2014 may have promised new opportunities in the years to come with remarkable growth in FDI disbursement but the decline in registered FDI capital compared to 2013 must be noted by authorities.
The four largest foreign direct investment (FDI) projects in 2014 had aggregate registered capital of $6.6 billion, which is only a bit more than half of the largest project in 2013, the Nghi Son Oil Refinery, with $12 billion. According to the Foreign Investment Agency (FIA) under the Ministry of Planning and Investment (MPI), foreign investors registered nearly $21 billion worth of projects last year, or just 93.5 per cent of 2013’s total. The trend, however, was anticipated by the government, as the former figure was 19 per cent higher than the $17 billion targeted for 2014.
Explaining the decline, Mr. Nguyen Noi, Deputy Chief of FIA, pointed to the absence of giant projects, and while the number of foreign-invested enterprises (FIEs) increased rapidly most were small and medium-sized. The emphasis on setting new records in registered capital, said Mr. Nguyen Dinh Cung, President of the Central Institute for Economic Management (CIEM), underlines that Vietnam should pay more attention to the quality of FDI inflows instead.
According to the FIA there were some notable bright spots in the quality of FDI in 2014, the most remarkable of which was that disbursement increased. FIEs were estimated to have disbursed $12.35 billion as at December 15, up 7.4 per cent compared with the same period of 2013 and 2.9 per cent higher than the plan for 2014. Mr. Nguyen Mai, Chairman of the Vietnam Association for Foreign-Invested Enterprises (VAFIE), said this confirms Vietnam’s appreciation of and focus on the quality of FDI.
Sixty countries and territories invested in Vietnam in 2014. With three new billion-dollar projects, Samsung set the groundwork for South Korea being the leading investor in the country, with total newly registered and additional capital of $7.32 billion, or 36.2 per cent of the total. Hong Kong and Singapore ranked second and third, with total newly registered and additional capital of $3 billion and $2.79 billion, accounting for 14.8 per cent and 13.8 per cent of the total.
The processing and manufacturing sector attracted the interest of most foreign investors, with 774 projects and a total registered capital of $14.49 billion, accounting for 71.6 per cent of the total as at December 15. The real estate sector and the construction sector came second and third, with total investment of $2.54 billion and $1.05 billion, accounting for 12.6 and 5.2 per cent of the total.
The figures clearly show that more and more countries and territories are interested in Vietnam and are investing in a range of sectors. Mr. Mai said that never before had Vietnam has such a great opportunity to attract giant multinationals and turn the country into their main manufacturing bases.
The question that always arises, however, is how does Vietnam benefit? FIEs receive incentives that local businesses can only dream of. The government is willing to discount infrastructure rent by 50 per cent and waive land taxes. Some giant FIEs are even offered corporate income tax exemptions for 16 years. In return they create hundreds of thousands of jobs and invest billion of dollars, but what more?
A report from the Bac Ninh Province Department of Customs revealed that in the first nine months of 2014 the two largest electronics enterprises in the province had exported a total of $15.78 billion worth of goods but imported $18.84 billion in materials and equipment. With such a deficit, some economic experts sarcastically noted that Vietnam is exporting at other countries’ convenience. The Ministry of Industry and Trade (MoIT) has warned that in 2015 Vietnam will not enjoy an overall trade surplus, as it has done for the last three years, but a deficit instead.
Mr. Cung believes that FDI in the last few years and especially in 2014 has not been able to create enough momentum for local businesses to flourish, which should be a feature of good quality FDI. He suggested that in order for the country to seize the opportunities that FDI may bring, Vietnam will have to introduce solutions to lead FDI into high-tech fields and help Vietnamese enterprises gradually master modern technologies and international management methods besides creating favorable conditions for attracting FDI.
Of a similar mind, Mr. Noi recommends the government pass new policies to encourage and expand links between FIEs and the local business community. He emphasized that another value of FDI was to form well-built support industries for Vietnam through active technology transfer and human resources training so that local companies can better participate in the global value chain.
