GROWTH AND DEVELOPMENT REPORT BÁO CÁO TÁC ĐỘNG CỦA FDI ĐẾN NỀN KINH TẾ VIỆT NAM

Báo cáo Tác động của FDI đến kinh tế Việt Nam: tăng trưởng và phát triển: Economic development is always an urgent global requirement. Globalization connects countries together more importantly, plays an important role in developing countries. Financial flows, information, skills, technology, item goods and services between countries are on the rise. Trade plays an important role in improving skills through imports and advanced technology. Export businesses are motivated to apply technology to deal with competition fierce (Frankel and Romer, 1999). Trade liberalization reduces the cost of international transactions and necessary early direct foreign investment. The liberalization of capital flows already contribute to the expansion of foreign direct investment capital flows. Because the production process is dispersed and moves across the board microglobal, the global value chain has become central to the world economy (Cattaneo et al., 2010). FDI is one of the most dynamic elements in the stream international resources, it is a package of tangible and intangible assets, image and catalyst for investment and capacity in the country. FDI helps to supplement development investment capital (Brems. H., 1970), Human Resource Development and Job Creation (Gregorio, Jose, 2003), market expansion

FOREIGN TRADE UNIVERSITY

GROWTH AND DEVELOPMENT MID-TERM REPORT

IMPACTS OF FDI ON VIETNAM’S ECONOMY

Hanoi, 03/2021

TABLE OF CONTENTS

INTRODUCTION 4

CHAPTER 1 THEORETICAL BACKGROUND 6

1.1 Definition of FDI 6

1.1.1 Concept 6

1.1.2 Characteristics of FDI 6

1.1.3 Driving forces of FDI 6

1.2 FDI classification 8

1.2.1 Horizontal FDI 8

1.2.2 Platform FDI 9

1.2.3 Vertical FDI 9

1.3 General impact of FDI on economy 9

1.3.1 Impacts on financial market 9

1.3.2 Impacts on economic growth 9

1.3.3 Impacts on labour force 11

1.3.4 Impacts on technology 11

CHAPTER 2 PRACTICAL SITUATION IN VIETNAM AND IMPACTS OF FDI ON VIETNAM’S ECONOMY 13

2.1 Practical situation in Vietnam 13

2.1.1 FDI situation from 2000 to 2007 13

2.1.2 FDI situation from 2008 to 2019 16

2.1.3 FDI situation in 2020 23

2.2 Impacts of FDI on Vietnam’s economy in the period 2000 - 2020 26

2.2.1 Impacts on Financial Market 26

2.2.2 Impacts on Labor Force 29

2.2.3 Impacts on Technology 36

2.2.4 Impacts on Economic Growth 39

CHAPTER 3 POLICY RECOMMENDATION 46

3.1 Opportunities and challenges for Vietnam attracting FDI 46

3.1.1 Opportunities 46

3.1.2 Challenges 53

3.2 Policies in attracting FDI 58

3.3 Policies in utilizing FDI positive impacts 61

CONCLUSION 63 REFERENCES 65

INTRODUCTION

1 Rationality of the study

Economic development is always an urgent global requirement Globalization connects countries together more importantly, plays an important role in developing countries Financial flows, information, skills, technology, item goods and services between countries are on the rise Trade plays an important role in improving skills through imports and advanced technology Export businesses are motivated to apply technology to deal with competition fierce (Frankel and Romer, 1999) Trade liberalization reduces the cost of international transactions and necessary early direct foreign investment The liberalization

of capital flows already contribute to the expansion of foreign direct investment capital flows Because the production process is dispersed and moves across the board micro-global, the global value chain has become central to the world economy (Cattaneo et al., 2010) FDI is one of the most dynamic elements in the stream international resources, it is

a package of tangible and intangible assets, image and catalyst for investment and capacity

in the country FDI helps to supplement development investment capital (Brems H., 1970), Human Resource Development and Job Creation (Gregorio, Jose, 2003), market expansion and export promotion import, speed up the process of economic restructuring

2 Objectives of the essay

Like several other developing countries, Vietnam wants to boost the position of foreign direct investment (FDI) in its growth by drawing more FDI One of the cornerstones of Vietnam's economic growth policy for nearly two decades, since the country's opening to the world in 1986, has been to raise FDI The Vietnamese government has built a friendly atmosphere for foreign direct investment The Vietnamese government has established an attractive environment for FDI, including the passage of an FDI legislation in late 1987 and several amended FDI laws based on investor feedback

3 Object and scope of the essay

This research explores the effects of FDI on the Vietnamese economy using data from

2000 to 2021 in order to determine the importance of FDI to the Vietnamese economy The results of this paper should be used to make suggestions to policymakers in order to enhance

their estimates of the impact of FDI on the country's growth There are several studies currently being conducted on the relationship between FDI and the economy Between 1991 and 2009, Assiobo Komlan Mawugnon and Fang Qiang studied the causal association between Foreign Direct Investment (FDI) and Economic Development in Togo Hansen and Rand (2004) argued that FDI has a long-term effect on GDP However, little study has been done in Vietnam on the relationship between FDI and the economy This paper fills in the gaps by looking at the effect of foreign direct investment on Vietnam's economy before and after the COVID-19 pandemic.

