The impact of foreign direct investment capital on the manufacturing industries in vietnam

Ministry of Education and Training National Economics University DANG QUY DUONG THE IMPACT OF FOREIGN DIRECT INVESTMENT CAPITAL ON THE MANUFACTURING INDUSTRIES IN VIETNAM Specia

Ministry of Education and Training National Economics University

 

DANG QUY DUONG

THE IMPACT OF FOREIGN DIRECT INVESTMENT CAPITAL

ON THE MANUFACTURING INDUSTRIES IN VIETNAM

Specialized Reasearch: International economics (External economics)

Code: 62310106

SUMMARY OF DOCTORAL THESIS IN ECONOMICS

Hanoi - 2014

THE RESEARCH IS COMPLETED AT NATIONAL ECONOMICS

UNIVERSITY

Scientific Supervisor: Prof.Dr Do Duc Binh

Reviewer 1:

Reviewer 2:

Reviewer 3:

The thesis will be reviewed and marked by Government Thesis Examination

Committee At:………

At… On……

You can read and refer more about the contents of research at:

- State library

- Library of National Economics University

Introduction

1 Reasons to do the research

The economic growth and development are always the aims that many countries

around the world would like to achieve including Vietnam Since Vietnam regained

independence in 1975 and especially after renewal policy was implemented in 1986,

the Party and State have set goals for economic development to the forefront with the

orientation to 2020 that Vietnam will basically become a modern industrialized

country

In order to achieve this objective, Vietnam needs to make the best use of existing

resources and simultaneously force international integration in order to attract outside

resources In recent times, Vietnam has attempted to attract outside resources, mainly

from foreign direct investment (FDI)

Theories and practices show that FDI plays a very important role in the economic

development of Vietnam First, FDI contributes to the development of economic

sectors through additional funding, technology transfer and restructuring the

economy towards modernization and industrialization The development of the

economy will facilitate the growth of the entire economy as higher growth rate,

creating more jobs, improving the workforce quality, infrastructure and raise the

technology level etc which helps to elevate the position of Vietnam in the region and

the world

At the national level, there have been many studies on the impacts of FDI on

economic growth, economic restructuring, export promotion, infrastructure and

workforce quality improvement such as the studies conducted by Nguyen Thi Tue

Anh (2005), Tran Ngoc Thin (2010), Bui Thuy Van (2011) and Nguyen Tien Long

(2012) However, at the sector level, the number of researches on the impacts of FDI

on economic sectors is still modest

Besides, during the process of economic development, it is found that the

development of the process and manufacture industries, also known as manufacturing

industry, is a key factor to speed up economic growth rate Industry contributes the

largest amount of money to GDP so the growth of manufacturing industry decides the

growth level of Vietnam economy

Therefore, it can be affirmed that both FDI and the growth of the manufacturing industry are key factors to stimulate the economic growth This leaves a question for us: Is there any relationship between FDI and the growth of the manufacturing industry? and to what extent? What is the role of FDI in developing the manufacturing industry? For answering these questions helps us allocate and use FDI reasonably as well as develop manufacturing industry, which contributes to the growth of Vietnam economy

In the world, there have been abundant of studies on the impact of FDI on the manufacturing industry In Vietnam, there are a number of quantitative studies on the impact of FDI on the process industry such as the research performed by Le Quoc Hoi (2008), Nguyen Phi Lan (2008), Nguyen Ngoc Anh (2008) However, almost all studies in Vietnam on the impact of FDI on manufacturing industry usually tend to lean heavily toward one side: either quantitative analysis or qualitative analysis In summary, up to now, there is no comprehensive and systematical study, combining both quantitative and qualitative methodology, on the relationship and the impact of FDI on the manufacturing industry That is why I selected the topic "The impact of foreign direct investment capital on the manufacturing industries in Vietnam" for my thesis

2 The aims of the research

The purpose of the thesis is to analyse and assess the impact of FDI on the manufacturing industries in Vietnam On this basis, the author proposing solutions to take advantage of the positive effects and mitigate the negative impacts of FDI capital

on the manufacturing industries in Vietnam

Specifically, the research focuses on the following main points as below:

