Analysis of japanese foreign direct investment in vietnam in the period of 2011-2021 Analysis of japanese foreign direct investment in vietnam in the period of 2011-2021
INTRODUTION
Rationale for the study
Having implemented the reform policy, which is known as Doi Moi in 1986, Vietnam has paid more attention to establishing diplomatic and cooperative relations with other countries around the world Economic liberalization, global capital markets and continued economic transition in emerging command economies strongly influenced investor behavior and strategy (Delaunay and Torrisi, 2012) Besides, the Law on Foreign Investment in 1987 has been promulgated, giving a turning point in the perception of opening the market and attracting foreign direct investment in Vietnam Particularly, this is the most important legal document for foreign investment, the law has many advances, more progressive points than some countries in the region such as Japan, Thailand, Indonesia, etc The Government, hence, have encouraged foreign enterprises to start business in Vietnam, attract external resources, and transform the country's economy which had gone into recession due to war and embargo Within 2 years from 1988 to 1990, 213 investment licenses were granted with a total registered capital of nearly 1.8 billion USD However, the low contemporary disbursed capital and the major attraction of small and medium FDI enterprises led to lack of foreign trade activities with other partners in the region
Notwithstanding, the country has experienced a high level of economic growth since attracting significant FDI inflows since 1991 In attracting foreign investment, for the whole period of 1991-2000, realized FDI reached an average of 1.95 billion USD per year According to the Ministry of Planning and Investment (2018), the annual Gross Domestic Product rate of Vietnam increased to 8.2% during the ten years since Doi Moi The budget from the FDI sector reached 23.7 billion in the period of 2011-2015, which occupied nearly 14% of the total national budget Therefore, FDI has played an indispensable role in promoting Vietnam’s economic recovery
Due to an overwhelming need for foreign investment capital, there is always fierce competition among countries for capital However, Vietnam has still maintained its position as one of the largest recipients of FDI inflows in ASEAN with the main
2 investing partners from the EU, Japan, Korea, China, Hong Kong, Singapore, Taiwan, and the United States Being appreciated for stable ventures, from the beginning of Vietnam’s economic reopening, Japan is one of Vietnam’s most important and long- term investment partners Having appeared in Vietnam since the dawn of opening economy, Japanese investment has gradually increased in both registered capital and implemented capital In particular, Japan always stays in top three partners who have the most FDI venture in Vietnam Within 10 years, on average, Japan contributed an average of USD 4.7 billion to Vietnam's total investment capital The appearance of Japanese FDI effectively stimulates the economic and social transformation of many localities in Vietnam such as Hanoi, Thanh Hoa and Binh Duong Besides the tremendous boost in GDP, the quality of life in places which have Japanese FDI also improved significantly
Vietnam and Japan have many advantages in terms of cooperation Japan and Vietnam are known to share the concurrence of two development and cooperation agreements, including ASEAN-Japan Comprehensive Economic Partnership (2008) and Vietnam-Japan Comprehensive Economic Partnership (2009), which strongly stimulates the inflow of Japanese FDI into Vietnam Other factors are also partly attributable to the changes of Japanese investment in Vietnam is the negotiation in TPP in 2010 and joining in free trade agreements such as Vietnam - Eurasian Economic Union FTA (2016), Comprehensive and Progressive Agreement for CPTPP (2018) and EUVNFTA (2020) Japanese-invested enterprises in Vietnam could also extensively take advantage from the participation in ASEAN Economic Community (AEC) in 2015 On the other hand, having officially joined in regional economic partnership agreements and cooperation, Vietnam experiences several changes in policies, given both opportunities and challenges for external investors Furthermore, since the early 2020, the emergence of the pandemic Covid-19 has evoked a serious economic crisis on a global scale, which certainly exerts a massive impact on Japan’s direct investment in Vietnam
In the study, a series of remarkable events occurred in Vietnam for ten years have been mentioned so that the correlation between real events and Japanese FDI
3 venture is clarified It is not only investigating the shifts in the overview of Japanese investment inflow to Vietnam from 2011 to 2021 but also significant in synthesis and statistics, thereby advancing the literature on international economy and assist Vietnamese policy makers to understand the current situation of Japanese investment Accordingly, when causes and the status quo of Japan’s foreign direct investment into Vietnam are clarified, right strategies for Japanese FDI attractions will be employed Therefore, the analysis of Japanese FDI in Vietnam has no longer been more necessary than ever.
Statement of research problem and research question
- How did Japan's FDI change from 2011 to 2021?
- What are the reasons for the changes in the situation of Japan’s FDI in a decade?
- What are the impacts of Japan’s FDI in Vietnam on the national and local economy as well as on domestic society?
- Compared with other countries in the region, what are strengths and limitations of Vietnam's policies to attract FDI in general and Japanese FDI in particular?
- What are the solutions for Vietnam’s investment environment to attract more Japan’s FDI?
Scope of the study
The scope of the study is the inflows of Japan’s FDI to Vietnam in the ten years spanning from 2011 to October, 2021 In the article, the research is a macroeconomic study.
Significance of the study
The novelty of the study presents the status of Japanese FDI to Vietnam from
2011 to 2021 Moreover, the study is expected to clarify the real situation and impacts of Japan’s FDI on the socio-economic situation of Vietnam in the current context, advance common literature on Japan-Vietnam cooperation and compare FDI policies of Vietnam and those of other countries and have lesson learned for Vietnam The
4 research would provide Vietnamese policymakers with information in the attempt to harmonize Japanese FDI, foreign investment policies and legal environment, which is likely to promote sustainable economic growth.
