FDI and vietnams liberalization on investment in free trade agreements

36 LIST OF ABBREVIATIONS ASEAN Association of South East Asian Nations FTA Free Trade Agreement FDI Foreign Direct Investment WTO World Trade Organization UNCTAD United Nations Conferen

HOANG PHUONG YEN

FDI AND VIETNAM’S LIBERALIZATION ON INVESTMENT IN FREE TRADE AGREEMENTS

Master’s ThesisJuly, 2018

FDI AND VIETNAM’S LIBERALIZATION ON INVESTMENT IN FTAs

Table of Contents

LIST OF FIGURE 3

LIST OF TABLE 3

LIST OF ABBREVIATIONS 3

Abstract 4

I Introduction 4

II A brief literature review of the impacts of FTAs on FDI 6

III Background 8

3.1 Macroeconomics 9

3.2 Integration to global economy 9

3.3 Regulation and FDI Regulatory 11

IV Methodology 13

V An analysis on FDI inflow into Vietnam 14

5.1 Overview and distribution by sector and by countries 14

5.2 FDI from Korea, ASEAN and Australia 19

VI An analysis on Vietnam’s commitments in FTAs 24

6.1 The relationship between investment and services chapters 24

6.2 Liberalization provisions in investment chapters 25

6.3 Vietnam’s commitment on investment in trade in services chapters 28

VII Discussion 38

VIII Recommendation and Conclusion 40

ANNEX 1 List of Free Trade Agreements of Vietnam 42

REFERENCE LIST 45

LIST OF FIGURE

Figure 1 FDI Restrictiveness index of Vietnam in total and by industry (2006 – 2016) 12

Figure 2 FDI restrictiveness index of ASEAN countries 13

Figure 3 FDI flow into Vietnam, 1995 – 2016 (BoP) 14

Figure 4 FDI into ASEAN countries, 2010 – 2016 15

Figure 5 Registered FDI into Vietnam by industry, 2005 - 2016 17

Figure 6 Share of total registered capital by industry (percentage of total), 17

Figure 7 Top 10 source countries of FDI into Vietnam in 2016 (percentage of total FDI) 18

Figure 8 FDI into Vietnam from FTA partners in 2016 (percentage of total FDI) 19

Figure 9 Registered FDI from Korea, 2005 - 2016 20

Figure 10 Registered FDI from Australia, 2005 - 2016 21

Figure 11 FDI from ASEAN countries in 2016 (percentage of total FDI from ASEAN) 23

Figure 12 Registered FDI from Singapore, Malaysia and Thailand, 2005 - 2016 23

LIST OF TABLE Table 1 Sector/Subsector with commitment on full of market access 30

Table 2 Sector/Subsector with wide market access 32

Table 3 Sector/Subsector with narrow market access 33

Table 4 Sector/Subsector with no commitment on market access 36

LIST OF ABBREVIATIONS

ASEAN Association of South East Asian Nations

FTA Free Trade Agreement

FDI Foreign Direct Investment

WTO World Trade Organization

UNCTAD United Nations Conference on Trade and Development

AFTA ASEAN Free Trade Agreement

AKFTA ASEAN – Korea Free Trade Agreement

AANZFTA ASEAN – Australia/New Zealand Free Trade Agreement

ACIA ASEAN Comprehensive Investment Agreement

AFAS ASEAN Framework Agreement on Services

OECD Organization for Economic Cooperation and Development

Being active in international economic integration, Vietnam not only promotes trade but alsoattracts a lot of foreign investment Over the past 20 years, FDI into Vietnam has increaseddramatically and Vietnam has gained considerable success in joining the FTA and liberalizinginvestment By early 2018, it has signed 12 FTAs, one is planned to be signed and arenegotiating three other FTAs However, the degree of liberalization on investment in Vietnam’scommitments is not the same under each FTA The objective of this study is to assess the FDIinflows and the extent of liberalization on investment in AFTA, AKFTA and AANZFTA.Although Korea has the highest FDI inflows, Vietnam's commitments in AFTA are the highest interms of investment and investment in services In general, the level of investment liberalization

in services is lower than that in manufacturing industries regulated by investment agreements.There are still a large number of sectoral reservations and sectors/subsectors with restrictions.This reflects the fact that the FDI inflow into service is very limited compared to the investmentflow in the manufacturing sector