- To formalize theories of FDI, FDI capital and the impacts of FDI capital on the manufacturing industries

- To analyse and assess the impacts of FDI capital on the manufacturing industries in Vietnam by using methodology of qualitative analyze and econometric models

- To analyze the causes affecting the impact of FDI capital on the manufacturing industries in Vietnam

- Based on the results of research and analysis, to propose solutions that utilize the positive effects and mitigate the negative impacts of FDI capital on the manufacturing industries in Vietnam

3

3 The objects and scope

3.1 The objects of the research

The thesis studies the impacts of FDI capital on the manufacturing industries in

Vietnam

3.2 The scope of the research

- Spatial research: The thesis studies the impacts of FDI capital on the manufacturing

industries in Vietnam

- Time range: The manufacturing industries in Vietnam: from 1988 to 2013

4 Research methodology

The thesis has employed a combination of different research methods such as

statistics, analysis and synthesis, modeling method, using references to clarify the

contents of the thesis The secondary data was collected from the General Statistics

Office, Ministry of Industry and Trade and Foreign Investment Agency The

theoretical framework contains groups of statistical indicators and econometric

models, used to assess the impacts of FDI capital on manufacturing industries on both

direct and indirect aspect

5 Contributions of the thesis

5.1 Academic and theoretical contributions

The thesis has proved FDI capital impacts on the manufacturing industries on both

aspects of direct and indirect Direct impacts includes: (1) The impact on total capital;

(2) The impact on the growth of the manufacturing industry; (3) The impact on

economic restructuring in the manufacturing industry; (4) The impact on promoting

export in manufacturing industry; (5) The impact on the contribution to the state

budget and job creating in the manufacturing industry; (6) The impact on the

formation of new industries in the manufacturing industry; (7) The impact on the

formation and development of supporting industries for the manufacturing industry

Indirect impacts includes 4 transmission channels: (1) Competition channel by

putting competitive pressure on enterprises in the manufacturing industry (2)

Technology transfer and Research and Development; (3) Training and movement of

human resources; (4) Vertical and horizontal linkages among enterprises

4

5.2 The findings, new suggestions drawn from the results and surveys of research

FDI capital contributes to productivity growth, export promotion and economic restructuring in the manufacturing industry in a reasonable way

In terms of levels: Manufacturing industries at level 2 and 3, the medium and low-tech manufacturing industries at level 3 are affected negatively by forward linkages and backward linkages among FDI firms and domestic firms, which is shown through output decline in these industries Only the high-tech-3rd-level manufacturing industry is the exception because thanks to better internal resources and capabilities, domestic firms in this sector co-operate with FDI enterprises more efficiently than enterprises in the medium-and-low-3rd-level industries

The thesis has proposed some viewpoints of taking advantage of the positive effects and mitigating the negative effects of FDI capital on manufacturing industries, including some breakthrough points of view such as: (1) FDI capital is an important strategic capital for manufacturing industries; (2) The manufacturing industry need to consider modern technology transfer as one of the fundamental interests; (3) FDI capital in the manufacturing industry must play an important role in the training of human resources; (4) Do not distinguish between FDI firms and domestic enterprises; (5) Appreciate the linkages between FDI firms and domestic enterprises; (6) The industrial clusters supporting manufacturing industry have an important role to take advantage of the positive impacts of FDI capital; (7) Need to respect both attracting and using FDI capital effectively in manufacturing industries; (8) The FDI strategy of manufacturing industry need to be put in relation with the socio-economic policies

On those bases, the thesis proposes two groups of solutions:

(i) The first is related to taking advantage of the positive impacts of FDI capital impact on the manufacturing industry in Vietnam In which the breakpoints are: (1) strengthening the efficient of linkages and joint venture between enterprises in the manufacturing industry; (2) the development of industrial clusters supporting for the manufacturing industry; (3) boosting research and development (R & D)

(ii) The second is related to taking measures for restricting the negative impacts of FDI capital on the manufacturing industry in Vietnam In which innovative solutions are: (1) FDI policy to minimize attracting FDI capital into low-tech and low added value industries; (2) improving the efficiency of technology transfer activities; (3) the State support for the fledgling industries