Organization
Apart from introduction and conclusion, this thesis includes five chapters including:
Chapter 2: Literature review about foreign direct investment and Japanese direct investment in Vietnam
LITERATURE REVIEW
Theoretical framework
The term “foreign direct investment” has encompassed a variety of definitions According to Moosa (2002), foreign direct investment (FDI) is the process whereby residents of one country (the source country) acquire ownership of assets for the purpose of controlling the production, distribution, and other activities of a firm in another country (the host country) Sharing the same point, IMF defines FDI as a category of international investment that reflects the objective of a resident in one economy (the direct investor) obtaining a lasting interest in an enterprise resident in another economy (the direct investment enterprise) This enduring benefit implies the relationship between the direct investor, the enterprise, and their great impacts on the company’s management Direct investment involves both the initial transaction between the two entities and all subsequent capital transactions between them and among affiliated enterprises, both incorporated and unincorporated (OECD, 1996) The definitions above emphasize the goal of realizing long-term benefits of an investor residing in a country, called an investor, directly through another resident, called a direct investment enterprise
On the other hand, Vietnamese government has given unclear definitions about foreign direct investment in Law of Investment Vietnamese Foreign Direct Investment Law promulgated in 2005 stated that FDI is an investment form in which a foreign investor provides capital and participates in the management of investment activities in Vietnam Amended investment law in 2020 states that foreign-invested organization means an economic organization whose foreign investors are members or
6 shareholders Basically, the definition of FDI in Vietnam has been in accordance with the shared knowledge but lack of details
The most typical characteristic of FDI investment is its profit retrieval (Hoang,
2016) Regarding external private enterprises, FDI encompasses its primary purpose of seeking profit The classification of FDI according to UNCTAD, IMF and OECD is private investment The main feature of direct investment relationships, by their very nature, may lead to long-term and steady financing and technological transfers with the objective of maximizing production and the earnings of the multinational enterprise over time (OECD, 2008) Hence, strong legal corridors and appropriate policies are fundamental requirements for FDI recipient countries when attracting FDI
The contribution of FDI enterprises depends on authorized capital regulated in provisions of the laws of each country, which aims to impose control on outbound investment Regulations concerning minimum capital ratio are different in each country For example, in the law of the US, the ratio stipulated is 10% while the figure in France and the UK is 20% In the case of Vietnam, according to the Law on Investment 2014, there is no distinction between direct investment and indirect investment but collectively referring to business investment On the other hand, OECD
(2009) states that “an equity capital stake of 10 per cent or more of the ordinary shares or voting power in an incorporated enterprise, or its equivalent in an unincorporated enterprise, is normally considered as a threshold for the control of assets.”
According to WTO, there are three main categories of FDI:
● Equity capital is the value of the multinational corporation’s investment in shares of an enterprise in a foreign country An equity capital stake of 10 per cent or more of the ordinary shares or voting power in an incorporated enterprise, or its equivalent in an unincorporated enterprise, is normally considered as a threshold for the control of assets This category includes both mergers and acquisitions and “greenfield” investments (the creation of new facilities) Mergers and acquisitions are an important source of FDI for
7 developed countries, although the relative importance varies considerably
● Reinvested earnings are the multinational corporation’s share of affiliate earnings not distributed as dividends or remitted to the multinational corporations Such retained profits by affiliates are assumed to be reinvested in the affiliate This can represent up to 60 per cent of outward FDI in countries such as the United States and the United Kingdom
● Other capital refers to short or long-term borrowing and lending of funds between the multinational corporations and the affiliate
So far in Vietnam, there have been mainly traditional types of investment Among different forms of investment, 100% foreign investment, joint venture, build- operate-transfer (BOT), build-transfer (BT), build-transfer-operate (BTO), and business cooperation contracts (BCC) are the most prevalent ones which have been clearly defined in Vietnam’s Law of Investment
The Investment law in 1996 regards “100% foreign-invested enterprise” as a fully foreign-owned capital venture by foreign investors in Vietnam For this investment form, an investor is an individual, an organization or many individuals or organizations that cooperate and share capital to establish a company and do business in Vietnam Investors have legal status and enjoy rights and obligations under Vietnamese law There will be no discrimination or inequality between foreign enterprises and Vietnamese enterprises Companies will be incorporated as limited liability companies This means that the investor will only be responsible for the business invested capital All assets of the enterprise belong entirely to the ownership of the investor Enterprises will be self-managed by foreign individuals and organizations as well as responsible for business results The State only manages the procedures for granting investment certificates and monitors and checks whether enterprises conduct business in accordance with the law but does not interfere in the management of investment activities Regarding the advantages, the host country could avoid business risks, benefit from land rent and tax, and create a large number of jobs for employees (Hoang, 2016) Attracting fully foreign-owned ventures affords
8 host country the opportunity to absorb the technology and business management know-how which are accumulated and developed over the years However, non- profitability and difficulty in controlling business activities are the biggest obstacles of the host country
An enterprise called an “joint venture enterprise" should be established in Vietnam by two or more parties cooperatively on the basis of a joint venture contract or an agreement signed between the Government of the Socialist Republic of Vietnam and a foreign government Moreover, joint venture enterprises are also formed in the cooperation of foreign-invested firms and Vietnamese enterprises, or joint-venture enterprises cooperate with foreign investors according to a joint venture contract (Law of Investment, 1996)
Joint ventures provide a larger force to supply goods and services while risks will be shared It is especially effective in exploiting complementary resources, while one has technology and the other has market insight Another benefit of the investment is creating opportunities for workers to get jobs and learn management experience from overseas On the contrary, there may be conflicts or disputes of ownership between the participating parties due to disagreement on investments or profit sharing 1.1.3.3 Business cooperation contract (BCC)
Direct investment in the form of business cooperation contract occurs when a contract is signed between investors for business cooperation and profit or product distribution without establishing an economic organization