Participation in FTA plays an important role not only in enhancing international trade butalso in attracting FDI Through FTA, market access are provided, stable and non-discriminationenvironment are ensured, and investment and interests of foreign investment are protected.However, the commitments and the degree of liberalization of Vietnam, like other countries, aredifferent in each FTA and therefore have different influence on the attraction of FDI inflows

The aim of this study is to clarify the content of Vietnam's commitment to investment insome FTAs, compares the extent of the liberalization of investment, and from there, identify how

it might affect the FDI inflows into Vietnam The impact of the FTA investment agreements onperceptions and decision of investor is not only by opening market for foreign investors, creatingopportunities and protecting them and their investments in host countries, but also by creating afavorable environment, promoting investment and securing investor’s interests in disputes.However, the scope of study limits only to principles of investment liberalization that Vietnamhas committed to foreign investors For services, the effectiveness of investment liberalizationare usually imposed in Mode 3 (Commercial presence) but also in other modes, especially Mode

4 (Presence of natural persons), the coverage of persons who are eligible to enter the marketwhich is often strictly regulated However, this paper is also limited only to Vietnam'scommitments in market access under Mode 3 in specific schedules

ASEAN FTA (AFTA), Asean – Korea FTA (AKFTA) and Asean – Australia/New ZealandFTA (AANZFTA) are selected to be assessed in this study While ASEAN and Korea are thetwo largest investors of Vietnam in 2016, Australia is one of the FTA partners which have lowinvestment capital in Vietnam Both agreements of AKFTA and AANZFTA came into forceduring the period 2009 to 2010 For ASEAN, ASEAN Comprehensive Investment Agreement(ACIA) was signed in 2009 and came into effect in 2012 In term of services, although theASEAN Framework Agreement on Services (AFAS) was signed in 1995, from the 1st to 7thPackage of Commitments under AFAS the level of service openness in Vietnam’s commitments

is just equal or even lower compared to that in WTO Until 2010, when the 8th Package cameinto force, higher commitments were made for some subsectors and some new subsectors wereopened for trade and investment (WTO Center, 2015) Particularly, this study are based on thetext of investment and services agreement/chapters as following:

- For ASEAN-Korea FTA:

o Agreement on investment

o Agreement on trade in services

o Schedule of Specific Commitments of Vietnam – Annex of Agreement on trade inservices

- For ASEAN - Australia – New Zealand FTA

o Chapter 8: Trade in services

o Chapter 11: Investment

o Vietnam’s Schedule of specific services commitments

- For AEC

o ASEAN Comprehensive Investment Agreement (ACIA)

o ASEAN Framework Agreement on Services (AFAS)

o Vietnam’s schedule of specific commitments – The 8th Package of Commitmentsunder AFAS (2010)

o Vietnam’s schedule of commitments on Air transport services under AFAS – The

II A brief literature review of the impacts of FTAs on FDI

FDI is considered as one of the importance source of economic development, especially fordeveloping countries According to OECD (2002), generating technology spillovers, promotinginternational trade integration, generating production and employment, especially skilled labor,management know-how are the benefits of FDI for host country In addition, FDI also helps tocreate a more competitive business environment, plays as a mean for enterprise development andbrings an access to international markets and to production network (UNCTAD, 1999) All ofthese help host countries to advance economic growth, increase welfare and reduce poverty.Despite the fact that empirical studies support for the impact on economic growth of FDI ismixed (Walsh & Yu, 2010) and there is different between developed and developing countries,global FDI flows have grown rapidly in recent years, particularly into emerging markets

The attractiveness of country for FDI is attributed by a number of determinants According

to Walsh and Yu (2010), effective macroeconomic management, such as high growth, lowinflation, openness; more independent judiciary and good infrastructure are important factors toexplain the growth of FDI In addition, developing country also should to develop a flexiblelabour market and strong and deep financial market in order to attract more FDI By comparisonsuccessful countries in attracting FDI with others using panel data from 68 low-income andlower-middle income developing countries, Mottaleb and Kalirajan (2010) found that beside thelarge market and the high GDP growth rate, the business friendly environment and the openness