6 Organization of the research

Besides the introduction, conclusion, appendices and reference lists, the structure of

the thesis is divided into four chapters as follows:

Chapter 1: Overview of scientific work related to thesis topic

Chapter 2: Rationale for FDI capital and model for assessing the impacts of FDI

capital on the manufacturing industries

Chapter 3: The current situations of FDI capital impacts on the manufacturing

industries in Vietnam

Chapter 4: Viewpoints and solutions for exploring the positive impacts and mitigating

the negative impacts of FDI capital on the manufacturing industries in Vietnam

Chapter 1

LITERATURE REVIEW

1.1 Literature review conducted in the world

In the world, science works studying on FDI in the manufacturing industry are very

diverse, abundant and on many different aspects

To set premise for research, the thesis will present an overview of the main research

points relating to the relationship, the impacts of FDI on the manufacturing industry

on some main aspects such as imported technology, research and development, the

spillover effect, vertically associated linkages, technology selection, training and

salary for workers in the manufacturing industry in the developing countries

- FDI in relation to imported technology and local research & development

India is a country of many studies on the relationship between imported technology

and local research & development (R&D) These works show that the relationship

between imported technology and local R&D is both supplement and alternative

However, the findings also give many overlapping and unclear conclusion about this

relationship

- FDI and spillover effect on knowledge and productivity

Caves are one of the first people studying quantitatively on spillover effect Since the study of the Caves, there are many studies on the spillover effect of FDI in the developing world, including Asia, Latin America In the most general sense, almost all studies agree with the spillover effect of FDI on the manufacturing industry However, the conclusions of these studies conflict each other because it is unclear that whether the spillover effect of FDI is positive or negative Spillover effect depends on many factors such as the capacity of local businesses, the market share of foreign investment, the policies of the State and enterprises and others, and the studies have yet evaluated and compared the extent each factor to create spillover

- FDI and the linkages of firms

The above studies agree that the relationship between domestic enterprises and foreign enterprises will affect growth, productivity and export of enterprises However, gap in the above study has not determined at what degree, the linkage proves effective and at what degree the linkage need to reach in order to take full advantage of the benefits that FDI brings

- FDI and exports of local manufacturing industries

The studies on evaluating the role of foreign ownership on the export of manufacturing industry have given quite different results To explain this, two important points can be mentioned: export-oriented FDI plays an important role in improving the export performance of the host country, and different countries have different policies to attract FD, including export-oriented FDI Although the conclusions of the work are diverse on many different aspects, all show that each country's policy on FDI have a large impact on exports, export promotion, export expansion of that country

- FDI with technology selection and local industry

All studies on the technology selection have concluded that technology affects exports, the growth of the local industry However, the level of impacts mainly depends on the technology policy and the absorbsion ability in the industry of the host country

- FDI with labour and wages

The research on labor and wages give similar comments about the difference in the

7

salaries between foreign firms and local ones The distinction between unskilled

labors and expertise has provided a good basis for explaining this difference because

it helps to take human capital in the past into account

1.2 Literature review conducted in Vietnam

Since the foreign investment law came into effect in 1988, studies on FDI began to

appear in Vietnam In particular, from 2000 onward, the recent researches on FDI

increased rapidly both in terms of qualitative and quantitative research

The studies related to evaluation of the impacts of FDI on the economic growth,

the productivity of the economic sectors

From 2000 onwards, Vietnam has witnessed the appearance of many quantitative

studies on assessing the impacts of FDI Initially, they were the assessments of the

FDI impacts on the growth of the economy, then developed into more detailed studies

on the impacts of FDI on the economic sectors After that, there appeared many more

detailed studies on the spillover effects of FDI such as assessing the impacts of FDI

on productivity, wages, technology transfer, level of linkages

The studies related to attracting and using FDI

The qualitative studies on FDI often research on attracting and using FDI These

studies offer some solutions to attract FDI, such as creating a favorable investment

environment, preferential policies for foreign investors and giving recommendations

to the State about the innovation mechanism, decentralization of the licensing and

management of using FDI Recently, to increase the reliability, the qualitative studies

often incorporate quantitative factors

The studies on the direct impacts of FDI

These studies focus on the analysis of the impacts of FDI on economic restructuring,

export promotion, job creation and contribution to the state budget

It can be said that, since 2005, the domestic studies on FDI have shown a decrease in

gap between qualitative and quantitative method by using combination of two

methods in research

Through a review of the studies on FDI, we can see that there are many qualitative

and quantitative studies related to FDI in Vietnam There also have been some

quantitative studies assessing the impacts of FDI on productivity and growth in the

manufacturing industry However, the manufacturing industry has been and will be a