Business cooperation contract is considered to be the optimal choice for foreign investors Since having intention to invest in new market, they would have up-to-date information of trading trend via domestic partners Besides, this form of investment helps investors save on the time and cost of setting up and operating a new legal entity
On the other hand, the form of business cooperation contract does not establish a separate legal entity and all business cooperation activities must rely on the legal entity of the host country Therefore, it is difficult for investors to effectively control business contract activities Business cooperation contract is usually executed in the
9 early stage of the mutual project as it does not require complicated legal procedures Since there is an upward trend of 100% equity or joint venture forms, business cooperation contract seems to decline sharply
1.1.3.4 Build-operate-transfer (BOT), build-transfer (BT), build-transfer-operate (BTO)
Overview of previous findings
A number of studies have considered the impacts of the general foreign direct investment rate in Vietnam While not all the studies are recapped here, I highlight a selection of some remarkable studies Most of the authors agree with the critical importance of foreign direct investment in Vietnam, laying a foundation for the socio- economic development over the years Nguyen (2018) presented that FDI has contributed to the development of high-quality service industries in all sectors such as education and training, healthcare, and tourism
2.2 Determinants of FDI in Vietnam
There are several papers on researching the influences on FDI decision by foreign firms in Vietnam Determinants such as low production cost, political stability and currency are commonly mentioned in previous paper Doing research on the influence of FDI in the Southern Central Coast region of Vietnam over the period 2007–2016 by a spatial econometric approach, Hoang and his partners (2021) found out that skilled labor in the surrounding provinces has a positive impact on attracting FDI inflows in the host province However, investors from some countries such as Japan and Singapore hardly show their trustworthiness to skilled labors due to their commitment after training (Vuong and Yokoyama, 2011) Notably, foreign investors are more interested in the aspect of production factors than consumption Accordingly, FDI investors are willing to set up their production activities in provinces with unskilled but cheap labor force to minimize production costs, and skilled workers are unable to be recruited from neighboring provinces Besides, as employing different econometric techniques in analyzing characteristics of the source countries and other
11 bilateral relationship between the source and destination countries, market size is considered to be in a positive relationship with FDI inflows to Vietnam (Vo, 2018) In
2012, Christian and Richard (2012) analyze the determinants of FDI in the context of the transition to a market economy and there exists fierce competition among countries in FDI attraction by investigating the time series data for the period 1986-2009 and the Ordinary Least Square estimation method As a result, variables as GDP and labor cost impact positively significant on FDI Sharing the same point, Fuangfoo (2017) found out that GDP and Population are highly statistically significant with respect to influencing Vietnam’s progress in FDI inflows growth while inflation is slightly statistically significant at attracting change in FDI inflows to the country However, in
2004, a contrary point was shown by Le that the success of the country in containing hyperinflation is an important factor for the increase of investment ratio
Besides, different types of policies are shown to interface FDI in Vietnam such as human resource development and infrastructure, industrial policy, incentives and other FDI policy, etc (Le et al., 2021) Meanwhile, outward investment missions, investment guarantees, bilateral investment funds and international policies (multilateral, regional and bilateral investment treaties) could be of equivalent importance Moreover, investment ratio could be driven by more creditworthiness of the domestic currency as a result of the appropriate monetary policy (Le, 2004)
2.3 Impacts of FDI on Vietnam
The impact of FDI on Vietnam’s economy has been well-researched on previous studies FDI flows can be in the form of capital allocations, which may result in positive and/or negative outcomes, such as economic growth, spillovers and by- products (Fuangfoo, 2017) FDI inflow could be a measurable tool for the size and presence of multinational enterprises in an economy A number of findings outlining the importance of FDI on Vietnam’s GDP, imports and exports demonstrated a significant correlation between FDI and Vietnam’s economy For example, when study on the effects of Vietnam’s FDI inflows on exports, imports, and net-exports in three phases which are the pre-Asian financial crisis period, the post-Asian financial crisis period and during the Asian financial crisis period, there was a positive relation
12 pointed out (Anwar & Nguyen, 2011) There is an emerging consensus that foreign- invested enterprises have played a significant role in providing investment capital and stimulating export growth (Athukorala and Tran, 2012)
When it comes to locational advantages, Bhatt (2013) believed that they are specific to a country which dictate the choice of production site What extent FDI and spillovers impact on total factor productivity growth of manufacturing firms located in all eight regions of Vietnam are reported in Anwar and Nguyen’ study in 2014 that the presence of foreign firms is contributing to Vietnam’s technological advancement, but the rate of such advancement varies considerably across regions of Vietnam Furthermore, another research on FDI and poverty published in International Journal Trade and Global Market, Ngo (2019) proved that the distributional effects of FDI companies on poverty reduction existed However, their significance was still up for debate due to different methods and regional differences Both articles clarified Vietnam's economic benefits since the foreign direct investment law was introduced; however, their mutual limitations are the lack of actual analyzed data, which impeded authors from a more in-depth assessment Underlining the advantages of multinational enterprises in Vietnam, Garg et.al (2015) showed that foreign firms can foster competition and benefits for the host country’s economy by raising standards and providing possible opportunities for the domestic economy to reach international markets
Spillover effects of FDI are also present in FDI inflow in Vietnam, especially in processing industries, due to labor movements and competition pressure (Nguyen et al., 2006) Theoretically, spillover effects include several types such as competition, imitation and demonstration, and labor turnover (Gorg and Greenaway, 2004) It is beneficial for domestic firms that they enjoy many benefits from competition, especially in industrial production Reductions in the costs of inventing new machinery technology and development of efficient business procedures and operations are examples (Nguyen et al., 2020) Similarly, a positive effect of FDI were shown in foreign studies that domestic companies have specific advantages in enhancing productivity (Javorcik, 2004; Liao et al., 2012; Bui et al., 2018) Oppositely, it is
13 confirmed in several studies that the presence of FDI could be a trigger for domestic companies' performance (Aitken and Harrison, 1997; Jeon et al., 2013; Khachoo and Sharma, 2016) The negative “market-stealing” effects shown by the competition between domestic and oversea enterprises offsets the benefits of FDI spillovers (Aitken and Harrison, 1997) As a result, productivity and efficiency of domestic business considerably decrease since the existence of foreign firms