This paper includes 3 chapters:

Chapter 1: Theoretical background

Chapter 2: Practical situation in Vietnam

Chapter 3: Policy recommendation

CHAPTER 1 THEORETICAL BACKGROUND

1.1.2 Characteristics of FDI

- Investors must contribute a minimum amount of capital according to the regulations

of each country Vietnam's Foreign Investment Law stipulates that foreign investors must contribute at least 30% of the legal capital of a project

- The division of management over firms depends on the level of capital contribution

If contributing 10% of the capital, the business is completely operated and managed

by a foreign investor

- The investors' profits depend on the results of their business operations and are divided according to the proportion of capital contributions after paying taxes and dividends

- FDI is done through building new businesses, acquiring all or part of existing businesses or merging enterprises

- FDI is not only associated with capital movement, but also associated with technology transfer, transfer of knowledge and management experience and creating new markets for both the investor and the investee side

- FDI is now associated with international business activities of multinational companies

1.1.3 Driving forces of FDI

- Differences in the marginal productivity of capital between countries

A capital surplus country usually has a lower marginal productivity A country that lacks capital tends to have a higher marginal productivity This situation will lead to a movement of capital from surplus to scarcity in order to maximize profits Because the production costs of capital surplus countries are often higher than in capital shortage countries However, this does not mean that all activities with high marginal productivity can be invested and produced by enterprises, but also have important and vital activities of enterprises, they still produce by themselves even if that activity is low marginal productivity

- Product cycle

For most firms engaged in international business, the life cycle of these products consists of three main stages: new product phase; product maturity stage; standardized product stage Akamatsu Kaname (1962) thinks that new products, initially invented and produced in the invested country, can then be exported to foreign markets In the importing country, the advantage of the new product increases the demand on the local market, so the importing country switches to production to replace this imported product by mainly relying on capital and technology of the country outside (product maturity stage) When market demand for new products in the domestic market is saturated, export demand reappears (product standardization stage) This phenomenon takes place cyclically and thus leads to the formation of FDI

- The special advantage of multinational companies

Multinationals have unique advantages (eg basic competencies) that allow companies to overcome cost constraints abroad, so they are willing to invest directly abroad When choosing a location to invest, multinationals will choose where the conditions (labor, land, politics) allow them to take advantage of these particular advantages Multinational companies often have great advantages in capital and technology to invest in countries with available raw materials, cheap labor costs and often a potential consumer market

- Access to the market and reduce trade conflicts

Foreign direct investment is a way to avoid bilateral trade conflicts For example, Japan is often complained by the US and Western European countries because Japan has a trade surplus and the other countries have trade deficits in the bilateral relationship In response, Japan has increased direct investment in those markets They manufacture and sell cars and computers in the US and Europe, in order to reduce the export of these products from Japan They also invest directly in third countries, and from there export to North America and Europe.

- Exploiting experts and technology

It is not that FDI is only going from a more developed country to a less developed country The opposite is even stronger Japan is a country actively investing directly

in the US to exploit a contingent of experts in the US For example, Japanese car companies have opened vehicle design divisions in the US to employ American professionals The same goes for Japanese computer companies Not only Japan invests in the US, but also other industrialized countries have similar policies China has recently promoted direct investment abroad, including investment in the US The purchase of the laptop division of a multinational company with US nationality, IBM, by the Chinese multinational company Lenovo, is seen as a strategy for Lenovo

to approach superior PC technology Vietnamese IBM Or the merger of TCL (China) with Thompson (France) to become TCL-Thompson Electronics, the acquisition of Unocal (China) in the oil exploitation industry by National Offshore Oil Corporation (China) is also with the same strategy

- Access to natural resources

To source raw materials, many multinational companies seek to invest in countries with rich resources Japan's first wave of foreign direct investment in the 1950s was for this purpose China's FDI now has a similar purpose

1.2 FDI classification

1.2.1 Horizontal FDI

A business expands its domestic operations to a foreign country In this case, the business conducts the same activities but in a foreign country For example, McDonald’s opening restaurants in Japan would be considered horizontal FDI.