8

key industrial sector of Vietnam, therefore, it is necessary to have a comprehensive study on the impacts of FDI in this industry This thesis will evaluate comprehensively the impacts of FDI on manufacturing industry in Vietnam by using both qualitative and quantitative analysis with assessing the impacts of FDI from two angles of the direct and indirect

CHAPTER 2

THEORETICAL FRAMEWORK OF FOREIGN DIRECT INVESTMENT AND MODEL FOR ASSESSSING THE IMPACTS OF FOREIGN DIRECT INVESTMENT CAPITAL ON THE MANUFACTURING INDUSTRIES

2.1 The Theories of foreign direct investment capital

Foreign direct investment (FDI) always closely links with foreign direct investment capital Therefore, in order to make the general theory of FDI, first of all, the thesis will focus and clarify the theoretical issues about the concept of FDI

2.1.1 The FDI concept

There are many definitions and aspects of FDI, but generally said that: FDI is the process of moving the long-term capital from one country to another, foreign investors invest a certain capital ratio and directly involve in the production and business management in relation to the capital they invest in order to achieve long-term benefits not only in long-terms of economic but also the political and socio-cultural aspect

2.1.2 Concept and characteristics of FDI capital

Because the concept of foreign direct investment is the movement of capital, it can be suggested that FDI and FDI capital are linked together

The conception of FDI capital: FDI is a kind of capital formed in the process of foreign direct investment, it is also the capital moved from one country to another by foreign investors Foreign investors will be directly involved in managing business and production related to this moving capital with the aim of obtain long-term benefits not only in terms of economic aspect but also other related benefits

Characteristics of FDI capital: (1) FDI capital can be expressed in many different forms such as cash, land, machinery, equipment, inventions, patents, trade secret, trademark; (2) FDI capital is the long-term capital but a loan; (3) FDI capital has a

minimum and maximum level that a foreign investor has to contribute; (4) FDI

capital link directly with the disposal of foreign investors; (5) The ratio of FDI capital

regulate dividing profits that foreign investors are entitled to; (6) FDI capital often

move into areas that have many priorities and advantages of the host country; (7) FDI

capital may affects the economy of host country positively or negatively; (8) FDI

capital is more common and profitable than indirect investment capital, it means that

FDI is also risker

2.1.3 Some theories relating to FDI capital

The thesis cover some theories such as the theory of market power; the eclectic

theory; the marginal productivity theory of capital in order to clarify the motive to

invest abroad of countries and multinational firms These theories will support

analyzing the impacts of FDI on the manufacturing industries

2.2 The impacts of FDI capital on the manufacturing industries

This thesis examined the impacts of FDI on manufacturing industries in two

dimensions (direct and indirect) through channels to manufacturing industries

2.2.1 The direct impacts of FDI on the manufacturing industries

2.2.1.1 The impact on the total investment capital in the manufacturing industry

FDI capital not only helps to supplement capital in the manufacturing industry but

also stimulate investment in this sector This is very important for the manufacturing

industry in the developing countries like Vietnam

2.2.1.2 The impact on the growth of the manufacturing industry

FDI capital is one of the inputs besides other resources like natural resources and

human resource As an important input, the scale of FDI capital in manufacturing

industry will affect the scale of the output In other words, FDI capital has a direct

impact on the growth of manufacturing industry

2.2.1.3 The impact on economic restructuring in the manufacturing industry

FDI capital flows into the industry from other countries, multinational firms, different

sectors, which alters the overall capital structure in each industry and then alters