Steps to take
Looking back on the efforts made by local authorities, Vietnam’s business and investment environments have not improved greatly compared to other countries in the region. At a meeting between MPI and 50 Japanese enterprises in December 2013, the latter stressed that when tariff barriers within ASEAN are eliminated in 2018 they will head to destinations with the best investment environments, especially those with consistent, favorable policies and an ability to develop support industries. When reviewing 2013, Mr. Misuhiko Lino, President of Toyo Drilube (a supplier of Toyota and Honda located in Ha Nam province), commented that “Vietnam is behind compared to its neighbors in terms of policies and support industries,” and one year on his opinion still stands.
Foreign investors have selected Vietnam solely for its low labor costs and political stability, and accept the prevalence of corruption and the absence of intellectual property rights protection, among others. This may be explained by the fact that almost all FIEs in Vietnam have low-cost activity patterns with very modest positions in the manufacturing as well as the global value chain, and so cutting costs is the only thing they take into account.
Labor costs, however, are increasing in Vietnam and the very real possibility exists that investors may take their projects to newly-emerging countries in the region, as happened to China. To improve FDI efficiency in 2015 and the years to come, Mr. Do Nhat Hoang, Director of the FIA, said that the agency and related authorities will try to attract more large-scale projects that manufacture competitive products of high value in the global value chain, in order to offset the shortage of investments due to a shift of FDI away from Vietnam to countries with lower labor costs.
While not comprehensive, this solution appears to be the most practical at the moment, based on Vietnam’s macroeconomic situation. To realize this goal, however, Vietnam should have appropriate strategies to attract particular investors of each and every stripe. It should also take good care of its existing investors, who happen to be great promoters in spreading the image of Vietnam among the global foreign investment community.
Vietnam has passed the stage of attracting FDI at all costs, accepting all projects no matter how labor-intensive or environmentally-destructive they may be. To realize the goal of attracting FDI in both quantity and quality, it is time for Vietnam to adopt specific orientations. Mr. Cung stressed that, in the course of implementation, local authorities should have a clear direction, in particular having suitable criteria for selecting investors, and policies should be transparent and fair for all sides.
With the amended Law on Investment being approved by the National Assembly in November, barriers have been lifted for the business and investment environments to improve, creating conditions for fair competition and promoting Vietnam’s image, in an effort to attract new strategic partners as well as open up to all international investment flows.
“Vietnam has been continuously evaluated as an attractive destination for FDI, especially in the context of various foreign trade agreements with the EU, Russia, and South Korea being expected to be signed in early 2015. But it is extremely important that Vietnam has a specific direction in attracting new FDI, in order to offset the shortage of investments due to the shift of FDI from Vietnam to countries with lower labor costs.”
Mr. Nguyen Van Trung,
“The FDI sector has contributed greatly to Vietnam’s overall exports. However, FIEs not only export considerably but also import extensively. Additionally, they mainly operate in the manufacturing and processing sector, and hence the national economy has not benefited much. The reason may be the under-developed support industries in the country and industrial production still depending heavily on imported raw materials. I am really looking forward to an exit from this “manufacturing and processing karma”, as this is the way for Vietnam to enrich its national economy.”
Mr. Nguyen Dinh Cung, President of CIEM
“Vietnam is experiencing the third giant wave of FDI, after the peaks of 1991-1997 and 2005-2008. With the presence of 100 of the 500 largest transnational corporations, this wave will be of even higher quality than the previous two. The National Assembly’s recent approval of the amended Law on Investment will better facilitate the mission of attracting FDI by generating spillover effects to support industries.”
Mr. Nguyen Mai, Chairman of VAFIE
“Vietnam is yet to meet the support industry requirements of leading multinationals from South Korea.”
Mr. Ha Chan Ho, Former South Korean Ambassador to Vietnam
- Year in review