On the other hand, researchers also argued that the FDI inflows have not always assessed outstanding merits for Vietnam As cited in an article, Nguyen and Do (2018) presented that although FDI substantially contributes to economic restructuring for the industrial sector, it has not yet made Vietnam significant changes in technical progress and caused imbalance in regional economic development Moreover, FDI is also attributable to the increasing environmental pollution in Vietnam Technology spillovers from outbound is always a great concern for many countries in attracting foreign direct investment This was proved in Le and Pomfret’s study (2011) that horizontal spillovers in Vietnam leads to the reduction in the productivity of domestic firms through competition effects with foreign ones
Some studies have made conclusions that FDI’s impact on economic growth may be ambiguous and not statistically significant, such as Bangladesh’s case with Shimul et al (2009) Shimul et al (2009) stated that causality between FDI inflows and openness (export/imports ratio) is not statistically significant, however their study suggested several steps to help contribute to development
2.4 FDI inflow into Vietnam from Japan
Japan has been one of the most major and long-term partners of Vietnam since the early days of economic reform When doing research on Japan’s FDI into Vietnam in the context of World Trade Organization integration, Hoang (2016) used data collection and analysis methods to emphasize that Japan’s FDI is the important motivation for Vietnam’s economy He also found out that the trend of Japanese FDI inflow was in the sector of manufacturing and construction By the end of 2011, the main form of Japanese investment was only the establishment of 100% foreign-owned enterprises, followed by joint venture companies In another master thesis about
Japanese FDI in Vietnam, Nguyen (2012) showed Japanese investment in Vietnam in the four stages, including exploration, boom, recession, and recovery She also pointed out the advantages and drawbacks of Vietnam’s investment environment after joining ASEAN Economic Community, which could remarkably affect Japan's investment decision Both of the authors seem to be proposing solutions to improve the ability to attract the Japanese FDI capital of Vietnam; however, it does not fit the current situation anymore Besides, there was a comparison between factors attracting investment capital in Vietnam, Thailand, and China Specifically, China is considered more advantageous than Vietnam and Thailand with a huge domestic market scale, better provision of raw materials and intermediary goods for production (Vuong and Yokohama, 2011) Meanwhile, facilities and technology are considered to be a weak point of Vietnam (Vuong et al., 2011; Hoang, 2016; Nguyen, 2012)
In conclusion, most of the authors affirmed the importance of Japanese FDI to Vietnam's development, while others pointed out weaknesses in the investment environment and infrastructure of this country
It could be seen from the previous studies that Japan’s FDI inflow to Vietnam has not been a new topic in the history of research Nevertheless, most of the studies on the status of Japanese foreign investment in Vietnam were undertaken several years ago, so they no longer guarantee the urgency and novelty of the information
METHODOLOGY
Data collection method
The data used by the author in this study are secondary data collected from twenty-five reliable articles and reports These data have been aggregated, processed and published The advantage of this data collection method comes from its fast and convenience; accurate information is collected from official information sources The source of information in the article is collected from research works such as reports, statistics from the Foreign Investment Agency, Ministry of Planning and Investment, conference and seminar reports, reports from prestigious domestic and foreign research agencies and organizations such as Ministry of Industry and Trade and Political Theoretical Agency of Central Committee of Vietnam, the Foreign Investment Agency and Japan International Cooperation Agency Besides, the data is retrieved from specialized articles, conference proceedings and economic journal articles published in economic journals such as Journal Science magazine of Vietnam University.
Data processing and analysis methods
To synthesize data, I process the data collected by put the secondary data into tables, pie charts and line charts When summarizing the statistical data, I focus on
16 selecting sources for accuracy and accurate statistics to avoid much bias
Drawing comparison of statistics over the years will present a broad overview of Japan's investment capital in Viet Nam Thereby, analyzing and highlighting impacts of the remarkable events on the state of Japanese investment to Vietnam sheds light on the reason for the Japanese FDI changes in Vietnam during ten years from 2011 to
FINDINGS AND DISCUSSION
Analysis of Japanese direct investment in Vietnam in the period off 2011 to 2021
1.1 Statistics on Japanese FDI by capital from 2011 to 10/2021
After the Law on Foreign Investment was promulgated (December 1987), Vietnam started attracting stake from Japan regardless of low number of projects and limited amount of capital In 3 years (1989-1991), there was only one project per year and the value of the project was also insignificant It is believed that by Japanese companies required careful preparation and exploration to enter Vietnamese market Since 1992, Japanese investment in Vietnam has increased in both quantity and value
A new transition in co-operation between Vietnam and Japan was opened, setting strong foundation prior to FDI boom since 2003
Table 1: Japanese FDI by capital in Vietnam (2011-2021)
Capital contribution and share purchase ($m)
Total registere d investme nt capital ($m)
In general, the total of Japanese FDI inflow to Vietnam has considerably fluctuated over the past 10 years Despite the significant variation in total capital,
Japan still maintains its position in the top investors which have largest and most stable foreign direct venture in Vietnam Specifically, Japan, Singapore and South Korea continuously holds the leading position on investment rankings in Vietnam from 2011 to 2021 Japanese FDI projects should be commended for its effective operation and great contribution to advanced technology in Vietnam In particular, the working style and entrepreneurial skills of Japanese enterprises have been fully appreciated for their diligence, intelligence, creativity and sense of responsibility (FIA,
The period 2011-2015 marked substantial changes in the amount of capital as well as the number of Japanese investment projects in Vietnam Starting at the point of
2430 million USD in 2011, the accumulated registered investment capital of Japan sharply increased in the next two years At the end of 2011, there were only 212 newly launched projects in Vietnam However, a year later, this number has significantly increased to 317 While in 2011, Japan contemporary ranked 4 th among countries and territories whose FDI capital in Vietnam, in 2012, it located in the first among other partners having the most FDI venture in Vietnam Starting from a low starting point in
2011, the volume of Japan regained its growth momentum reaching $5.6 million in
2012, contributing to the share of 51% total foreign investment in Vietnam Surprisingly, although being affected from the world’s economy which notched its stagnant growth due to so far, the figure for Japanese FDI inflow in Vietnam even doubled that of the previous year
Chart 1: Total Japanese FDI capital in Vietnam (2011-2015)
In 2011, 3 years after the ASEAN - Japan Comprehensive Economic Partnership Agreement (AJCEP) and 2 years after the Vietnam - Japan Economic Partnership Agreement (VJEPA) was signed, the cooperation of Vietnam and Japan achieved impressive progresses Vietnam's export turnover to Japan reached a high proportion, when tariff barriers were no longer an obstacle for many businesses This led to a favorable stepping stone for Japanese investors to start a business in Vietnam However, unimaginable events occurring in 2011 constituted the main reason for the modest investment in Vietnam In 2011, continuously suffered from earthquake - tsunami - nuclear catastrophe Japan's trade balance saw a deficit for the first time in