of economy are the crucial factors for developing countries to attract FDI

Among those, openness is one of the key determinant for the attractiveness of developingcountries (Mottaleb & Kalirajan, 2010; Sekkat, 2007; Liargovas & Skandalis, 2012) Inparticularly, other studies (Daude, Stein & Yeyati, 2003; Kreinin & Plummer, 2008; Büthe &Milner, 2008) stresses that international trade agreement which has a positive and significantimpact on FDI and developing countries are enable to increase FDI inflow by joining regionalintegration agreement In more recent work, although Medvedev (2012) found the relationshipbetween preferential liberalization and FDI in only from late 1990s to early 2002, his study alsoconcludes that preferential trade agreement significantly impact on increase the net FDI inflows

of country members and “this relationship is driven by the developing countries” Notably, byanalyzing the bilateral data of 30 OECD and 9 ASEAN countries from 2000 to 2009, Thangavelu

& Narjoko (2014) observes that FTAs also resulted in the increase of FDI in ASEAN countriesand they can expect a larger FDI inflows by developing infrastructure, human capital andtechnologies

There are several channels that joining the trade agreements may promote theattractiveness of a country toward foreign investors According to Nguyen & Cao (2016), theincrease of FDI by trade liberalization is caused by signaling effect, commitment effect,commerce expansion and efficiency gain By joining free trade agreement, country want to showits desire to create a friendly investment environment and pursue policy for economicdevelopment, therefore, to become appealing to foreign investors In addition, under itscommitment in FTAs, on the one hand, government reduces concern of investors about theinconsistency problem, such as change in regulation, a higher tax rate or political conflict which

might lead to significant loss of investors In other words, key policies and regulations would beensured the same after FTA came into effect as governments bound On the other hand, countrymembers also committed to open their market and facilitate investment and investors from othercountries in FTAs Investors, therefore, have the opportunity to expand their commerce andincrease their investment By taking advantages of preferential treatments from FTAs, theywould not only reduce their costs, gain the productivity and efficiency but also expand theirmarket Besides, Daude et al (2003) also indicates that capital flow liberalization, legalharmonization and cooperation in cross-border disputes between countries members help toreduce transaction cost for investors, while they can get more profit thank to the tariff reductionand economies of scale through the increase size of market as a result of FTAs.

In the context of Vietnam, openness and joining the FTAs are also ones of the importantfactors which lead to the high growth of FDI inflows Pham (2010) indicates that the effect ofWTO accession on the dynamic of FDI into Vietnam is significant during the period from 1990 –

2008 The same result is founded in the period 2006 -2010 by Nguyen, Zhong & Tran (2012),although that study observed that law factor is considered as the stronger determinant Withregards to FTAs, both Hoang, Tran & Dong (2015) and Nguyen and Cao (2016) found that being

a member of FTAs has a “strong and significant” impact on attracting FDI inflow, howeverindividual FTA have not equal effects While AFTA, ASEAN – China FTA, ASEAN – JapanFTA have not affected, AKFTA significantly facilitated FDI inward flows in Vietnam Bycontrast, AANZFTA is shown in negative side It might be explained by the tariff reductionwhich help investors to export directly to Vietnam at lower rate

It should be noted that studies on the effects of FTAs on FDI inflows usually treated FTA

as "black boxes", while in practice FTAs vary in their own provisions and the commitments ofeach member country This can be considered as one of the reasons that the effects of FTA onFDI in each country and the results in the studies are open to discussion

III Background

Over the past 20 years, macroeconomics and regulation framework have seen significantdevelopment and became the essential conditions for increasing FDI inflows into Vietnam.Before analysis the level of liberalization in Vietnam as committed in its FTAs, this section will

provide an overview of Vietnam's economy, integration process and important milestones in FDIregulatory of Vietnam in recent years.

3.1 Macroeconomics

Vietnam is considered as one of the most impressive, dynamic and stable economies inSouth East Asia GDP growth has averaged over 6% in the last 20 years and is forecasted toremain at 6.4% in the period from 2017 – 2020 (World Bank, 2017) Despite the difficulties andchallenges in the global economy, especially the global economic crisis in 2009, Vietnam hasdemonstrated its resilience with growth drivers coming from strong domestic demand, increasinginvestment, greater integration and export oriented manufacturing (KPMG, 2016) After peaking

at 22.9% in 2008, the Vietnamese government made great effort and was successful incontrolling inflation by contractionary fiscal and monetary policies While the average priceincrease in 2011-2015 was about 7%, in the next five years it is projected to be lower, at 4%

with the commitment to pursue economic development of government has made themacroeconomic environment steadily improved in recent years

