Characteristics of FDI contribution to Vietnam economy and government’s policy to attract inward FDI selectively

1.Outlook of inward FDI in Vietnam  From 1995-2004, foreign investors were attracted by the potentiality of a transitional economy  Vietnam officially joined ASEAN 1995  Agreement o

ATTRACT INWARD FDI

SELECTIVELY

Presenter: Mai Hai Sam Vietnam National University

1.Outlook of inward FDI in Vietnam

 From 1995-2004, foreign investors

were attracted by the potentiality

of a transitional economy

 Vietnam officially joined ASEAN (1995)

 Agreement of Cooperation and

Development between Vietnam and

EU (1995),

between Vietnam and the United

States (2001)

sharp fall in FDI inflows to

Vietnam, mainly as a result of

the Asian financial crisis (1997)

and the unattractiveness of

Vietnam’s investment

environment relative to other

regional countries, especially

China

Source: UNCTAD, World Investment Report 2011 Figure 1 Vietnam FDI in selected years ( Unit: Millions of USD)

Outlook of inward FDI in

Vietnam

 From 2005-2007, Vietnam has

witnessed the strong comeback of

FDI

 The Law of Foreign investment in 1996

was also revised, taking out some

favors to foreign investors since it

generated unequal competitive

environment between domestic and

foreign investors

 This upsurge in performance indicates

a great interest from foreign investors,

especially since Vietnam became the

150th member of the World Trade

Organization (WTO) in 2007

 The year 2008 was a particularly

good year for Vietnam to attract

FDI.

 Dip in 2009 and 2010 due to global

crisis (2007) and other internal

and external reasons

Source: UNCTAD, World Investment Report 2011

Vietnam FDI in selected years ( Unit: Millions of USD)

Planning & Investment (MPI) set the FDI target of year 2009 to attract

almost a half of actual in year 2008

Source: Created from data of GSO Vietnam

Foreign investors in Vietnam (1999-2010)

SEA includes: Japan, Korea, HongKong, Taiwan and mainland China

*1 Tax havens are states or countries or territories where certain taxes are levied at a low rate or not at all while offering due process, good governance and a low corruption rate.

In this research, taz havens are defined according to OECD including British Virgin Islands, Cayman Islands, Bermuda, Channel Islands, Cook Islands, Island of Man, Barbados, Belize, Bahamas , Samoa, Panama, Mauritius, Sain Kitts Nevis, British West Indies, Cyprus…

 European investors reacted weakest during recent 3 years after Vietnam’s full participation in

ASEAN (1995)

 While USA, Canadian, Australian investors’ capital injected into Vietnam during 2007-2010

took 3 times more than total registered capital in last 15 years

 It’s noted that capital coming from tax haven territories has been originated from

multinational corporations (MNEs) who set up their fund subsidiaries in these tax haven.

1.1.FDI by investors (cont.)

 Taiwan is the biggest foreign investor (11,8%) with US$ 22,7

billion of registered capital, followed by Korea, Singapore, Japan These top five economies have invested with total committed

capital of US$ 87,6 billion (45,6 % of the total FDI capital).

Top 20 foreign investors in Vietnam from 1990-2010

Source: Vietnam partner data, 2011

US’s investme

nt capital doubled their direct registed capital

(MPI/ FIA and USAID/ST

AR, CIEM and FIA, 2007)

1.2 FDI by geographic

structure

 Foreign investments concentrated geographically in key economic areas in the South ( 65% of total investment projects and 57,7% of registered FDI capital) and North due to well-improved infrastructure, good sea ports, international airports, acceptable costs for employees, office and accommodation

City/province Project (%) Capital (%) Baria-VungTau 2.36 4.73 BinhDuong 16.44 7.05 DongNai 10.54 13.73 HoChiMinh city 34.11 26.56 LamDong 1.60 2.20 QuangNgai 0.15 3.44 ThanhHoa 0.21 1.15 HaiDuong 1.12 1.30 HaiPhong 3.20 3.38 HaNoi 12.30 20.42 Others 17.98 16.05 Total 100 100

FDI in Vietnam provinces up to 2002

Source: Vietnam Investment Review, No 563/July 29-August 4, 2002.

1.3 FDI in ownership

The increasing FDI contribution seemed to motivate the increasing domestic investment as well with the stable share in about 22% average in foreign investment and higher rate from 24% to 36,4% among private sectors in 1996-2000 and 2006-2009 respectively

1.3 FDI in ownership (cont)

investment after learning the various difficulties occurring by operating a

JV with Vietnamese counterparts

corporations, but from their affiliates or branches from the third countries

mSource: UNTCAD, 20084 326

2 Contribution of FDI to Vietnam economy

2.1 Grossed fixed capital

What’s your best guess?