31 years The immediate effects of triple disasters posed an onerous burden on the economy of Japan having already borne consequences from the global economic crisis in 2008-2009 The knock-on effects from the Fukushima nuclear power plant accident have brought Japan's economic engine to a halt Production and export sectors have been stagnant while supply chains have been disrupted Japan's economy also suffered from damages due to the suspension of big firms, inevitably put on mounting concerns about the risk of a financial crisis When the domestic implications of the disaster are mixed, its international import will be more uniformly negative The interruption of normal commercial activities in Japan, hence, would curtail demand for foreign investment
However, after the visit of Vietnam’s Prime Minister in 2011, the two countries have come to sign a joint declaration on commercial and investment in multi-lateral cooperation This could be a sound foundation for the Japanese FDI growth in Vietnam in the following two years (2012-2013)
In 2012, Japan was the largest investment partner in Vietnam According to the data from the General Statistics Office, in the 7 months of 2013 alone, Japan had 169 projects with 1001.6 million USD, accounting for 14.5% of the total newly granted capital and ranking in the 3rd place, out of 42 countries and territories with newly licensed investment projects in Vietnam Notably, although Japan in 2012 was in the process of rebuilding after the double disaster of the earthquake and tsunami; coincidingly, the deflation situation has not shown any signs of change, Japanese investors still led the investment market with total registered capital and increased capital of 5.47 billion USD, accounting for over 34% of total investment capital
One year later, 2013 that was an impressive year for Japanese FDI, which had a consecutive positive growth within 2 years The stake inflow to Vietnam saw the biggest rise by far, which increased by 58% to nearly $5748 million, with a growth acceleration in new projects (+27%) in 2013 The remarkable growth in Japan’s FDI inflow to Vietnam could be possibly emanated from the acceleration of “yen” and the difficulties in producing auxiliary machinery This reduced competitiveness in domestic production and provoked the tendency of Japanese enterprises to invest in Asia Compared to India and China, which showed similar characteristics to Vietnam in terms of FDI attraction, relatively higher profit rate was recorded due to reasonable cost of labor and rent expense As a result of yen’s surge, China’s economy was no longer stable as the increasing cost of labor while it used to be a preference of Japanese investors Applying "China plus one" model, there was a greater tendency that Japanese enterprises endowed in other markets to spread risks (Vu, 2013) At the same time, Japan took the lead in the group of countries having the most FDI inflow in Vietnam (figure 3) Strong investment shift along with massive capital withdrawal from China was expected to increase opportunities for Vietnam
However, Japanese FDI inflow in Vietnam in the next 3 years no longer maintained its
21 sustainable growth A gray picture of growth is seen across most countries in the world in 2014 In almost every developed economy, the growth rate changed very slowly in the first two years of 2011-2012 and only started to show signs of regaining momentum in 2013, but the recovery process was still gradual According to data released by the Japan Trade Promotion Organization (JETRO), while 2013 experienced the highest level (5.87 billion USD) of FDI growth for 5 years, the amount of investment capital from Japan into Vietnam in 2014 decreased by 65% to 2.05 billion USD (figure 2) On the other hand, the amount of licensed capital for newly registered projects did not sharply diminish, which slowed down from 1.4 billion USD to 1.2 billion USD However, additional capital for projects plummeted by 81% The number of projects decreased from 352 to 298 (FIA, 2014)
Chart 2: Leading FDI countries in Vietnam (2013)
Explaining the downturn, the difficult economic situation in Japan and the depreciation of the “yen” currency induced Japanese government increased public spending and opened many opportunities for investors in the domestic market The situation of corporations’ decision led to outbound investment limitation Japanese currency’s deflation had led to the limit in outbound investment of businesses Many difficulties in attracting FDI from Vietnam and disrupts in the profitability of FDI companies investing in export sectors were reported Japanese consumers’ demand of domestic
22 goods exploded due to their tight spending on overseas imported goods The priority on domestic consumption of customers led Japanese FDI companies to stagnate investing abroad According to a preliminary report by Japan’s Cabinet Office, consumer spending increased by 0.9% compared to the prior quarter FDI inflow from Japan to Vietnam, hence, showed the significant downward trend as the majority of projects in Vietnam in 2014 were on a small scale of venture In particular, 85% of Japan's investment projects in the past year were under 5 million USD (Duc, 2015) The amount of FDI capital from Japan sharply reduced by two-thirds, which aroused paramount concern from the host country However, it was believed that the FDI asset would be merely a short-term decrease since Japanese enterprises were waiting for the new regulations in revised investment and enterprises law, which was in effective from July 2015, with the hope for better business environment
Chart 3: Newly registered and adjusted Japanese FDI capital (2012-2014)
On the contrary, Japanese FDI capital withdrawn from China in 2015 was mainly invested in Singapore and Indonesia As can be seen in figure 1, the foreign stake inflow in Vietnam in 2015 hit the lowest point in the consecutive four years This downward trend reflected several problems in legal corridor of Vietnam Limited
2012 2013 2014 m illi o n U SD Total registered capital
Adjusted capitalNewly registered capital
23 investment environment, inconsistent policies, bureaucratic administrative procedures, high tax costs, and corruption were the major culprit of Japanese enterprises’ apathetic (Anh, 2016)
Chart 2: Total Japanese FDI in Vietnam (2016-2021)
Overall, Japanese FDI in Vietnam has fundamentally altered between 2016 and
2021 due to the great influence of the world’s economy In 2016, the total investment into Vietnam was 20.9 billion USD, which is down by 8% compared to 2015 It is noted that Japan's FDI inflows lost their leading position among top countries investing in Vietnam since 2014 Large Japanese corporations was showing signs of slowing down in capital accumulation with small projects In addition to poor business environment and limitations in investment policies, undeveloped domestic supporting industry was to blame for the reduction of Japanese firms’ stake Surprisingly, positive signs appeared when Japan returned to the track in 2017, which the total registered capital of Japan is recorded three-fold as much as the figure of 2016 It were Nghi Son
2 BOT thermal power plant project (Thanh Hoa province), Van Phong 2 coal-fired power plant (Khanh Hoa province) and Omon Gas Project (Can Tho city), which are 2.79 billion USD, 2.56 billion USD and 1.27 billion USD in volume respectively that had a significant contribution to the surge in 2017 (figure 5) Explaining for the
Impacts of Japanese FDI on socio-economic development of Vietnam