3.2 Integration to global economy

While the first and important step in trade integration of Vietnam is joining ASEAN in

1995 and ASEAN Free Trade Agreement in 1996, becoming the 150th WTO’s member fromJanuary 2007 is considered as the biggest milestones Since then, Vietnam has been activelypursuing the further integration into the world economy In addition to entering into FTAs as amember of ASEAN with other countries in the Asia Pacific region, Vietnam also negotiated andsigned its own bilateral FTAs The year of 2015 is considered as a successful year of Vietnam as

4 agreements with its important trading partners was signed, including Korea, EurasianEconomic Union, EU and TPP2 Up to now, Vietnam has signed 12 FTAs, planned to sign oneFTA in 2018 (see Annex 1) and 3 FTAs3 are under negotiation

1 Political Stability Index is indicator developed by World Bank in order to assess the potential of government for instability or being overthrown by unconstitutional or violent means, including political violence and terrorism It ranges from -2.5 to 2.5 The higher indicator is better (Kaufmann, Kraav & Mastruzzi (2010) The score of Vietnam in 2016 is 0.2 which is higher than almost scores of ASEAN countries.

2 Now is CPTPP

3 Including Regional Comprehensive Economic Partnership (RCEP), Vietnam – Israel and Vietnam – EU.

Vietnam's FTA partners are mainly countries in the Asia Pacific region However, in recentyears, Vietnam has entered into negotiations and signed FTAs with countries from Europe andthe Middle East The extent of commitments of Vietnam in FTA is also higher and morecomprehensive Most recently, Vietnam has joined and negotiated the very deep andcomprehensive agreements, which are considered as 'new generation' FTAs, including CPTPP,EVFTA RCEP, and even Free Trade Area of the Asia-Pacific among APEC economies (WorldBank, 2016) These agreements cover not only traditional trade in goods, trade in services,investment but also other trade-related areas, such as intellectual property, labor, environment,competition, state enterprises, public procurement, e-commerce, etc With the signing of theseagreements, Vietnam has expanded its market to foreign investors not only in manufacturing,real estate but also in services Active participation and success in Vietnam's economicintegration over the years has made Vietnam as a FTA hub in South East Asia and became anattractive investment destination.

Before signing the CPTPP, ASEAN was the FTA that Vietnam had joined with the highestand most comprehensive commitments among Vietnam’s FTAs Currently, Vietnam is close tocompleting the tariff reduction and elimination schedule as it committed in the agreement Ninepackages of commitments under AFAS have been signed and implemented, with highercommitments and higher number of service sectors that Vietnam bound to open for trade andinvestment A comprehensive investment agreement that was in place since 2012 has createdmore investment opportunities for countries in the region Domestic regulations on investmentalso provide a friendlier environment for investors to access Vietnam market In 2016, as agroup, ASEAN is the second largest investor in Vietnam

The Framework Agreement on Comprehensive Economic Cooperation between ASEANand Korea was signed in 2005 but it was not until 2007 that the Agreement on Trade in Goodswas signed and came into effect Trade in Service and Investment reached an agreement later andcame into force in mid-2009 With the aim of promoting trade and economic cooperationbetween Korea and ASEAN countries, the agreement has reduced and eliminated up to 90 % oftariff lines as well as important barriers to trade in goods, and most of the sectors and subsectorsimportant to trade in services are covered in agreement on services Creating a liberal,transparent and competitive investment environment are the goal of the ASEAN-Korea FTA

However, investment capital from Korea to ASEAN after signing until 2016 this FTA increased

by only 30% (ASEAN Statistics, 2017) On the other hand, Korea is one of the most importanttrading partners of Vietnam, especially in investment FDI from Korea to Vietnam has increased2.7 times in the same period

All commitments on trade in goods, services, investments and other issues are agreed byASEAN and Australia, New Zealand in the same Agreement which was signed and came intoeffect in 2009 Under AANZFTA, 90% of tariff lines are committed to reduce or eliminate byVietnam, including key Australian and New Zealand’s products such as beef, lamb, dairyproducts or wood products (WTO Center, 2013) While commitments on trade in serviceschapter is quite the same as commitments in WTO except education services, the investmentchapter has higher standard and commitments, especially in investment protection