structure and economic restructuring in the manufacturing industry

2.2.1.4 The impact on export promotion in the manufacturing industry

Output growth not only meets domestic demand but also contributes to promote exports, this is the next step of development because when the manufacturing industry meets domestic demand or takes advantage of comparative advantages to obtain more and more profits Furthermore, FDI enterprises with multiple relationships with international partners in global market with the brand prestige will

be an important channel for promoting the exports of surplus products

2.2.1.5 The impact on the contribution to the state budget and job creation for the national economy

After receiving FDI capital, the manufacturing industry has continuously expanded production scale, employment, thereby creating greater added value and more jobs for the economy, increasing more revenues contributed to the state budget and reducing the pressure on increasing the number of jobs in the economy

2.2.1.6 Impact on the formation of new industries in the manufacturing industry

FDI flows moving from the developed countries to the developing countries are characterized by often associated with technology, know-how and technology, better-qualified workforce than developing countries FDI capital has helped developing countries to form new industries, develop and connect the fragmented industries in the developing countries Developing countries which make good use of FDI will quickly complete the process of industrialization and modernization

2.2.1.7 Impact on the formation and development of supporting industries for manufacturing industry

FDI flows from developing countries, multinational firms into developing countries with the aim of finding and increasing profits They can only earn sustainable profits when the industry in developing countries reaches a certain threshold of manufacturing capabilities, production cooperation and competition in the international market Thus, FDI flows are not directed at their main production industry but moving into the supporting industries in order to be able to search for and exploit the maximum profit This will help the developing countries have a great opportunity to shape and develop the support industries

2.2.2 The indirect impacts of FDI capital on the manufacturing industry

In terms of indirect impacts, FDI capital affects industry through the following

11

channels:

2.2.2.1 Competitive channel through creating competitive pressure for firms in the

manufacturing industry

Positively speaking, the presence of FDI enterprises can stimulate local businesses

for innovating technology and creating new initiatives Negatively speaking, FDI

enterprises with superior dominance have dominated the market of local businesses

and force them to cut down production scale and maintain production activities at

non-optimal scale, which make the productivity decrease

2.2.2.2 Technology transfer and research and development

In order to use transferred technology effectively, both FDI and local businesses

should have to research and develop technologies, modify technologies to suit the

local environment The research may take place abroad or locally, but common

purpose is to serve local production of technology-receiving country

2.2.2.3 Investment in developing human resource and labor movement

FDI enterprises help in training highly-qualified workforce for local businesses

Initially, human resources are trained to become professional and skilled ones After

that, some will be moved to work for local businesses and so they become

high-quality human resources of local businesses

2.2.3.4 Linkages of firms

Horizontal linkages: Links between FDI firms and domestic firms in the same

industry For local businesses, they can increase market share, learn experiences and

expand business co-operation

Vertical linkages: Links between FDI firms and domestic firms in different industry

Forward linkage is a form of vertical linkage in case the FDI enterprises are the

providers for domestic enterprises Backward linkage is a form of vertical linkage in

case FDI enterprises are the distributors of domestic enterprises Local businesses can

also benefit from the increase in demand of their products, the expansion of

consumption market and thus they will increase production scale and achieve

economies of scale

12

2.3 The statistical indicator groups of direct impacts and model of assessing indirect impacts of FDI capital on the manufacturing industries

2.3.1 The groups of statistical indicators of the FDI’s direct impacts on the manufacturing industry

2.3.1.1 The statistical indicators reflecting the scope of FDI capital in the manufacturing industry: they are the absolute indicators, calculated by money, indicate the number of FDI projects, total value of FDI capital and average value of FDI capital per project

2.3.1.2 The statistical indicators reflecting the structure of FDI capital in the industry: FDI structure is divided by the form of investment criteria, investment sectors, economic sectors, economic zones, investment partners

2.3.1.3 The statistical indicators reflecting the effect of FDI capital on the manufacturing industry: the proportion of gross output of the manufacturing industry sponsored by FDI in total FDI capital; the proportion of export value of FDI sector

to the realized capital in the manufacturing industry; the proportion of contribution

to the state budget of FDI sector to the realized capital in the manufacturing industry 2.3.1.4 The statistical indicators reflecting the impacts of FDI on the manufacturing industry: promoting growth and economic restructuring and export

