations According to statistics of GDVC,

in the first 8 months of 2021, the total trade turnover between Vietnam and China reached105.45 billion USD (increased by 37.45% compared to the same period in 2020), inwhich exports reached 33.41 billion USD (increased by 22.15%) However, Vietnameseimport value from China is still very high (about 72.04 billion USD), so the noteworthypoint is that Vietnam has become China's 6th largest trading partner in 2020, creatingstrong belief in Vietnam's limiting trade deficit from China

3 Medical assistance during the COVID-19 pandemic