3.3 Regulation and FDI Regulatory

Policy development plays an important role in further economic integration in order tocreate an environment for trade and investment The Government of Vietnam has made greatefforts to improve Vietnam's business and investment environment, especially when it startedWTO accession to align domestic institutions and policies with WTO disciplines Legal andregulatory frameworks have been revised and reforms towards transparency and equality Inparticular, the Investment Law 2005 and Enterprise Law 2005 are the two most important laws

as they are the foundation for non-discrimination between domestic and international investors aswell as public and private enterprises which the previous regulation has not created yet (WTO,2013) The policy development is continuing by government and aiming to improve businessenvironment, liberalize further, and stimulate competition as well as be in line with Vietnam'scommitments in FTAs (KPMG, 2016)

Most recently, the revised Law on Investment and Enterprise Law has come into effect onJuly 2015, replacing the Investment Law 2005 with many important changes that could ease theburden on foreign investors (Tilleke & Gibbins, 2015) The new law decreases the prohibited andconditional business lines, defines “foreign investor” and “foreign invested enterprise” in moredetail, make registration procedures more efficient and effective, and reduces M&A transactionperiods (UNCTAD, 2014) They also facilitate the business activities of foreign investors, such

as the process of buying shares of foreign investors or legal representatives (Tilleke et al 2015)

The significant change in Vietnam's FDI Restrictiveness Index4 since 2003 reflects thecommitment and efforts of the government to ensure a friendly and non-discriminatoryenvironment for foreign investors The level of restrictions on FDI has decreased significantlyover the past 20 years, from 0.434 in 2003 to 0.115 in 2016 (see Figure 1).

Figure 1 FDI Restrictiveness index of Vietnam in total and by industry (2006 – 2016)

Source: OECD (2018)

Figure 1 also represents dramatic changes in the level of restriction after 2 times whenVietnam revised its Law on Investment and Enterprise Law, in 2005 and 2015

4 FDI Regulatory Restrictiveness Index (FDI index) measures the restrictiveness of regulatory framework

of a country, including foreign equity limitations, screening or approval mechanisms, restrictions on the employment of foreigners (key personnel), and operational restrictions This index is developed by OECD (OECD, 2018a).

Figure 2 FDI restrictiveness index of ASEAN countries

Source: OECD (2018) and calculated by author

In 2016, among 27 non-OECD countries, Vietnam's index ranked 15th on ease ofinvestment and was below the average of non-OECD economies, at 0.152 (see Figure 2) AmongASEAN countries in the list, Vietnam has a less restrictive legal system than other countries,except Cambodia In term of industry (Figure 1), the secondary sector, including manufacturingand electricity, has the lowest score, and the barriers to investment in these sectors are alsoremoved most rapidly, followed by the primary sector, including agriculture, forestry, fisheries,and mining and quarrying Meanwhile, tertiary and real estate investment are the most restrictedsectors In particular, sensitive sectors that affect public interest or are underdeveloped such asmedia, communication and transport services are the most restricted sectors, with the figure atabove 0.4 However, electricity, construction, manufacturing, business services and financialservices have the lower barrier, with their index below 0.05

IV Methodology

With its objectives to assess the FDI inflows into Vietnam and the extent of liberalization

in investment under FTAs, the study uses both quantitative and qualitative analysis It firstcollect statistics and data to examine the situation of FDI inflows to Vietnam and evaluate itstrend over the period of time from 1995 – 2016 The document of free trade agreements then will

be used to identify and discuss the commitments of Vietnam in term of liberalization ininvestment

V An analysis on FDI inflow into Vietnam

5.1 Overview and distribution by sector and by countries

In 1995, when Vietnam became a member of ASEAN and joined the first FTA in 1996,FDI inflows into Vietnam was just around 2 billion USD (see Figure 3) After reaching a peak in