• sfsf

supplementary source of

funds for gross fixed capital

and improved the balance of

payment for the past years.

becoming member of WTO

in 2007 made implemented

FDI accounting highly again

for over 30 percent

Source: Created by author from data of CIEC, World Development indicators, World Bank (2009) and UNCTAD, World Investment Report 2011

2.2.Contribution of FDI to GDP

growth

What’s your best guess?

been based on foreign investment more than in the past

context of global crisis leading to economic regression in many

countries, only following China in region (IMF 2011 Article IV report)

Year 1995 2000 2008 2009 2010

Inward FDI stocks Vietnam 7.150 20.596 49.854 57.454 65.628

Share of gross domestic product Vietnam 34,5 55 61,7 66,1

Inward FDI stocks SEA 152.403 266.291 661.143 746.258 938.401

Share of gross domestic product SEA 22,4 44,1 50,7 51,5

FDI stock situation in Vietnam (Unit: Millions of USD and %)

Source: UNCTAD, World Investment Report 2011

2.3 Contribution to business

structure

What’s your best guess?

• sfsf

 The sectors which attract higher inflows

were light and heavy industry and

services (30% each in 2007)

 However, FDI in agriculture, forestry and

fishing is under-proportionate compared

to the importance and huge potential of

these industries in Vietnam

Source: Annual Statistical Books 2006-2009

 Industry: crude oil, light industry, heavy industry, foodstuff, construction

 Agriculture: agri and forestry, aquatic

 Service: transport and telecoms, hotel and tourism, finance and banking, culture, health and educ, new cities, offices and apartment

Source: Vietnam partner

2.4 Contribution to International

trade capacity

increasingly attracted to

export-oriented industries, FDI

has played an important role in

export growth, especially after

the crisis in 1997

domestic companies, FDI

certainly has impacts on

domestic firms’ effectiveness in

export, making the market

become more competitive.

Contribution of FDI to Export (bil USD)

Source: Vietnam Ministry of Trade Year Total Export Export by FIEs

2.4 Contribution to International

trade capacity

Vietnam Balance of Payment, 2007-12

Current account balance

Projecte d

3 Vietnam country’s factors to attract FDI

 Empirical researches using an institutional theoretical approach have emphasized the study of institutional quality, political risk, bilateral investment treaties, foreign investment and trade regulations, and capital markets liberalization to explain flow of FDI (Busse et al., 1996; Habib & Zurawicki, 2002)

 The flow of FDI into Vietnam is related to these simultaneous satisfied institutional quality conditions:

 (1) The Political Stability

Vietnam country’s factors to

attract FDI

3.1 Political Stability

government and as a security state to ensure investment (Agarwal & Feils, 2007; Brada et al., 2003; Trevino & Mixon, 2004; Zitta & Power, 2003);

 Political and social stability is strength of Vietnam There are in Vietnam less problems related religions, languages or ethnic disputes, and the

safety of foreign direct investments is guaranteed

Vietnam country’s factors to

attract FDI

3.2 Rule of Law

to FDI open better investment climate and get closer to regional commitment

thus to compete with other regional economies

Segment

New investmen t

M&A Vietna

m Region GlobeFuel

50 75,7 92 Coal 100 100

Oil and gas 0 0 Agriculture- forestry 100 100 100 82,9 95,9 Light industry 100 100 75 86,8 96,6 Telecommunication 49-51 49-51 50 64,9 88 Electricity 100 100

71,4 75,8 87,6 Electricity transfer 0 0

Banking 100 30 65 76,1 91 Insuarance 100 100 100 80,9 91,2 Transportation 49-100 49-100 69,4 63,7 78,5 Media (Journal & Television) 0 0 0 36,1 68 Construction, Tourism and service 100 100 100 91,6 98,1 Pharmacy and clean water management 51-100 51-100 75,5 84,1 96

Comparison of Vietnam’s foreign ownership commitment among regional and global countries

Source: Investing Across Borders 2010, World Bank and Vietnam Foreign Investment Law

Vietnam country’s factors to

attract FDI

3.3 Competitive investment cost

 According to a survey conducted by the Asian Business Council, Vietnam ranked third for investment attraction among Asian nations in the 2007-2009 period, after China and India (VIR, 2007)

 Due to lower costs for labor, land rent, telecommunications, power and water supplies, Việt Nam is in better position than regional countries (JETRO, 2010).

