What’s needed to shift towards higher-quality investment?

Vietnam has come a long way since the doi moi reforms. Its success in attracting foreign direct investment has been evident.

What’s needed to shift towards higher-quality investment?
Khoon Goh, head of Asia Research at ANZ

With the right policies and implementation, Vietnam can remain a magnet for the right type of FDI that will help push the economy into higher value-added industries and propel the country towards the upper middle income status.

Khoon Goh, head of Asia Research at ANZ, looks into the contributions of foreign investment to the Vietnamese economy, and suggests what the country must do to attract higher quality FDI.

Vietnam has become a magnet for foreign direct investment (FDI). FDI inflows to Vietnam stood at $2.4 billion in 2006, or 0.2 per cent of the global FDI flows. This has grown to $14.1 billion and 1 per cent in 2017.

This share is set to rise further as more multinationals seek to set up manufacturing production in the country.

In the first four months of this year, there have been 1,082 new projects that were granted investment certificates, with the total registered investment capital amounting to $5.34 billion, a 50 per cent increase from the same period last year.

What attracts foreign investors to Vietnam are its political stability, a welcoming policy environment, skilled and competitive labour force, and access to the global market place with the country securing free trade agreements which will cover 60 per cent of the world’s GDP.

What’s needed to shift towards higher-quality investment?

The benefits of FDI to the Vietnamese economy are evident in the strong GDP growth performance, the rapid rise in the country’s total trade as a percentage of the GDP at close to 200 per cent, and turning around the past external imbalances to now persistently running current account surpluses.

Even more remarkable is the rapid shift in the composition of Vietnam’s export mix. A decade ago, textiles and garments were the top export items, comprising around 15 per cent of the total value of exports.

While textiles and garments remain an important export product, its top position has been replaced by phones and parts, which now account for a fifth of all exports. This would not have been possible without FDI.

Vietnam is in the enviable position of being a top destination for FDI despite continued uncertainty in the global environment. Vietnam will pick up a reasonable share of manufacturing production shifting out of countries like China and South Korea.

In addition, the country will see increased interest from foreign companies keen to benefit from Vietnam’s fast growing economy and rising middle class, not to mention its strong tourism market. It is no surprise that in 2018, after manufacturing which attracted half of all FDI, the second largest foreign investment went into real estate, accounting for 29 per cent of the total.

Policymakers at present are focussed on attracting new-generation FDI. Going for quality rather than quantity is essential in ensuring sustainable economic development.

After all, FDI that only relies on cheap labour and produces low-margin products will just as quickly move out once wage increases erode the benefits.

There is no shortage of cheaper labour in neighbouring countries. Focusing on the right types of FDI will also ensure that scarce resources are allocated for the most efficient use, and that environmental effects are limited.

There are three important priority areas for the country to bring in new-generation FDI. First, developing the right skill sets in the labour force.

Vietnam’s youth literacy rate is high, and its 15-year-old primary school students achieve scores that are well above the average of advanced economies in science and maths, based on the Organization for Economic Co-operation and Development’s Programme for International Student Assessment.

 

However, there are different requirements between what is needed for working on a factory floor and operating a hi-tech plant.

Building up the technical know-how and management skills that are industry relevant requires a shift towards post-secondary education that prepares students for the new workplace.

Increasing emphasis on innovation, creativity, and design will be important in attracting new-generation FDI.

Second, it is important to nurture domestic firms so that they are integrated into the production process of foreign multinationals. Despite the country’s success in attracting FDI, there is a distinct lack of linkages and spill-overs into local companies.

The lack of integration of local suppliers risk a two-tier business environment where foreign companies utilise external inputs and attract the best workers, while domestic counterparts fall further and further behind and become uncompetitive.

Ensuring that FDI at least looks to have a minimal level of integration with local companies and that there are programmes in place to help lift the capability of domestic businesses is important.

The ultimate goal is to develop domestic businesses that are innovative, competitive, and capable of exporting their products.

Exports by domestic businesses have declined from 43 per cent of the total exports in 2005 to just 29 per cent at present. A vibrant and innovative domestic industry will help in attracting new-generation FDI.

Third, better co-ordination is necessary among the provinces to develop specific clusters and identify priority sectors to better target the type of investors that match the new-generation FDI that Vietnam wants to attract.

This requires leadership at the national level, and a shift away from relying on broad incentives towards more strategic investment promotion.

Part of this is understanding what the specific requirements are, including infrastructure, to attract multinational companies to set up operations in Vietnam.

The co-ordination also helps to avoid different provinces competing to attract FDI, whilst ensuring the adequate allocation of resources.

For example, provinces with higher unemployment could be favoured for more labour-intensive FDI.

In striving to implement new strategies for FDI, it is also important not to forget the important role that prudent macroeconomic management plays in ensuring an attractive backdrop.

The Vietnamese economy is well managed with low and stable inflation, lack of external imbalances, and an exchange rate that is stable.

Financial market liberalisation as the economy continues to develop will be important to maintaining the country’s attractiveness to multinationals, as well as ensuring that domestic businesses are able to adequately access capital for expansion.

The government is rightly looking towards the future, given technological changes, to adopt a new strategy for FDI.

With the right policies and implementation, Vietnam can remain a magnet for the right type of FDI that will help push the economy into higher value-added industries and propel the country towards the upper middle income status. VIR

 
 

Other News

.
Shopee is top-ranked e-commerce platform in Buzz Rankings
Shopee is top-ranked e-commerce platform in Buzz Rankings
BUSINESSicon  09/02/2020 

Shopee, a leading e-commerce platform in Southeast Asia and Taiwan, has come out on top as the most positively discussed e-commerce platform in Vietnam.