Japan foreign direct investment has continuously provided comprehensive assistance for socio-economic development in Vietnam Foreign direct investment (FDI) including Japan’s has played a crucial role in catalyzing Vietnam’s socio- economic development and its economic integration into the global scene since it started transitioning to a market-oriented model during a decade The FDI influx from Japan has examined the constitutional issue about Vietnam’s economy and society since 2011, facilitating the development of major export-oriented manufacturing industries of the country, helping to reinvigorate the economy, keeping rampant inflation under control, and improving living standards Being commended as one of East Asia’s new economic tigers, Vietnam has achieved the second-fastest growth rate per capita worldwide since 1990, followed by only China A surge in government revenues through strong exports and higher average household incomes have enabled transformative social development over the last two decades It is worth noting that with assistance of Japanese FDI influx, the number of people living below the national poverty line has rapidly collapsed, and access to health, education and basic infrastructure has significantly improved, drastically reducing mortality rates, advancing learning outcomes and improving the quality of life
In terms of economic impacts, after 10 years, more than 47 billion USD of Japanese FDI has been invested in Vietnam This is a huge number, contributing significantly to the improvement of Vietnam's GDP Although 2020 and 2021 were dark years for the worldwide economy in general and Vietnam's economy in particular due to the impact of the Covid-19 epidemic, it is undeniable that there is a positive influence of foreign direct investment on GDP of Vietnam since 2011 Specifically, from 2011 to 2019, the rate of GDP growth steadily jumped by approximately 0.78%
(figure 5) The statistics show that economic growth has a positive correlation with the annual growth rate of FDI attraction in Vietnam FDI capital accounts for a significant proportion of total investment capital of the whole society The increase in disbursed
FDI capital expands the production scale of economic sectors, thereby creating conditions to promote economic growth The general implemented FDI capital in Vietnam reached 20.38 billion USD, accounting for about a quarter of the social investment capital and taking over 20.35% of GDP value in 2019 It can be seen that the structure of FDI sector in GDP tends to increase gradually from 2011 to 2019, prior to a Covid-19 pandemic wave in Vietnam Japanese FDI accounts for a high proportion of total attracted FDI capital in Vietnam with an average contribution of nearly 30% per year As a result, Japanese FDI is increasingly playing an important role to economic growth of Vietnam
Chart 7: GDP Growth rate in Vietnam from 2011 to 2021
Investment cooperation between Vietnam and Japan becomes more favorable when both two countries participate in many common FTAs This has important implications for boosting exports, which stimulates Vietnam's trade balance surplus and GDP growth The export value of goods of the Japanese FDI enterprises accounts for 27% in 2010 and nearly doubled to 41.5% of the country's export turnover in 2021 (Do, 2021) Export volume increased thanks to special import tax incentives through FTAs had significant impacts on the growth rate of registered and adjusted Japanese FDI in Vietnam in recent years
It is believed that Japanese FDI has contributed to the promotion of trade,
33 employment generation and technology spillover For example, large FDI enterprises of Japan such as Canon, Panasonic in the field of electronics; Toyota, Honda, Yamaha, Suzuki, Mitsubishi belonging to the manufacturing industry group; representatives of the energy industry are Marubeni, Sojitz, Idemitsu, Mitsui or Toray Textile and Garment Group, etc are all playing an important role in satisfying energy consumption demand and improving production and export capacity This greatly contributes to a gradual participation and a better foothold in the global value chain, especially in fields such as mechanics, metallurgy, chemicals, electricity - electronics, energy, textiles and garments, and footwear of Vietnam In terms of employment generation and technology spillover, Japan created good conditions for Vietnam to improve human resource management and technical knowledge by direct training and exchanging opinions By this way, the technical cooperation projects have promoted mutual understanding and trust Japanese FDI has produced synergistic effects and has led to an increase of Japan’s direct investment from the private sector Technologies transferred from Japan are advanced technologies, which are completely suitable for Vietnam's production and export needs, such as CAS technology, vaccines, micro- electromechanical systems, etc
Apart from economic positive impacts, Japanese venture has made a great contribution to enhancing Vietnamese people' living standards and quality of life Japan always upholds the importance of protecting people, so Japanese FDI projects always meet strict quality standards For example, real estate and construction projects built by Japanese firms need to be complied with demanding requirements for residential safety In addition, Japan always focuses on investing in facilities and convenience It is significant that investment in hard infrastructure recently be greatly stimulated by Japan A large number of building projects have been put into operation, especially projects on transportation Hence, people's living environment and conditions were much more convenient and substantially improved The augmentation of FDI stake also appreciates profound significance to traffic development of Vietnam One of the outstanding examples is the construction of North-South railway, which
34 were implemented under the PPP method with the investment volume up to 8,900 billion VND In addition, health and education sectors are heavily focused by Japanese firms due to its vital importance to human This is a smart move for investors, who will reaping a huge profit from such key sectors The FDI investment in the health sector contributes to the improvement of facilities and human resource development in Vietnam For example, medical device system was supplied for Cho Ray Hospital (Ho Chi Minh city), Bach Mai Hospital (Hanoi), and Central Hospital (Hue)
On the other hand, FDI projects have considerable contribution to creating a new face for many localities such as Dong Nai, Binh Duong, Vinh Phuc and Bac Ninh Rural residents’ life, consequently, has witnessed an enormous change It is obvious that foreign investment from Japan has the potential to facilitate the social development by hiring millions of Vietnamese people for new plants This improves aggregate domestic employment through types of jobs created, income distribution, skill upgrading, regional distribution of new employment and good wage levels Specifically, the salary of people in localities which has Japanese FDI companies always in a high amount As Vietnamese Communist Party Newspaper, the minimum wage of people working for Japanese FDI has increased by 3 million VND a month Moreover, the unemployment rate of Vietnam in rural areas clearly decreases over the last ten years It is estimated that every year, Japanese FDI firms generate job opportunities for approximately 1 million Vietnamese people, including unskilled and professional labors The qualifications of Vietnamese workers have been significantly enhanced due to the skills transfer and internal on-the-job trainings of Japan FDI enterprises
However, under great impacts of the massive influx of FDI from Japan which contains many potential risks, the domestic economy, society and environment can be vulnerable to external shocks
Apart from the positive effects as mentioned in 1.1, technology transfer also
35 poses many problems for the host country Out-of-date technology and devices in bad conditions from Japan are often transferred to developing countries including Vietnam This directly has an adverse effect ondevelopment, environmental pollution, tax evasion and transfer pricing