1996, FDI declined sharply from 2.3 to 1.6 billion USD in 2002 due to the impact of the Asianeconomic crisis and the slow pace of economic reforms According to UNCTAD (2008), due toits focus on industrial development along with its advantages, including low labor costs,infrastructure development, competition, increasingly friendly investment environment alongwith trade liberalization orientation, FDI increased again from 2003 and Vietnam have becomeone of the alternative solutions for China in manufacturing In particular, the dramatic changes inthe improvement of the investment framework, reform of regulatory and the businessenvironment during the WTO accession negotiation have opened up many investmentopportunities for foreign investors Since 2007, when Vietnam became a full member of theWTO, foreign investors from member countries of the WTO benefited greatly from Vietnam'scommitments and favorable conditions FDI inflows into Vietnam, therefore, grew dramaticallyand impressively over the previous period and made Vietnam as one of the most attractivedestinations for investment in ASEAN Before WTO accession, in the period of 1995 to 2006,the average FDI inflows per year into Vietnam were just around 1.7 billion USD However, afterjoining the WTO, the average FDI increased fivefold to over 9 billion USD for the next periodfrom 2007 to 2016

Figure 3 FDI flow into Vietnam, 1995 – 2016 (BoP)

Source: Word Bank – World Development Indictors (2018)

The period from 2009 to 2011 is the time that FDI experienced a downward trend FDI fallfrom 9.5 billion USD in 2008 to 7.4 billion USD in the next 3 years This was the result of theglobal economic crisis leading to the global economic downturn Meanwhile, high inflation andrising input costs also reduced Vietnam's appeal to foreign investors However, during thisperiod many FTAs, in which Vietnam participated as one of the parties, were signed and cameinto force This might be a necessary condition for the resumption and continuation of thenumber of FDI projects and FDI inflows since 2012.

FDI inflows into Vietnam has increased continuously since 2012 with the growth rate of11% per year and has reached the new record of 12.6 billion USD in 2016, despite the decline ofglobal FDI Vietnam has become one of the top 5 host economies in 2016 and ranked 12th in thetop 15 prospective destinations for 2017 - 2019, an increase of 2 levels compared to 2016(UNCTAD, 2017) It attracts projects from other countries in the Asia, including Korea, Japan,Singapore and Malaysia, owing to liberalization in trade, relatively stable regulatoryenvironment, low production cost and tax incentives and has become a major manufacturingcenter in the region (UNCTAD, 2017)

Figure 4 FDI into ASEAN countries, 2010 – 2016

Source: ASEAN statistics (2017)

Compared with other ASEAN countries, Vietnam has been one of the countries that haveseen continuous FDI flows since 2010, along with Philippines, Cambodia and Lao (see Figure 4).

In recent years, FDI into ASEAN has decreased by nearly 30%, from 133 billion USD in 2014 to

98 billion USD in 2016, due to the significant decline of the more advanced countries in theregion as Singapore, Indonesia and Thailand In contrast, Vietnam has consistently received theattention of foreign investors and became one of the most attractive investment destinations inthe region in 2016, just after Singapore

Distribution by industry

In overall, manufacturing has attracted the largest share of FDI inflows to Vietnam in thelast two decades (see Figure 5 and Figure 6), reflecting Vietnam as a manufacturing hub in theregion and foreign investors are using Vietnam as a location for production and then export tothe world (UNCTAD, 2008) Between 2005 and 2007, the manufacturing sector accounted fornearly 50% of the total registered capital before significantly went down in 2009 and 2010because of the global financial crisis in 2009 After the world economy recovered, FDI inflows

to this sector increased again and were higher than the previous period, accounting for aroundtwo thirds of total registered capital since 2012 until now With regards to export, the exportshare of FDI enterprises in total export value of Vietnam has grown rapidly, from 37% in 2006 toover 70% in 2016 (Vietnam Customs, 2017) However, the share of FDI invested inmanufacturing has been on the slightly downward trend for the past five years, giving way to therise of service sector The FDI inflow into real estates has the same trend For the years before

2010 it accounted for 26% of total FDI in average, its share then decreased to only 9% for theperiod from 2011 to 2016

Figure 5 Registered FDI into Vietnam by industry, 2005 - 2016

Source: General Statistics Office of Vietnam (2018)

Figure 6 Share of total registered capital by industry (percentage of total),

2005 – 2010 and 2010 - 2016

Source: General Statistics Office of Vietnam (2018)

Service sector accounts for about 20% of total registered FDI in Vietnam in the last twodecades In the period from 2005 to 2010, hotel and restaurant, transport, storage, andconstruction services attracted a lot of foreign investment, but the hotel and restaurant sector hasdecreased significantly since 2010 In contrast, investment in the distribution, transport andcommunication and other services, including professional and business services, has increased inthe last five years Especially in the last three years, while the growth rate of the manufacturingsector has slowed down, the figure of real estate has decreased, the service sector experiences asignificant increase year and has reached more than 7 billion USD by 2016, the highest levelsince 2010 One of the reasons is that many service sectors and sub-sectors has opened widerafter five years of joining WTO in line with Vietnam's commitments under the GATS.