2.3.2 The model of assessing the impacts of FDI on the manufacturing industry

To assess the impact of FDI on the manufacturing industry in both aspects of direct and indirect, the thesis uses 4 groups of statistical indicators as described above and applies econometric models of impacts of FDI capital This will also be the basis to use a combination of the two research methods of qualitative and quantitative in assessing the impacts of FDI to the manufacturing industry

Regression Model:

Y =α+βK +βL +β horizontal +β Backward +β Forw +ε

LnY =α+β K +β L +β horizontal +β Backward +β Forw +ε

Yjt: Output of industry j in year t, Kjt: Capital of industry j in year t; Ljt: Labor of industry j in year t

Horizontaljt: horizontal linkages between domestic firms and FDI firms of industry j

in year t, it shows the relationship between FDI firms and domestic firms in the same

(2.1) (2.2)

industry j

Backwardjt: Backward linkages between domestic firms and FDI firms of industry j

in year t, in this case FDI enterprises are downstream buyers of domestic enterprises

The increase in backward variable shows that domestic suppliers are involved more

in the production and business activites of FDI enterprises

Forwardjt: Forward linkages between domestic firms and FDI firms of industry j in

year t, in this case FDI firms are upstream suppliers to domestic firms Thus, the

value of vertical linkage variable increases in case the output of foreign firms and

the proportion of intermediate products that foreign firms supply to domestic firms

increased

2.3 The factors affecting the impacts of FDI capital on the manufacturing

industries

(1) the investment environment; (2) the strategy for developing the manufacturing

industry; (3) the characteristics of the manufacturing industry; (4) the characteristics

of international investors and (5) the characteristic of movements of FDI inflows

CHAPTER 3

THE CURRENT SITUATIONS OF FOREIGN DIRECT INVESTMENT

CAPITAL IMPACTS ON THE MANUFACTURING INDUSTRIES IN

VIETNAM

3.1 Overview of the manufacturing industry in Vietnam

3.1.1 The manufacturing industry in Vietnam

“Manufacturing industry” is the term commonly used to refer to the processing and

fabricating industries By this means, the manufacturing industry in Vietnam includes

24 industrial sectors; each is encoded by two numbers according to the sub-sector

panel of the General Statistics Office (GSO)

Food products and beverages; tobacco products; textiles; etc; tanning and dressing

leather; wood and wood products; paper and paper products; publishing, printing etc;

refined petroleum etc; chemical products; rubber and plastic products; non-metallic

mineral products; basic metals; fabricated metal products (except machinery and

equipment); machinery (incl Office electrical; vehicles; transport equipment;

furniture; other manufacturing; repairing, maintaining and installing of machinery

and equipment

3.1.2 The role of the manufacturing industry in the economy

Compared to the whole economy, the number of employees working in the manufacturing industry always accounts for over 15%, especially nearly 20% in some periods Manufacturing industries account for nearly 50% of the number of enterprises Compared to the entire industry, the proportion of employees and enterprises is always so far the greatest at over 90%

3.1.3 The role of the manufacturing industry in industry sector

The contribution of the manufacturing sector in the industry tends to increase during the period from 2008 to 2013 and always accounts for over 80% Until 2013, this proportion had reached a high of 88.23% The growth rate of gross output in the manufacturing sector is always higher than the growth rate of the manufacturing industry’s contribution to GDP

3.1.4 The role of the manufacturing industry in exports

From 2008 to 2013, the proportion of processed and refined products always stands at above 50% of Vietnam export structure classified according to the SITC, in 2012 and

2013, this ratio turns respectively 69% and 70%; light industry and handicraft always account for over 75%, by 2013 the proportion has reached a peak at 82.4%

3.2 Foreign direct investment in the manufacturing industry in Vietnam

In this section, the thesis will analyze and gather statistics on the attraction of FDI into the Vietnam manufacturing industry This is the basis for the assessment of the FDI impacts on the manufacturing industry

3.2.1 Attracting FDI into Vietnam

By 15/12/2013, the manufacturing industry has attracted the largest FDI capital with