Experts claim coronavirus plaguesVN economic growth
Experts claim coronavirus plaguesVN economic growth
BUSINESSicon  09/02/2020 

VOV.VN - The coronavirus epidemic has been spoiling the country’s growth story amid global industrial slowdown, experts have warned.

Evaluating first year of CPTPP in action
Evaluating first year of CPTPP in action
FEATUREicon  09/02/2020 

The landmark Comprehensive and Progressive Agreement for Trans-Pacific Partnership has been in force for more than a year now, influencing the trade activities of member economies. 

The government orders inspections to lasso in runaway pork prices
The government orders inspections to lasso in runaway pork prices
BUSINESSicon  09/02/2020 

The government ordered the inspection of big pork producers in Vietnam as part the efforts to curb prices, stabilise the market, and rein in inflation in 2020.

Agri-stakeholders mobilise to weather virus outbreak
Agri-stakeholders mobilise to weather virus outbreak
BUSINESSicon  09/02/2020 

Vietnamese authorities are striving to support enterprises and farmers to limit the impacts on import and export activities brought about by the new coronavirus crisis.

Gauging impact of nCoV on Vietnam
Gauging impact of nCoV on Vietnam
BUSINESSicon  09/02/2020 

At this point of time, it might be impossible to fully gauge the implications of the novel coronavirus outbreak (nCoV) on the local economy.

Korean cosmetic enterprise seeks entry into Vietnamese market
Korean cosmetic enterprise seeks entry into Vietnamese market
BUSINESSicon  09/02/2020 

A beauty centre ran by the famous Korean brand ID is poised to open a new premise in Hanoi in the area close to Hoan Kiem lake during the second quarter of the year, according to the Economic Times of AJU.

An insight into 2019 foreign trade
An insight into 2019 foreign trade
BUSINESSicon  09/02/2020 

The achievements in Vietnam’s foreign trade in 2019 are definitely clear. However, to gain better results, it needs an insightful look into these achievements.

Apple plan to move Airpod production to Vietnam stumbles on coronavirus
Apple plan to move Airpod production to Vietnam stumbles on coronavirus
BUSINESSicon  09/02/2020 

Apple is hesitant over moving the production of 45 million AirPods to Vietnam due to the risks and barriers raised by the coronavirus, even as its main producers are struggling with labour and material shortages.

The road to further improve connectivity across Vietnam
The road to further improve connectivity across Vietnam
BUSINESSicon  09/02/2020 

To reach higher levels of prosperity, Vietnam is encouraged to strengthen transport connectivity to seize international trade opportunities, as well as integrate deeper into world markets. 

New applications enter ride-hailing market
New applications enter ride-hailing market
BUSINESSicon  09/02/2020 

The Vietnamese ride-hailing market has witnessed the entry of two new apps, Unicar and ZuumViet.

Industries hit as epidemic cuts off raw materials
Industries hit as epidemic cuts off raw materials
BUSINESSicon  09/02/2020 

The textile industry suffers from a shortage of raw materials since they are mostly imported from China, which is reeling under the coronavirus epidemic.

Lessons from solar: Rush to invest in wind power plants to get high tariffs could overload grid
Lessons from solar: Rush to invest in wind power plants to get high tariffs could overload grid
BUSINESSicon  09/02/2020 

The rush to invest in wind energy to take advantage of the Government's pricing incentives could lead to overloading of the national grid in a repeat of the solar scenario, experts warn.

Vietnam sees rice export growth in January
Vietnam sees rice export growth in January
BUSINESSicon  09/02/2020 

Vietnam exported 560,000 tonnes of rice in January 2020, earning US$270.3 million, an increase of 12 per cent in volume and 39 per cent in value month-on-month, according to the General Department of Customs.

More people shopping online due to coronavirus
More people shopping online due to coronavirus
BUSINESSicon  09/02/2020 

To cope with the threat of coronavirus, many in Ha Noi are choosing to shop online or order food at home instead of facing crowds at brick and mortar stores and restaurants.

64% of Japanese firms want to expand business in Vietnam: Jetro
64% of Japanese firms want to expand business in Vietnam: Jetro
BUSINESSicon  09/02/2020 

About 64 percent of Japanese enterprises plan to continue expansion of their business in Vietnam due to its favourable investment environment.

VN farm produce exporters urged to look at markets other than China
VN farm produce exporters urged to look at markets other than China
BUSINESSicon  09/02/2020 

Exporters of agricultural products, especially dragon fruit, must improve quality and focus on the domestic and new export markets and reduce their dependence on the Chinese market amid the current epidemic outbreak, experts have said.

Vietnam gives scenarios for economic growth amid the impact of coronavirus
Vietnam gives scenarios for economic growth amid the impact of coronavirus
BUSINESSicon  09/02/2020 

The Ministry of Planning and Investment (MPI) has submitted two scenarios for economic growth this year to the Government, as the country faces the impact of coronavirus in China, one Viet Nam’s biggest trade partners.

Vietnam acts to improve labour productivity
Vietnam acts to improve labour productivity
BUSINESSicon  09/02/2020 

Vietnam will launch a national programme to improve labour productivity, a critical factor for the middle-income country to enhance its competitiveness and develop.

Vietnam to talk with the US on Minh Phu tax evasion case
Vietnam to talk with the US on Minh Phu tax evasion case
BUSINESSicon  09/02/2020 

The Ministry of Industry and Trade (MoIT) has said it will talk with the US on the case of local Minh Phu seafood firm, which was accused of tax evasion in the US.

 
 
 
Leave your comment on an article

OR QUICK LOGIN