1.2.2 Platform FDI

A business expands into a foreign country but the output from the foreign operations

is exported to a third country This is also referred to as export-platform FDI Platform FDI commonly happens in low-cost locations inside free-trade areas For example, if Ford purchased manufacturing plants in Ireland with the primary purpose of exporting cars to other countries in the EU

1.2.3 Vertical FDI

A business expands into a foreign country by moving to a different level of the supply chain In other words, a firm conducts different activities abroad but these activities are still related to the main business Using the same example, McDonald’s could purchase a large-scale farm in Canada to produce meat for their restaurants

1.3 General impact of FDI on economy

1.3.1 Impacts on financial market

Increasing the amount of capital available in the local economy is one of the most direct ways that FDI can contribute to economic growth In developing countries, where capital is usually scarce in relation to labor, policymakers often see potential capital infusion as the most significant advantage of FDI because it boosts investment and GDP in the host economy As a result, FDI enables countries to replace capital generated by domestic savings with capital from abroad However, the extent to which foreign firm activity indeed generates a net increase in capital depends on local financial conditions

1.3.2 Impacts on economic growth

Foreign investment has helped to crack the embargo, extend foreign economic ties, and promote Vietnam's membership in ASEAN, as demonstrated by the Framework

Agreement signed with the EU, the Trade Agreement signed with the US, the Investment Security and Promotion Agreement signed with 62 countries/territories, and the Economic

Partnership Agreement (EPA) signed with Japan and other countries With Vietnam's new status and the needs of international investors met, waves of foreign investment poured in Vietnam has long been regarded as a desirable location for foreign investment However, despite the large number of foreign investments, there are still several issues to

be resolved ODA is a notable foreign investment in Vietnam This investment

management has been handled and used efficiently and properly of a new type of refundable loan, as well as what remedy for existing inadequacies

non-We start by analyzing the findings of Borensztein et al (1998) They study the impact

of foreign direct investment on growth, based on data of 69 less developed economies covering the period 1970-1998, and they reported that FDI promotes technology transfers amongst countries Also, Bengoa and Sanches-Robles (2003) report that FDI positively affect growth for Latin American countries, by using a two-step approach First, they test the link between economic freedom and FDI inflow, after which they test for the link between FDI inflow and growth Also relating to the impact of FDI in Latin American countries are the findings of Bosworth and Collins (1999) They documented that FDI positively affects economic development- their models were based on cross-country data

In addition, Barel and Pain (1999) documented the positive impact of FDI on economic development Their analysis was based on four European countries receiving foreign investments originating from the USA Furthermore, Balasubramanyam et al.’s findings (1996) also support the notion that foreign direct investments trigger economic growth However, for FDI to positively affect growth, countries should have exceeded a threshold level of human capital, as has been proposed by Keller (1996) Similar results have been documented by Xu (2000) The findings of Blalock and Gertler (2005) suggest that FDI facilitates the transfer of technology from developed countries to developing countries In addition to meeting a minimum threshold level of human endowment, countries should also invest in their social capacity This has been proposed by Abramovitz’s findings (1986), where he suggested that the term social capacity represents economic stability, human capital and infrastructure By providing proper infrastructure, governments can convince multinationals to invest in their economy

On the other hand, the findings of Bos et al (1974) suggest that FDI negatively affects growth They studied FDI flows relating to the US market and documented a negative link between FDI and growth

Similar conclusions have been proposed by Prebisch (1968) As the findings in the literature suggest, the impact of FDI on growth is not exactly clear and straightforward

1.3.3 Impacts on labour force

What can be said about the effect of FDI on jobs in Vietnam, given its significant position in the Vietnamese economy? Despite large inflows of foreign capital in the 1990s and the substantial contribution of foreign affiliates to production during this period, the number of people directly working by such affiliates is still relatively poor 128 Transnational Corporations, Vol 15, No 1 (April 2006) As with other Vietnamese economic statistics, there are different estimates of employment by foreign affiliates There are considerable differences between the Ministry of Planning and Investment and the Ministry of Labour, Invalids and Social Affairs estimates of the numbers employed in foreign affiliates Ministry of Labour, Invalids and Social Affairs data are based on the annual Labour Force Survey which collects data from over 100,000 households, while the Ministry of Planning and Investment data are collected from a quarterly survey of enterprises Although it might be expected that enterprise data would give a more accurate picture of employment, it has been noted by the IMF that Ministry of Planning and Investment data are likely to be biased upwards because firms receive tax incentives for FDI-related activities (IMF, 1999, box II.1)

bring old technology or that the technology introduced is not adequate to the conditions of developing countries In both cases technology transfer does not take place True or not, this argument points to the fact that technology transfer cannot be expected to take place automatically but also depends on other factors like the quality of the labor force, the set-

up of the project or the type of technology introduced This determines the capacity of the LDCs to absorb and thus benefit from FDI and, on the other hand, the type of technology introduced by the multinationals Another important point is that "technology" should be taken in a wider sense including also organizational and international marketing know-how (Chen, 1996)

CHAPTER 2 PRACTICAL SITUATION IN VIETNAM AND IMPACTS OF FDI

ON VIETNAM’S ECONOMY 2.1 Practical situation in Vietnam

2.1.1 FDI situation from 2000 to 2007

2.1.1.1 Size of FDI in Vietnam

Since the Law on Foreign Investment took effect, Vietnam has achieved positive results

in attracting foreign direct investment Statistics showed that FDI inflows into Vietnam increased from 20.7 billion dollars in the period of 1991-2000 to more than 50 billion dollars in around seven years, from 2000 to 2007

Table 2.1 FDI project registrations and average size, 2000-2007

(Million dollars and number of projects)

