FIEs have been major players in Vietnam's economic development but there is more they could do.
The contribution of foreign-invested enterprises (FIEs) to Vietnam’s economy is beyond dispute. Multinationals have found the country to be one of the most attractive investment destinations in the world, with total new foreign direct investment (FDI) reaching $21.6 billion in 2013, an increase of 54.5 per cent year-on-year. Total investment in Vietnam in the 2011-2014 period stands at some $55 billion, of which FIEs have contributed nearly half, according to Mr Nguyen Mai, Chairman of the Vietnam Association of Foreign-Invested Enterprises (VAFIE). Without FIEs, he said, Vietnam’s GDP growth would be nowhere near the levels recorded today.
FIEs have also played a significant role in supporting Vietnam’s participation in global value chains. “By increasing the number of export enterprises and hence the volume of manufacturing exports, FIEs have directly improved Vietnam’s export performance and also helped the domestic economy to better integrate into the global market,” said Mr Phan Huu Thang, former Director of the Foreign Investment Agency (FIA) under the Ministry of Planning and Investment (MPI). FIEs are also major contributors to socio-economic stability, as they offer a variety of employment opportunities.
Securing a surplus
Prior to 2003 local businesses accounted for the majority, or approximately 55 per cent, of Vietnam’s total export turnover. But in the decade since, FIEs have taken over. Vietnam is now host to more than 17,000 FIEs who, in the first nine months of this year, accounted for more than 61 per cent of the country’s total export turnover, exporting $67.2 billion worth of goods (excluding crude oil). The figure for last year as a whole was roughly 65 per cent. The sector’s contribution to economic growth last year was 18 per cent, and this year it will come in at around 20 per cent.
Vietnam’s exports used to be primarily raw agricultural products, with a limited number of low-value processing industries such as apparel, footwear, minerals and crude oil, and accounted for less than 20 per cent of State budget income. With strong FDIs, the export structure has gradually shifted. The processing industry has seen increasing numbers of high added-value products, such as mobile phones, computers, and other electronic products.
This new structure has also helped Vietnam address its trade deficit and go into surplus. According to calculations by local agencies in the planning and investment field, Vietnam’s trade deficit would be somewhere around $13 billion to $14 billion for the first nine months of this year without the efforts of FIEs and the country would suffer from a balance of payment deficit that would impact on foreign currency exchange rates, among other things.
It is important to note, however, that production processes that add the highest value to a product, such as research and development (R&D) and component manufacturing, are mostly done overseas. FIEs in Vietnam only conduct non-added value or very low added-value processes such as assembly or packaging. In the case of Samsung, the local component ratio is estimated at just 20 per cent, and most of those are made by South Korean firms in the country. Vietnam, therefore, needs to strengthen product R&D so that more local enterprises can join production chains.
Despite being heavily affected by the global economic crisis, private enterprises, and especially FIEs, have remained the major job creators in the country. FIEs currently employ around 3 million workers, both directly and indirectly. Samsung’s factory in Thai Nguyen broke ground in March last year and went into operation just a year later. In the eight months since, the plant has employed nearly 17,000 workers and 22,000 will be employed by the end of the year.
Another South Korean giant, LG Electronics, poured $1.5 billion into a factory at the Trang Due Industrial Park in Hai Phong in September last year, producing smart phones, hi-tech electronic products, and household appliances. “The company aims to build not just a single factory but also a production complex,” Mr Kim Jong Sik, Co-President of LG Display, was quoted as saying. “This will create more than 20,000 jobs and lure many LG satellite enterprises to Hai Phong as well.”
The two giants and other FIEs in Vietnam will not only provide job opportunities to hundreds of thousands of workers but also have a significant impact on society as a whole. Samsung and LG, for instance, will pull in a variety of satellite companies in support industries to supply materials and components, generating not only more jobs but also more homes, shops, facilities and amenities. Employees at these FIEs will also have the opportunity to work in an international-standard workplace.
Even more importantly, these workers will be trained and acquire the skills needed for Vietnam to fully tap into technology transfer in the future. Some FIEs have already begun to build centres for R&D. Samsung, for instance, now has an R&D centre in Hanoi with 1,200 employees and is planning to expand it with around 2,200 highly-qualified engineers. Many have successfully proven their capabilities and are gradually replacing South Koreans in management positions.
The dark side
The spill-over effects of the FIE sector on domestic firms, however, are negligible. The advanced technologies they bring to the country are obviously not for sharing; not right now and maybe not ever. Mr Mai once told Samsung’s senior leaders that Vietnam offers the most incentives it can to multinationals and it actually expects them to not only create jobs but also to support Vietnamese firms to develop, in the same way small, low-tech South Korean firms rose to become leading global corporations.
Apart from Samsung and a few other large corporations, tasks like technology transfer and R&D in Vietnam have not been the focus of FIEs despite the fact that they have been enjoying significant investment incentives for quite some time. Some giant FIEs enjoy a tax exemption for the first four years of profitability and then a preferential tax rate of 10 per cent (against the normal 20 per cent) for the following nine years. No private Vietnamese enterprise is entitled to such incentives.
There are also FIEs that fail to fulfil their tax obligations, exploiting loopholes and using transfer pricing tactics. Many continue to expand despite reporting losses for decades. Concerns regarding transfer pricing have been raised frequently in Vietnam over the last few years, after 122 FIEs were exposed as using the tactic to avoid paying taxes during the 2007-2012 period. To prevent further transfer pricing, the government is closely monitoring FIEs’ interest and fee payments to parent companies while tax authorities are imposing penalties on those that violate the law.
Vietnam needs FIEs, but to some extent the country has become over reliant on the sector. When the country can no longer maintain its cost and demographic advantages over other countries or fails to provide better incentives, FIEs may simply up and leave. “The development of a country with 90 million people must not be dependent upon the growth of the FIE sector; it should rely on domestic firms instead,” said Ms Pham Chi Lan, a respected independent economist.
The contribution of the FIE sector is essential but Mr Mai has been quoted as saying that “the government should improve other sectors so that FIEs’ contribution is only 25 per cent of total social investment capital and/or 25 per cent of GDP.” Nevertheless, domestic firms face myriad difficulties and few new policies have been adopted to help them develop faster. Policies that pull domestic firms up rather than bring FIEs down are needed, to guarantee a fair game is being played.