Distribution by countries

The source countries of FDI into Vietnam mainly are Asia-Pacific countries with many ofthem have FTAs with Vietnam In 2016, 8 out of 10 countries with the highest registered capital,accounting for 84% of total FDI in Vietnam, are located in Asia (see Figure 7) In which, onlyTaiwan has not signed FTA with Vietnam yet

Figure 7 Top 10 source countries of FDI into Vietnam in 2016 (percentage of total FDI)

Source: General Statistics Office of Vietnam (2018)

Figure 8 FDI into Vietnam from FTA partners in 2016 (percentage of total FDI)

Source: General Statistics Office of Vietnam (2018)

Total FDI from countries which have FTA with Vietnam is more than 21 billion USD,accounting for around 81% of the total FDI to Vietnam The leading countries are Korea, Japanand ASEAN, with 57% of total capital (see Figure 8) They are also the countries investing most

in Vietnam over the past two decades, with the total registered capital at more than 145 billionUSD Conversely, investors from India, New Zealand and Russia have lowest FDI into Vietnam,

as FDI from these countries amounts to less than 1% of the total in 2016 Although the Hong Kong FTA has not been effective but Hong Kong is also one of the top host countries ofFDI to Vietnam in recent years

ASEAN-5.2 FDI from Korea, ASEAN and Australia

Korea

Korea is the largest individual country invested in Vietnam for more than two decades.Since 2005, the total registered capital of Koreans is around 46 billion USD, nearly 30% higherthan the figure of Japan

Figure 9 Registered FDI from Korea, 2005 - 2016

Source: General Statistics Office of Vietnam (2018)

Registered FDI from Korea to Vietnam began to decline in 2008 after reaching a level of5.3 billion USD in 2007 (see Figure 9) Over the next five years, the inflows were less than 2.5billion per year However, from 2013 the inflows have increased dramatically, from 4.5 billionUSD in 2013 and hit a record in 2016, at nearly 7 billion USD For three consecutive years from

2014 to 2016, Korea is the largest host country of FDI into Vietnam In 2016, FDI from Korea toVietnam accounted for 30% of Vietnam's total FDI and 46% of Korea's total FDI to ASEAN,which is much higher than the proportions of two following countries, namely Singapore andIndonesia, at 23% and 13% respectively Korean enterprises in Vietnam are hiring about 7000people and contribute about 30% to total export value of Vietnam in 2016 (FIA, 2016)

There are 3 waves of FDI from Korea to Vietnam and manly focus on manufacturing Thefirst wave took place in 1992 and focused on light-industrial projects, which were labor-intensivemanufacturing From 2009, the manufacturing, assembling of electronic, industrial and hi-techequipment has increased from 60% in the previous period to over 80% now (Shira, 2017) Inrecent years, the third wave has expanded into services such as real estate, construction anddistribution It is explained by the potential in growth of domestic markets, customers and supplychains However, manufacturing is still the area that attracts the most capital from Korea SamSung, LG are major investors of Korea in Vietnam

Figure 10 Registered FDI from Australia, 2005 - 2016

Source: General Statistics Office of Vietnam (2018)Most of the Australian projects focused on the manufacturing industry with 119 projectswith a total registered capital of 884 million USD, accounting for 48% of the total registeredinvestment capital (FIA, 2017) With 18 projects, the hotel and catering services ranked secondposition, at approximately 147 million USD, accounting for 8% of total registered investment Inaddition, investors from Australia also invest in other services, such as banking, education,insurance, construction, travel and logistics Investment flow from Australia to Vietnam isexpected to increase in next few years as a result of CPTPP and the development in relationshipbetween two countries, as strategic partnerships since 2018

ASEAN

As a group, ASEAN is the second biggest investor in Vietnam, after Korea About 37% oftotal registered FDI in the period from 2005 to 2016 are from ASEAN countries In 2008, whenthe registered FDI into Vietnam reached a record level, countries from ASEAN contributed to44% Excluding this year, it can be seen in the Figure 11 that the registered FDI from ASEANincreased more significantly and stably since the ACIA signed in 2009

Among the ASEAN countries, Singapore, Malaysia and Thailand are the main investors inVietnam, added up to 91% FDI from ASEAN in 2016 (see Figure 12) FDI from Brunei accounts

for 7% and other countries contributes to only 2% of the total Myanmar is the only country inASEAN has not invested in Vietnam yet.