Comparison of investment-related cost among ASIA (10/2011- Unit: USD)

Source: Japan External Trade Organization (JETRO), 2011, p66-71

Vietnam country’s factors to

attract FDI

Comparison of investment-related cost among ASIA (10/2011- Unit: USD)

Source: Japan External Trade Organization (JETRO), 2011, p66-71

Investment-related cost Danang HCMC Hanoi Jakarta Manila Bangkok Beijing Shanghai Kuala L HK Seoul Sing

Non-manufacturing staff's

salary/actual annual 3.205 5.638 5.954 5.333 5.737 9.806 11.270 12.154 14.460 28.949 30.739 30.835

Engineer's salary/actual annual 2.724 4.574 5.194 6.082 6.841 9.778 6.694 10.494 14.827 31.750 30.609 37.266

Worker's salary/actual annual 1.816 1.891 1.733 3.247 3.897 5.125 6.107 5.609 5.615 21.878 24.601 22.206

Regular gasoline price/liter 0,84 0,84 0,84 0,5 1,11 1,31 1,09 1,08 0,62 1,98 1,79 1,51

Mobile phone basic

charge/month 2,5 2,5 2,5 5 41 33 7,6 7,6 86,9 28 11 80,8

Corporate income tax rate (%) 25 25 25 25 30 30 25 25 25 16,5 16 17

Economy Inward FDI performance Inward FDI Potential Index

2008 2009 2010 2008 2009 2010 Vietnam 20 22 22 77 73

Country ranking by inward FDI performance index and inward FDI potential index, 2007-2009

Source: UNCTAD, World Investment Report 2011

Note: Ranking is that of the latest year available Covering 141 economies The potential index is based on 12 economic and policy variables.

Vietnam country’s factors to

attract FDI

3.4 Corruption Freedom

 In Vietnam, law enforcement is not consistent and uniform in the country, the law interpretation and

enforcement depend too much on local agencies or lower ranking state officials (JETRO, 2010)

 Corruption is a disturbing barrier existing in the institution to increase business cost If the rule of Law is not strong enough, it would let corruption surrounding institutional administration.

 Therefore, bureaucracy and low transparency are the big weaknesses of the business environment in Vietnam.

4 Recommendation on

government policies to attract FDI

What’s your “to” Statement?

short-term?

 Business information has to be provided;

 Transparency, accountability and predictability of the public administration must be improved

rapidly commitments

 Post-licensing procedures especially on land clearing, foreign exchange, tax and customs must be simplified tangibly

 Secondly, up-grading of infrastructure, especially in power and clean

water supply, Internet connection is one of the top priorities

 Vietnam maintain a competitive investment cost advantage but the quality of some public goods and services is low

 Higher charges and fees for public goods and services like international dial, Internet, seaport fees and others than in regional level

 Low stability, fluctuating tension, sudden black outs in power supply create significant additional costs for users and prevent investors to move high-tech investment into Vietnam

 In future policy to attract inward FDI flow, Vietnam should allocate national funds to up-grade its roads, ports and various areas of infrastructure as well as improve foreign investment regulations in these sectors

4 Recommendation on

government policies to attract

FDI (cont.)

 Young, fast learning relatively well-educated labor forces, competitive labor cost are advantages for Vietnam in region

 Geographic location, natural resources (oil, gas) are other factors foreign investors will take in consideration to choose a place for investment

 Therefore, the quality of Vietnam's labor forces must be enhanced in different ways like

vocational training, foreign languages, health and industrial discipline to keep up these

competitive advantages

evaluate inward FDI and select new efficient foreign investment

 FDI has represented an extremely important source of growth for the Vietnamese economy However, its impacts on employment and technology transfer have been limited than its

potentiality Even the imposed local content requirements have not yielded the desired results

 The authorities need to clearly communicate their views of the inward FDI effectiveness in

economic situation and provide economic agents with timely and comprehensive data, withdraw licenses in ineffective FDI projects to provide opportunity for more potential and capable

investors, controlling the project’s land transaction Projects which may cause pollution to

environment, whose investment-scope is small but use much land and spend a lot of energy will

be considered to be controlled

5 Conclusion

 FDI contributes capitals help accelerate the government’s development goal and has been recognized as a major indicator to promote economic growth

 Inward FDI flows contribute in the form of capital (to enrich their foreign exchange

system, improved infrastructure,

enhanced labor force and local agent capability

5 Conclusion (cont.)

 Vietnam still remains an attractive destination for investment due to favorable economic growth prospects and the

implementation of pragmatic economic policies

 FDI outlook for 2011-2012 is projected to grow to USD 7.7 billion and USD 8.5 billion, respectively due to returning interest and confidence by investors who are investing and doing business in the country (IMF, 2011)

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