Year Number of

project

Registered capital

Average registered capital per project

Implemented capital

Sources: General Statistics Office and Ministry of Planning and Investment

According the statistical data of FDI project registration and average size, there are nearly 7000 project licensed in Vietnam with the total registered capital of more than 50 billion dollars, in which implemented capital was around 28 billion dollars, accounted for 56% total registered capital Besides, average registered capital per project also had the tendency to rise If average registered capital per project was under 10 million dollars over

the 5- year period since 2000, this average capital went up substantially in the next two years with more than 12 million dollars per project

If we had a closer look on the registered capital in this period, we could find that this factor increased sharply, from 6.8 billion USD in 2005 to more than 12 billion USD in 2006 and even nearly double in 2007, with more than 21 billion USD The main reason for this increase was that Vietnam joined World Trade Organization (WTO) in January 2007 Within one year of becoming an official member of WTO, Vietnam had made great achievements in socio-economic development, created a favorable business environment and opportunities and opened up new opportunities in attracting foreign investment First

of all, joining WTO created the chance for Vietnamese enterprises to be treated more equally in their entry into international markets, contributing to overcoming market obstacles that enterprises with foreign owned capital faced In addition, Vietnam committed

to open 11/12 service sectors including a number of important sectors such as telecommunications services, distribution and so on, which created conditions for foreign investors to feel safe in long-term investment in Vietnam Last but not least, becoming a WTO member required Vietnam to continue building a more complete and transparent legal environment, which removed part of barriers in foreign investment in Vietnam

2.1.1.2 FDI structure in Vietnam by sector and industry

As we know, Viet Nam’s economic landscape has altered radically, moving from an agriculture-based to an industry- and services-based economy FDI has been one of the engines behind this transformation and it continues to be a driving force of industrial growth and economic diversification Although the first foreign investments were directed in the oil and gas sector, the industrial sector rapidly became the main magnet for FDI, as foreign investors used Viet Nam as an export platform

Table 2.2 Sectoral distribution of foreign investment projects, 2000–2007

(Million dollars and percentage of total)

Registered capital (million dollars)

Share of total registered capital (percentage of total)

Real estate, renting

Sources: General Statistics Office and Ministry of Planning and Investment

According to the data of the table above, we can easily see that the predominance of manufacturing FDI further increased in the past few years, as the sector attracted more than

62 per cent of all registered capital in 2000–2007 Real estate is a very distant second with

17 per cent of the total, followed by hotels, construction and transport with less than 6 per cent each This predominance of the manufacturing sector highlights that foreign investors have chosen Viet Nam mainly as a centre of production for globally traded goods

2.1.1.3 FDI structure by forms of investment

Figure 2.1 FDI structure by forms of investment, 2007

(Percentage of total)

Source: Ministry of Planning and Investment

Based on the graph of FDI structure by forms of investment, it could be easily seen that

by the end of 2007, FDI was mainly carried out in the form of enterprise with 100% foreign owned capital, which was accounted for 77.65% of the total number of projects, 61.65% of registered capital and 38.74% of implemented capital The form of joint venture has now decreased to 18.89% of total projects, 28.89% of registered capital and 38,12% of the implemented capital due to the fact that it only prevailed until the mid-1990s, which resulted from the restriction on establishing an enterprise with 100% foreign owned capital Besides, some forms of investment such as business co-operation contract, BOT/BT/BTO contract and joint-stock companies was still quite limited, which only accounted for 5%, 2%, 2% respectively

2.1.2 FDI situation from 2008 to 2019

2.1.2.1 FDI situation from 2008 to 2011

Overview of global financial crisis of 2008

The financial crisis of 2008, which also known as the global financial crisis (GFC) that originated in the US reached its peak on September 15, 2008 and tends to spread more and more, with the rapid breakdown of a series of large, reputable financial institutions, which leads the world financial market fell into a serious crisis Excessive risk-taking by banks,

62%

29%

5%

2% 2% 0%

FDI structure by forms of investment

Enterprise with 100% foreign owned capital Joint venture Business co-operation contract BOT/BTO/BT contract Joint-stock companies Parent - Subsidiary Companies

combined with the bursting of the United States housing bubble were proved to be the two

of the main causes of the crisis Following the US, Europe was also the center of the crisis, badly affected Additionally, a number of other countries with capital markets linked with the US and Europe were directly affected such as Canada, Australia and so on Besides, Asian countries' financial markets (Japan, Singapore, Thailand, Korea, Indonesia) and South America (Brazil, Argentina, etc.) are also affected, though not as serious as large countries like America, Europe

Impact of the global financial crisis on FDI in Vietnam

Due to the fact that Vietnam's economy has integrated more and more with the world economy, the global financial crisis has had a certain impact on Vietnam's economy, especially on foreign direct investment With regard to attract foreign direct investment capital, credit in international financial markets was narrowed due to foreign investors facing financial difficulties and being more cautious when making investment decisions Therefore, direct and indirect investment declined globally and Vietnam is not an exception Thus, the disbursement progress of FDI capital in was slower and had the tendency to be net out Other sources of capital such as foreign loans will also be limited Especially, serious effects of the global financial crisis on foreign direct investment could

be seen in a more clearly way through the statistics data of FDI in the period of four years, from 2008 to 2011