There should be some reasons that old technology is often transferred from Japan to Vietnam First, the technical devices which have been used or out of date tend to be cheaper and more labor-intensive than the new ones As a result, these devices and machines are no longer popular in Japan Instead of throwing away, third parties buying machinery and equipment will resell them at a cheaper and more competitive price Although these machines are old, they are all originated from Japan, so still being trusted by many foreign factories In general, this has turned Vietnam and other developing countries into a "technological dump" from big countries like Japan
The dark side of technology transfer has been shown in the low productivity and environmental pollution for the host country A lot of technology transferred to Vietnam are unlicensed For example, it was in 2016 when X-ray film scanners and accompanying accessories originated from Japan were transferred to Vietnam and refurbished into new goods to smuggle into some markets such as district hospitals, private medical facilities although they had no expiry date (Song, 2016) The technologies produced in Japan are featured with the following characteristics such as saving labor and using standardized raw materials while in fact, the technical devices do not meet these requirements In fact, old machines after a long period of use are proven to emit two to three times more CO2 than new machines with improved technology This raises the concern that environmental pollution in Vietnam, especially in industrial zones, will become more and more serious Moreover, the difference in climatic conditions is a factor that rapidly wears out technological equipment and makes it difficult to use in the receiving country In addition, the limited ability to provide technical services and spare parts in developing countries are also difficulties in absorbing foreign technology These characteristics have reduced the efficiency of the use of technology
In reality, there is limited multinational enterprises which are willing to transfer
36 new, highly competitive technologies to overseas affiliates for the fear of losing technology copyrights, modification, or imitation Another reason, somehow, even comes from the host country which has failed to meet the demanding requirements of technology use In additional to available technologies transfer, although Japanese multinational enterprises also invest in research and development (R&D) in Vietnam, most of the R&D activities at the present are to adapt technology to only local conditions of use without widespread applicability
Moreover, higher-than-actual technology prices is a common phenomenon in technology transfer contracts to developing countries as Vietnam Because the capital, knowledge and experience in negotiation in Vietnam is limited, Japanese investors often charge technology prices higher than market prices
Among the existing problems of Japanese FDI, the environment is the most controversial issue The similar characteristic of foreign investors from developed countries is that they have transferred many technologies that cause high environmental pollution to exploitation in developing countries like Vietnam It is inevitable due to strict requirements in environmental protection standards in Japan
Comparison of policy in Vietnam and regional countries and recommendations
Vietnam has formulated investment policies to attract FDI since the beginning of market opening and integration The promulgation of Law on Foreign Investment in
1987 established the foundation for legal framework for investment in Vietnam So far, the Law has been revised several times, the most recently is in 2014, 2015 and
2020 Table 3 summarizes the most key changes in FDI policy over time in accordance with each revision
Table 3: Key changes in FDI policies in Vietnam
Policy areas Revised Law in 2000 Revised Law in
+ Publishing the list of FDI enterprises which are permitted to make business registration, without FDI license
+ Applying FDI licenses for all investment projects with foreign capital (even if it is only 1% of charter capital)
+ Shortening shorten the procedure for granting investment capital to 15 days)
+ Publishing the list of projects calling for foreign investment in the period 2001-2005
+ Allowing foreigner to buy stocks of domestic enterprises
+ Investment license only record information about investment projects
+ For projects under the authorization of the National Assembly and Prime Minister: investors submit investment project documents to the Ministry of Planning and Investment + For projects under the
Policy areas Revised Law in 2000 Revised Law in
Committee at province level: investors submit investment project documents to the investment registration agency
+ Expanding areas for foreign investment, allow FDI in housing construction
+ Reducing 24 conditional investment sectors + Restricting prohibited business industries
+ Officially banning debt collecting service business
+ Prohibiting trading wild plants and animals extracted from nature
+ Removing regulation that the FDI enterprise has to allocate their certain profit proportion to reserve fund;
+ Further reforming tax system; gradually reduce the tax gap between domestic and foreign investment
+ Applying FDI corporate income tax rate lower than normal tax rate + Exempting and reducing of land rent, land use levy, land use tax
+ Fast depreciation, increasing deductible expenses when calculating taxable income
+ Reducing number of areas with
Policy areas Revised Law in 2000 Revised Law in
2020 require for export proportion of 80 percent
+ FDI enterprises may act as dealers for imports – export services imported goods comparison with revised Foreign Investment Law in
3.2 Comparing key FDI policies in Vietnam to regional countries
As presented in Table 3, Vietnam’s FDI policy has now been more relaxing, and more favorable to foreign investors than previously However, compared to other countries in the region such as China, Thailand, and Indonesia, the total amount of Japanese FDI capital into Vietnam seems to be much more moderate In this section, I would analyze the case studies of China, Thailand and Indonesia Having realized that China is considered as the leading attractive destination for Japanese FDI investors in Asia with 10.2 billion U.S dollars in total, in this section, the case study of China is to be analyzed Studying the differences between investment policies of China and Vietnam contributes to advance the literature about the investment strategies of China and improve legal corridor to attract more Japanese foreign direct investment In addition, when comparing the ability to attract FDI of Southeast Asian countries, Thailand and Indonesia are chosen as the critical samples for their similarities in economy and geography to Vietnam According to a report of ASEAN Secretariat and UNCTD, Japanese FDI in Indonesia in 2021-2021 reached 2.1 billion USD while the figure for Thailand was witnessed a catastrophic drop to under 1 billion USD Therefore, their strengths and weaknesses of investment policies are expected to clarify in the study, thereby summarizing lesson learned for Vietnam
There will be three aspects of investment corridor shown in the comparison, which are restriction on the form of enterprises, areas and regulation on the granting license and land assess
First, in China, all foreign enterprises must ask for license However, there will be no difference in the registration process between domestic and foreign enterprises and no additional approval or license for foreign investments is required In the latest Negative List in 2021, there is no foreign investment restriction in the financial sector FDI firms can change investment form, be free to choose investment partners during transition period of five years to adjust their organizational forms and corporate structure in accordance with China’s foreign investment law To be granted investment license, enterprises are required to register via State Administration for Market Regulation and local counterparts (Wei, 2020) Regarding assess to land, ownership on land and house is permitted This country put some difficulties for investors in terms of site, land; transfer and mortgage of land use rights are permitted