8620 projects equivalent to 122.71 billion US dollars, accounting for 53.32% of the total registered FDI capital in Vietnam from 1988 to present

3.2.2 Attracting FDI into the manufacturing industry

In this section, the thesis will go into a detailed analysis of attracting FDI into the manufacturing industry based on timeline, forms, geographical areas and technology degrees

3.2.2.1 Foreign direct investment in the manufacturing industries in Vietnam over the years

15

During the period 2000-2013, the amount of registered FDI capital in the

manufacturing industry tends to increase, the proportion of FDI in the manufacturing

industry in total registered FDI capital in Vietnam was commonly at 60% By 2012,

this proportion was over 70% and in particular in 2013 the percentage of registered

capital in the manufacturing industry reached a peak at 86.24%., which equivalent to

11.7 billion USD; 18.6 billion USD in 2012 and 2013 respectively The number of

FDI projects in 2012 and 2013 are 561 and 662 respectively

3.2.2.2 Foreign direct investment in Vietnam manufacturing industry in the form of

investment

In recent times, FDI inflows into the manufacturing industry are mostly in the

form of 100% foreign investment By 31/12/2013, the proportion of projects and

registered capital of 100% foreign investment are 82,73% and 82,73%

respectively; the corresponding figures of joint ventures are 14.96% and 28.25%;

the remaining belongs to cooperation contracts, BOT, BT and BTO

3.2.2.3 Foreign direct investment in the Vietnamese manufacturing industry in local

areas

Up to now, there are 25 provinces that have attracted over 1 billion USD of registered

FDI capital in the manufacturing industry, accounting for 93.48% of the total

registered FDI in this sector FDI mainly concentrates in the two major cities of

HCMC and Hanoi, and the vicinity of these cities The mountainous or remote

provinces, the amount of FDI capital flowing into the manufacturing industry is very

small

3.2.2.4 The proportion of FDI capital in the Vietnamese manufacturing industry

according to the technological level of industry

The low-level manufacturing industries: In general, FDI inflows in these industries

tend to decrease over the period from 2000 to 2012 However, this proportion

remains high in some fabricating, food processing and textile industries

The medium-level manufacturing industries: Beside the metal production industry,

only the industry of manufacturing products from rubber and plastic attracted high

and stable proportion of FDI capital over the period 2000-2012

The high-level manufacturing industries: Manufacturing of electronic products,

computer and optical products are the sectors that have the largest proportion of

registered FDI capital compared with other high-level manufacturing industries In

16

2011 and 2012, this ratio was above 10% and remained highly stable in the following years The registered FDI proportion of remaining industries is still low, which is inconsistent with the priority development of high-tech industry in the period of industrialization and modernization In 2012, 4 out of 8 high-level manufacturing industries had the ratio of register FDI capital under 1%

3.3 The current situations of the FDI capital impacts on the manufacturing industry in Vietnam

3.3.1 The current situations of the direct impacts of FDI capital on the manufacturing industries in Vietnam

3.3.1.1 The impact on the growth of the manufacturing industry

FDI sector has always contributed more than 30% of gross output of the manufacturing industry From 2010 up to now, this proportion has remained high at 40% or more

3.3.1.2 The impact on economic restructuring in the manufacturing industry

The proportion of gross output in the FDI sector classified by the level in the period from 2005 to 2011: despite being at low level, the food the manufacturing industry accounts for the highest yields in the FDI sector, during the period of 2005-2012, this ratio remained stable at the highest point (above 14%) Regarding sectors with the ratio over 8%, the high-tech industry has two branches and the low-tech industry has two branches, whereas the medium-level industry has no branch

The proportion of gross output of the FDI sub-manufacturing industries in the total gross output of these during the period from 2005 to 2011: In almost all the high-level industries, the gross output ratio of the FDI sector are above 40%; not any medium-level industries have the ratio over 50% ; considering the low-tech industries, there are two branches that FDI gross output account for over 60% of the total, they are the other the manufacturing industry and the leather and related products manufacturing