FDI by size

Table 2.3 FDI project registrations and average size, 2008-2011

(Million dollars and number of projects)

Year Number of project Registered capital Implemented capital

Source: General Statistics Office

According to the statistical data in the period of four years, from 2008 to 2011, we could see that there was not too much change in the number of project and implemented

capital with around 11000 million dollars and more than 1000 projects per year However, this period witnessed the record decrease in registered capital, from more than 70 billion dollars in 2008 to 23 billion dollars in 2009, which declined more than 60 percent and continually fell in the next two years, reached the bottom in the year 2011 with just 15 billion dollars

First of all, 2008 could not only be considered as the most successful year of Vietnam

in attracting FDI since Vietnam’s effort to attract FDI more than 20 years ago but also a milestone marking one year after Vietnam joined WTO In this year, Vietnam had more than 70 billion dollars registered capital, which was 48.3% higher compared to 2007 Nevertheless, after the global financial crisis occurred at the end of 2008, the cost of capital becomes more expensive and the export market is likely to be narrowed so that a decrease

in capital flows into Vietnam is inevitable In addition, the loan capital often accounts for a large proportion of the total investment capital, so when financial institutions, banks have difficulties, many loan contract could not be signed or disbursed The on-going FDI projects may be halted because investors have to balance their capital capacity and ensure financial safety in this crisis Newly licensed FDI projects will face difficulties if investors suffer great losses from the crisis Due to that main reason, FDI in Vietnam was affected seriously during the next three years until there was an improvement from 2012 onwards

FDI by main counterparts

Besides the downward trend in the size of FDI, this period still witnessed the decline

in the newly registered capital

Figure 2.2 FDI by main counterparts, 2008

(Billion dollars)

By 2008, there are 50 countries and territories registered for investment in Vietnam, of which 11 countries and territories registered investment capital of over 1 billion USD First

of all, Malaysia led the way with 55 projects, registered capital of 14.9 billion USD, accounting for 4.7% of the number of projects and 24.8% of registered investment capital Taiwan ranked second with investment capital of 8.64 billion USD In addition, Japan ranked third an investment capital of 7.28 billion USD Last but not least, Singapore ranked 4th with registered investment capital of 4.46 billion USD and Brunei ranked 5th with around 4.4 billion USD of investment

However, after the global financial crisis, the registered investment capital decreased a lot compare to positive situation in 2008

Figure 2.3 FDI by main counterparts, 2011

(Billion dollars)

14.9 8.64

7.28 4.46

As can be seen from the graph, Hong Kong led the way with a total investment of registered capital with 3.09 billion dollars, accounting for 21% of the total investment in Vietnam Japan ranked second with 2.43 billion dollars and following by Singapore, South Korea and China with 2.2; 1.47 and 0.74 billion dollars, respectively We can see that the total investment in Vietnam from foreign investors by 2011 decreased too much, just equal about one-fifth compared to 2008

2.1.2.2 FDI situation from 2012 to 2019

After the global financial crisis on 2008 and its effect on the foreign direct investment

in Vietnam over the next few years, Vietnam has witnessed a remarkable change in a positive way through size, investment sectors and lists of countries invested in Vietnam

2.2 1.47

Source: General Statistics Office

In the period of 2012-2015, FDI increased slightly, mainly due to the decline of the global economy The number of projects rose marginally with 1287 projects in 2012 and the highest number was 2120 in 2015 Besides, the registered capital witnessed a slight fluctuation in this stage The registered capital went up slowly from 16 billion USD to 22 billion USD in 2013 before a slight decline in 2014 with only 21 billion USD However, by

2015, the registered capital increased again with more than 24 billion dollars

On the other hand, due to the fact that Vietnam joined some FTAs, especially CPTPP and EVFTA, FDI in this period grew sharply Within four years, the number of projects from foreign investors rose rapidly, from 2613 projects in 2016 to more than 4000 projects

in 2019 There was also an upward trend in registered capital, which was only 26 billion dollars in 2016, equally 68% of total registered capital in 2019 Moreover, implemented capital also climbed, which forecasted a more positive future in attracting FDI in Vietnam

in the next few years

FDI by main counterparts

Figure 2.5 FDI by main counterparts (Accumulation of projects having effect as of

31/12/2019) (Million dollars)

0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500

FDI project registrations, 2012-2019

Registered capital Implemented capital Number of project

Source: General Statistics Office

Regarding investment counterparts, over a few decades of attracting FDI, there are more than 130 countries and territories registered to invest in Vietnam, but FDI mainly concentrated in investors from 15 countries territories, in which South Korea, Japan and Singapore are countries with the largest total investment capital in Vietnam Following three countries mentioned before are Hong Kong and Taiwan Meanwhile, the US and Europe, although being the two main export markets, bringing a large export surplus to Vietnam, the FDI inflows from these markets to Vietnam are still very limited