Second, in Thailand, there are no restrictions on the form of enterprises and area and enterprises are permitted to freely choose investment form, except for some restricted industries About regulation on granting license, the investors must apply for a permit from the Department of Commercial Registration in the Ministry of Commerce Moreover, enterprises may lease land for 50 years, with automatic extension when expire; the land leasing contract may be used to mortgage
Thirdly, in Indonesia, apart from sensitive sectors, there are also no restrictions on the form of enterprises, so FDI investors are free to choose investment form About regulation on the granting license, in Indonesia, complicated procedures and prevalent corruption in investment licensing are reported Enterprises are required to have approval of President if the project capital is greater than 100 million USD Several licenses were also needed even after being granted investment license Leasing land in industrial zones is permitted but may have complicated processes Land lease for 30 years is most popular Transfer and mortgage of land use rights is permitted
To compared to the other 3 countries, Vietnam seems to make great effort in creating the best conditions for FDI investors by allowing them to freely choose investment form Almost all sectors are allowed for FDI enterprises; and they could change form of investment to joint stock at any time Moreover, FDI investors could be free to choose investment partners However, preferential treatment was rougher
42 compared to China and Thailand
By comparing with three countries in Asia, it is clear that there are some weaknesses in Vietnam's investment policy The first problem comes from land lease and use Foreign investors still encounter certain obstacles in Vietnam when land resources have not been really exploited and fully promoted Difficulties in accessing land stem from contradictory and overlapping legal system, leading to unclear management responsibilities, making it difficult for FDI organizations to approach It is required that site clearance be carried out after they receive the license Because of these problems, it may take longer to prepare and construct necessary facilities, delaying the commencement of projects and the investors may miss the business opportunities Back to the lesson from Thailand, this country has a well-established system for land rights which is generally upheld in practice Thailand encourages to computerize land titling information, especially in regional land offices This can be a lesson for Vietnam in digital transformation of land management
Although the current conditions of Vietnam’s investment environment have become more favorable to foreign investors in Vietnam, the legal system and policies related to FDI, however, still lack consistency, transparency, predictability, and have been rather changeable Investment policies revealed several shortcomings that need to be fundamentally overcome, reoriented from policy making to investment structure and implementation process Specifically, some investors supposed that Vietnam's policies were imposing a burden on the business process of FDI firms such as restricting areas of operations, expanding the list of business with required conditions, imposing export proportion on FDI enterprises, raising the land price and compensation of site clearance
In general, Vietnam government is tightening regulations on investment However, the effectiveness of law enforcement in Vietnam is still low, leading to a gap between policy and practice The effectiveness of FDI attraction is also reduced due to other factors such as weak infrastructure and business support These push up the costs of doing business - for example, fees for telecommunications services, electricity, administrative procedures - in Vietnam According to JETRO (2009), the
43 aforementioned costs in China or Thailand were about 0.2% lower than Vietnam These factors also affect the international competitiveness of products from FDI enterprises In 2020, when comparing the production costs of Japanese enterprises in a number of cities and countries, JETRO's Annual Report indicates that some services in Vietnam such as shipping, international communication still have higher prices than other countries Not to mention, the price of raw materials is increasing due to the development of the Covid-19 epidemic, especially for steel
3.3 Proposals to improve Japanese FDI attraction
3.3.1 Improving Vietnamese policies on land access
Attracting FDI Japanese greatly contributes to expanding foreign economic relations, creating favorable conditions for Vietnam to successfully integrate, bringing Vietnam step by step to join the global production value chain To promote the attraction of Japanese FDI, it is recommended that the reform of land procedures be promoted Determining Japan as an important partner to focus on attracting investment, Vietnam needs to support Japanese FDI enterprises in site clearance and speeding up the implementation of industrial parks and industrial clusters Moreover, it is recommended that Vietnam should promulgate a land price bracket based on market reality and finalize regulations to provide a legal basis for conducting electronic transactions on land Formulating programs and policies to attract investment in urban and housing development and giving priority to large-scale urban development projects are necessary for land re-planning, which helps to create favorable conditions for Japanese investment in Vietnam In addition, because Japanese investors are giving much concern to build smart cities, Vietnamese authorities should have solutions to synchronous technical and social infrastructure, social housing development projects and resettlement housing, high-rise housing along key traffic axes and corridors 3.3.2 Improving the legal environment and administrative procedures
Over the past 10 years, Vietnamese government put much effort to improve the legal system and investment policies However, in the process of finalizing the investment policy mechanism, adjustments are still needed to unify the whole region and simplify administrative procedures The main solution is to publicize and
44 transparently handle the work process in all agencies and units and urge the implementation of online public services Also, using electronic invoices and integrating administrative procedures on national public service portal; strengthening the organization of meetings between the city government and associations and businesses at home and abroad should be implemented In order to attract more FDI from transnational corporations, especially from Japan and developed countries, Vietnam needs to pay attention to the requirements of foreign investors in several aspects such as: publicity, transparency, stability, predictability in terms of institutions, policies and laws In addition, the local authorities should strictly and uniformly enforce the law to protect the legitimate rights and interests of investor and simply administrative procedures
The improvement of investment law and the reform of administrative procedures is no longer a new issue for Vietnam and researchers, but it is important because it solves the inadequacies in this area, thereby creating an attractive, open and most favorable investment environment for investors
Due to the great competition in attracting Japanese FDI among countries in the region and great difficulties and challenges such as the epidemic and the world economic crisis, if the government does not execute strict reforms, Vietnam may take a risk of missing the chance receiving Japanese FDI to other countries in the region