Singapore has the highest FDI growth rate after the entry into force of the ASEANInvestment Agreement as well as is the largest source of FDI in Vietnam since 2005 from thisregion In the period from 2005 to 2009, the average registered capital investment in Vietnam ofSingapore is 1.7 billion per year, this number increases nearly 2 times in the period from 2010 to

2016, at around 3 billion USD per year Since 2007, Singapore has always been in the top threecountries with the highest investment capital in Vietnam, excluding the year of 2008 and 2009

In 2016, 9% of the total registered capital came from this country, ranked after Korea and Japan.Singaporean investors mainly invest in manufacturing industry which accounts for nearly 45% oftotal investment (FIA, 2016a) Next is real estate business, with 30% of total investment Otherareas that Singapore has invested in Vietnam are legal services, banking, IT, education

Compared with Singapore, FDI form Malaysia is significantly lower, at less than 1 billionUSD per year, except for 2008 with a record level of nearly 15 billion USD The capital raisedslightly in 2015 with over 2 billion dollars but then fell in the following year Unlike Singaporeand other ASEAN countries, real estate ranked first among the sectors attracting FDI fromMalaysia with more than 50% of total investment (FIA, 2014) Next is manufacturing withalmost 18% total Malaysia has also invested heavily in water supply and waste treatment.Nearly 40% of Malaysian companies said that Vietnam is their preferred investment destination

in Southeast Asia in the next 3-5 years (UOB, 2016)

Singapore Malaysia Thailand Brunei Philippines

Indonesia Cambodia Lao Myanmar

Source: ASEAN statistics (2017)

Figure 12 Registered FDI from Singapore, Malaysia and Thailand, 2005 - 2016

Singapore Malaysia Thailand

Source: General Statistics Office of Vietnam (2018)Thailand was one of the first countries invested in Vietnam when Vietnam decided to openfor international trade and foreign investment in (FIA, 2016b) From 2005, Thailand has invested

in 350 projects with total registered capital of 6.7 billion USD Between 2005 and 2016, after

peaking in 2008 at more than $ 4 billion, FDI from Thailand drop to the bottom just one yearlater, at only about 100 million USD However, since 2010, FDI registered from Thailand hasbeen recovered and increased continuously until 2016 to over USD 700 million and is the 9thlargest source country Thai investors invest most in manufacturing, distribution, wholesale andretail Besides, Thailand has the largest share of agricultural capital in comparison with otherASEAN countries.

Overall, FDI inflows into Vietnam significantly increase since Vietnam became a member

of WTO Based on data on registered FDI, investors from Korea, Australia and ASEAN haveinvested more in Vietnam since 2010, when FTAs between Vietnam and these countries weresigned FDI from Australia has the fastest growth rate, but its capital is very small compared toKorea, which has the largest investment capital in Vietnam Manufacturing and real estateattracted the majority of FDI into Vietnam Investment in services is still limited but it is inupward trend in recent years

VI An analysis on Vietnam’s commitments in FTAs

In general, investment regulations and commitments of parties are provided in both theInvestment chapter and the Trade in Services chapter under Mode 3 (Commercial presence) ineach FTA The relationship between the investment chapter and the service chapter, therefore,will be discussed in this section of the study The content and the level of investmentliberalization in Vietnam's commitments are then clarified in the following parts

6.1 The relationship between investment and services chapters

The liberalization of FDI is regulated not only in investment chapter but also in serviceschapter Investment chapters or investment agreements usually cover all form of investment withcomprehensive commitments on all of the issue of investment, including non-discriminationtreatment (national treatment and MFN), performance requirements, fair and equitable treatment,expropriation and compensation, as well as investment dispute Services chapters, in the otherhand, cover narrower form of investment in services as ‘commercial presence’ which is based onthe GATS (Mode 3) While services chapters provide the general provisions of transparency andMFN, the extent of market access and national treatment are committed only in sectors which arewritten in separate schedules The interaction between the investment and services chapters,therefore, is made in many different way depended on their content in each FTA