As we know, the origin of FDI inflows into a country is one of the factors that reflect the quality of FDI and the efficiency in using this capital It could be seen that FDI inflows into Vietnam have the tendency to shift in origin, towards increasing FDI from developed countries and some countries with source technology such as Korea, Japan and so on

FDI by sector and industry

Figure 2.6 FDI by kinds of economy activity (Accumulation of projects having effect as of

31/12/2019)

(Percentage of total)

68102 59364

49772 32378

23722 21722 16284 12634 10908 10053 9307 7385 7176 5028 3716

Korea Japan Singapore

Taiwan Hongkong

British Virgin Islands

China Malaysia Thailand Netherlands

USA Samoa Cayman Islands

Canada United Kingdom

FDI by main counterparts

Source: General Statistics Office

With regard to kinds of economy activity, FDI has increasingly concentrated on a few key industry groups, associated with the tariff reduction roadmap and opening up attractive investment fields according to increasingly open commitments in FTAs From 2001 up to now, which mentioned in the section of FDI in Vietnam from 2000 to 2007, we could see that FDI has focused mainly on processing and manufacturing industries FDI inflows into the manufacturing and processing sector accounted for 59% of the capital structure and 50.3% of the project structure However, considering the fluctuation of FDI inflows into Vietnam, it shows that foreign investors has had the tendency to invest more in a number

of other Vietnamese service industries such as real estate business, wholesale and retail, repair cars, motorcycles and motorbikes; professional activities, science and technology and prominent is the arts and entertainment On the contrary, some traditional industries have gradually decreased FDI attraction The most powerful ones are the production, distribution of electricity, gas, hot water, steam, air-conditioning and the mining industry, which only accounted for 7% and 1%, respectively

Real estate activities

Electricity, gas, stream and air conditioning supply

Accommodation and food service activities

Construction

Wholesale and retail trade; Repair of motor vehicles and motorcycles

Transporation and storage

Mining and quarrying

Education and trainning

Other

Despite the negative effects of Covid-19 pandemic, Vietnam is still a market that has recorded many positive points in attracting foreign investment in a number of fields and industries

The manufacturing and processing sector accounts for 48 percent of total registered investment capital in the country, as shown in the table below This is followed by real estate worth $60 billion, power production and distribution worth $28.7 billion, and accommodation and food services worth $12 billion Construction, wholesale, transportation, mining, and education are some of the other prominent FDI industries

Table 2.4 Vietnam FDI Attraction by kinds of economy activity (As of November 2020)

(Million dollars)

investment captital

Production, electricity, gas,

stream and air conditioning

Wholesale and retail trade,

repair of motor vehicles

and motorcycles

This diverse set of industries suggests a wide variety of potential FDI sources for Vietnam The manufacturing and processing sector's dominance represents the productivity gains offered by Vietnam to foreign companies Moreover, a majority of the industries in the preceding list are also consumer-facing Food service, retail, transportation, and education are only a few examples With a population of over 96 million people, the majority of whom are under the age of 35, it is expected that the middle-class in Vietnam could double by 2026 This means that international investors will have potential prospects

in consumer-facing sectors

Besides, the fact that Vietnam has been in good control of Covid-19 created the opportunities for foreign investors decide to transfer the investment to Vietnam

There were 109 countries and territories with investments in Vietnam as of November

2020 Singaporean companies have spent $8 billion in the world, the most of any country, surpassing South Korea from the previous year South Korean firms came in second with a total investment capital of 3.7 billion dollars, followed by Chinese firms with a total investment capital of 2.4 billion dollars Moreover, a number of Japanese, Thai, and Taiwanese companies are also active

Table 2.5 Top 5 investors in Vietnam (As of November 2020)

Source: Ministry of Planning and Investment

Specifically, a new group of Japanese companies, including AEON, Uniqlo, and Mizuho, has recently expanded their presence in Vietnam According to a new study, Japanese companies see Vietnam as the most attractive FDI destination in 2020

Similarly, Thai companies reported twice as many ventures in 2020 as they did in 2019,

owing to the favorable investment environment and Vietnam's involvement in multiple regional trade agreements

2.2 Impacts of FDI on Vietnam’s economy in the period 2000 - 2020

2.2.1 Impacts on Financial Market

2.2.1.1 The change of financial market

The introduction of the Law on Foreign Investment has created a higher legal environment and is a lever to attract foreign capital into Vietnam After 30 years of ups and downs with the world economy, Vietnam has recently succeeded in attracting FDI, even though there are times when foreign capital has not really fully exploited its potential The banking and financial sector increasingly plays an important role in the financial system of the economic sector and with the economic potential of an economy of more than