In the remaining industries, this proportion is mainly below 40%

3.3.1.3 The impact on export promotion in the manufacturing industry

The manufacturing industries with low-technological content such as textiles, footwear and furniture, the FDI export proportion of these sectors in comparison with export value is fairly high and in the range of 50% - 70% This proportion of the manufacturing industries with high-technological content such as electronics and

electrical equipment is also very high - above 90% and even just under 100% in some

years

3.3.1.4 The impact on additional investment capital in the manufacturing industry

According to the Foreign Investment Agency, FDI capital accounts for about 25% of

the total investment capital in the manufacturing industry for the period from 1988 to

2013 Besides, FDI capital stimulates the increase in investment in the manufacturing

industry; for example, the manufacture and assembly of motorcycles and spare parts

FDI invested into this sector increased by 1.5 times, but domestic investment has

increased by 7.9 times during the same period

3.3.1.5 The impact on the formation of new industries in the manufacturing industry

The formation and development of the automobile industry in Vietnam

By the end of 2009, there were 17 firms operating in the automotive assembly

industry in Vietnam The annual gross output continuously grows from 18,000

vehicles in 2001 to 120,000 ones in 2009, within 9 years the output of Vietnamese

automobile industry had increased by 6.7 times However, since 2010, auto

production has showed sign of a slowdown and a downward trend In 2010, the

number of assembled autos was 112.3 thousand, which dropped to 108.2 thousand

units in 2011, and until 2012 only 99.2 thousand autos was assembled

The formation and development of the electronic industry in Vietnam

With an annual average growth rate of 20-25%, the electronics industry has more

than 500 enterprises accounting for 1/3 of the FDI enterprises The export value of

electronics industry was about $100 million in 1996 and in recent times, this figure

has increased significantly According to statistics from the General Department of

Vietnam Customs, in the first 9 months of 2013, the export value of phones and

accessories reached $15.5 billion, increased 79.8% compared to 2012 Computers,

electronic products and components reached $7.7 billion, increased by 43.9%

compared to the same period in 2012

Although there are about 500 enterprises in the electronics industry, the investment in

this sector still poses many drawbacks such as limited investment capital,

spontaneous, incoherent and unprofessional operation

3.3.1.6 The impact on the formation and development of supporting industries in the

manufacturing industry

The formation and development of the electronics supporting industry: Recently, many major electronics manufacturers such as Samsung, Canon, Intel, Foxconn undertook to invest in Vietnam Most recently in 2009, Samsung had invested $670 million to conduct the first mobile phone manufacturing complex in Vietnam (Bac Ninh) (later raised to $1.5 billion and $2.5 billion at present) and continuously invested $2 billion to build the 2nd complex in Thai Nguyen According to Samsung, there are about 4 Korean firms that have signed commitments and they are building the plants In addition, about 10 other Korean satellite firms of Samsung are promoting investment projects to build factories producing spare parts to supply to Samsung

The formation and development of the autos supporting industry

Typically, Toyota Vietnam has attempted to invite successfully other firms supplying components owned by Toyota to invest in Vietnam as Denso, Toyota Boshoku Hai Phong, Hai Phong Toyota Gosei and others to produce parts and at the same time export auto parts to the whole world, the supplier has provided Toyota more than 300 diverse categories of details, including the normal details and the functional details requiring high technology and quality

3.3.1.7 The impact on the contribution to the state budget and creating jobs for the economy of the manufacturing industry

The FDI enterprises play a huge role in creating jobs and contributing to the State Budget By 31/12/2013, the FDI sector had created 2.2 million jobs, about 70% of this came from the Vietnamese manufacturing industry In addition to solve job problem, the FDI sector helps to increase the contribution to the State Budget of the manufacturing industry By 31/12/2013, this sector had contributed $19.5 billion to the state budget, in which FDI-manufacturing industry accounted for about 50%

3.3.2 The current situations of indirect impacts of FDI capital on the manufacturing industries in Vietnam through the channels

3.3.2.1 Competition channels - creating pressure on domestic firms to improve productivity

In the manufacturing industry, the joint venture local businesses are more productive than the normal ones The impact of FDI through competition channels is very clear

in the Vietnamese textile industry For example, the Garco 10 Firm has invested much for renovation, advanced technology and highly-skilled workers recruitment in