95 million people, this area attracts great attention from foreign investors

From 2006 and 2007, foreign investors started buying shares to become strategic investors in domestic banks But with the limit of ownership of foreign institutions that can only hold in a domestic bank is 30% and the highest level of stake a foreign bank can buy

to become a strategic investor is 20 %, foreign banks have not really made strong changes due to not holding control Therefore, the source of foreign capital to access domestic banks

is also quite limited

The fact that Vietnam joined the WTO in 2007 created conditions for foreign financial institutions to have stronger access to Vietnam's financial market, as regulations for foreign financial institutions were relaxed Especially with regard to branch opening and transaction points, restrictions on VND deposits have been removed along with the possibility of expanding banking services Foreign credit institutions have become more active

Since 2009, with the strong commitment of the Government of Vietnam to the WTO and the recognition of the important role of a strong financial system, a 100% foreign owned bank is allowed to establish in Vietnam This is an important milestone when the operating environment of the industry has made significant changes

Foreign banks with high financial capacity and expertise can expand the distribution network, compete in a healthy manner with domestic banks By the end of 2017, there were more than 50 foreign credit institutions operating in Vietnam, of which the number of 100% foreign owned banks was 9 banks

2.2.1.2 FDI impacts on the positive change of financial market

FDI from foreign banks

The active participation of foreign banks besides domestic banks has partly promoted competition, helped customers benefit more and contributed to the development of the banking industry Whether domestic or foreign banks, to achieve success, all banks must understand customers, upgrade and diversify their product and service portfolios, and proactively improve processes so that they can be successful serve the best customer segments they choose

Foreign capital flows can be considered as one of the solutions to improve the financial capacity and governance of domestic banks, help to improve labor productivity and, in a broader view, improve the competitiveness of the economy

While domestic banks have the advantage of branch networks and long-established relationships with the local community, foreign banks have a strong point in complex products that have been tested in many ways markets, networks and international relationships - what Vietnamese customers, both businesses and individuals, are in desperate need in a period of ever stronger economic connectivity and daily income increase

Foreign capital inflows into Vietnamese banks also help stimulate the handling of bad debts, raise the capital adequacy ratio (CAR) and accelerate the application of Basel II The strengthening of the banking system has also helped Vietnam upgrade the country's credit rating, thereby increasing the attractiveness of foreign capital flows into many fields

FDI from effects of the relationship between internal and external factors

Capital flows into developing countries and transition economies have strongly

changed due to policy changes of developed countries

Since the 2008 global financial crisis, the radical application of monetary policy (monetary policy) has been expanded through quantitative Easing (QE) programs in

advanced countries (UK, US, EU, Japan…) has caused a massive capital inflow into emerging markets After that, because developed countries simultaneously raised interest rates to avoid "hot" growth and high inflation led to mass investors withdrawing capital

from these markets

In the face of policy changes in developed countries, emerging economies also responded to protect their domestic currency and curb inflation by raising interest rates This makes capital flows into developing countries, including Vietnam, change rapidly and

tend to fluctuate greatly

Thus, it can be said that the change in global economic conditions and the evolution of macro factors in developing countries and emerging economies are the main determinants

of capital inflows this Foreign investment inflows are considered one of the important capital flows for the current and future development of Vietnam's economy, so considering the relationship between internal and external factors In addition to influencing this capital

flow in Vietnam is essential

Factors outside the country

About the relationship between FDI and interest rates in the US, in general, except for the period of the 2007-2009 global crisis that caused capital inflows to emerging countries including Vietnam to plummet, in the remaining different periods it seems that a higher interest rate level in the US will reduce this capital inflow into Vietnam

However, with the US industrial index, the relationship between foreign direct investment flows and this index is not clear (Figure 2) Theoretically, when this index increases, the rate of industrial development in the US increases or in other words, the US economy is growing well, this will attract FDI into the US instead for developing countries like Vietnam (the period 2009-2010, 2018-2019)

The VIX index (a measure of the volatility of a stock market created by a Chicago options exchange) is more often associated with outflows of foreign indirect investment, but as with Figure 3, it appears that capital inflows Foreign direct investment also tended

to fluctuate in the opposite direction of the change in the VIX index Specifically, in

2011-2012, when the VIX index increased, this capital inflow into Vietnam decreased

significantly This can be seen in other periods like 2016-2017 period and 2018 to early

2019 period

Source: IFS – IMF data

Factors inside the country

Figure 4 shows that the relationship between the money supply and FDI inflows, the increase in the M2 money supply means a decrease in interest rates, which will help businesses borrow investment capital, boosting FDI inflows into Vietnam

The adjustment of interest rates through the money supply was applied in many times of crisis, when the growth rate of the economy declined Each positive relationship between FDI and money supply can be seen in the period 2007-2009 and the period 2013-2019, but there is also a period when the money supply is inversely related to this capital flow, namely

in 2010-2012 period

Inflation is also an important factor affecting foreign direct investment It can be seen that, after the world economic crisis in 2008, inflation in Vietnam increased sharply due to the economic relief policies launched, along with a clear decline in FDI (Figure 5)

2.2.2 Impacts on Labor Force

The effect of FDI on regional development and poverty alleviation is the subject of this chapter It will investigate the factors that influence the regional allocation of FDI flows and, as a result, their effects on regional development Following that, an analysis

of how FDI aided Vietnam's fruitful attempts to reduce poverty in the 2000s will be presented.

2.2.2.1 The change of labour force in Vietnam

Figure 2.7 Total labour force from 1990 to 2019

The data retrieved on January 29, 2021

As Figure 2.7 shows, from 1990 to 2019, the total number of employees increased steadily over the years from 33.03 million workers in 1990 to 56.54 million workers in

2019 (increased to 23.51 million workers) within nearly 30 year

Labor working in FDI enterprises is increasing If in 1990 the labor force in this sector only accounted for 0.04% of the national labor force, in 2007 it was 1.6% In 2010, the FDI sector attracted over 1.7 million direct workers, of which direct workers working in the industrial sector accounted for nearly 80%, in 2015 it was 2.2 million workers, accounting for 4, 2% compared to the whole country In addition, FDI also creates jobs for about 2.5 million indirect workers

In 13 years (from 2000 to 2013) the total realized investment (76,127 million USD) created jobs for 3,222 thousand people, on average 1 million USD was invested directly in Vietnam (real capital invested To create 23.6 jobs for Vietnamese workers or to create a

Labour force Linear (Labour force)

job in a foreign FDI enterprise requires an average investment of 42.3 thousand USD (about

900 million VND) If calculated according to registered capital, on average, 1 million USD

of registered capital to invest in Vietnam created 6.4 jobs (205,632 mil USD / 3,222,000 people)

2.2.2.2 Impacts of foreign direct investment flows

Countries investing in Vietnam mainly invest in manufacturing, processing, construction and service industries, which are not only in need of development in Vietnam but are industries that are in line with modern development trends In the world In the workforce attracted to FDI enterprises, most of them come from rural areas where agricultural production is predominant and has not been trained to adapt to industry The restructuring of human resources from agriculture to industry and services is a progressive trend that Vietnam is aiming for and FDI plays an important role in promoting that progressive trend

FDI capital of countries investing in Vietnam all have a positive impact on human resources and employment of Vietnamese workers

FDI flows have promoted overall regional economic development, this impact has been unevenly distributed between Vietnam’s seven regions, with foreign investment concentrated in the largest cities, the Red River Delta, and the Southeast

In the period under review, the impact of FDI on regional economic development was mainly in the industrial sector, which attracted the largest share of foreign investment; FDI in the service sector was present in only sixteen provinces, and only a small amount

of FDI went to agriculture

By 2008, the capital of foreign invested enterprises (FIEs) accounted for a major share

of the total in several regions in Vietnam In the Southeast, which received the largest share of FDI flows, the capital of FIEs accounted for 71.6 percent of the region’s total industrial capital, almost four times that of SOEs and more than eight times that of private enterprises While the Red River Delta region ranks second in terms of receiving FDI flows, FIE capital made up only 28 percent of the region’s industrial capital and less than half of SOE capital as many SOEs are concentrated in the Red River Delta Moreover,

most FDI flows to the Red River Delta region were actually channelled toward services and hence reduced the contribution of FDI flows to that region’s industrial capital.

In contrast, the relatively small amounts of FDI flows to other regions has contributed significantly to these regions’ hitherto scarce industrial capital As shown in Table 6.3, in the case of the Northern Uplands, which received only 3.9 percent of total FDI, FIEs were the largest in terms of industrial capital Similarly, the small amount of FDI flowing to the North Central and the Central Coast made up more than 30 percent of those regions’ total industrial capital Only in the case of the Central Highlands and Mekong River Delta did FIEs account for the smallest share of industrial capital

However, FDI has created a large number of jobs for Vietnamese workers Although half of them are low-quality workers, they are trained in the basics to grasp the job and improve the lives of workers According to the development trend, the source of FDI will continue to increase in the coming years, will ensure jobs for workers in Vietnam

2.2.2.3 FDI and poverty alleviation

One important objective of the socio-economic development process in Vietnam is

to tackle poverty Foreign invested enterprises may contribute to poverty alleviation indirectly by promoting economic growth, or directly by generating employment and increasing income by paying higher wages and salaries This section examines the poverty alleviation process in Vietnam and then analyzes the contribution of FDI

Poverty alleviation

The results of two living standards surveys in 2003 and 2008 jointly conducted by the government of Vietnam and donors, including the World Bank, United Nations Development Program (UNDP) and Sweden’s International Development Agency (SIDA), showed a “striking reduction in the incidence of poverty in Vietnam” (GOV and World Bank 2009, p 4) The proportion of people classified as poor2 declined from 58 percent

in 2003 to 37 percent in 2008 while the figure for food poverty reduced from 25 percent in

2003 to 15 percent in 2008 This decrease of general poverty and food poverty in Vietnam within the short span of five years has been considered “very impressive” and “…no other country has recorded such a sharp decline in poverty in such a short period of time” (GOV and World Bank 2009, p 4) In addition, social indicators including primary and secondary