FDI is expected to see something of a boom this year but the focus needs to remain on quality over quantity.
The owner of the AEON retail chain, Japan’s AEON Financial Service (AFS) Co., plans to expand its investment in Vietnam’s financial market through mergers and acquisitions.
It views Vietnam as a key investment destination in Southeast Asia and also expects to pour some $5 billion into shopping malls around the country, raising the total to 30 from an initial target of just 20. Many other foreign-invested enterprises are following suit by seeking to invest or expanding existing investments in Vietnam.
During a meeting with 30 leading global corporations at the Vietnam Economic Dialogue held on the sidelines of WEF Davos 2019 last January, Prime Minister Nguyen Xuan Phuc expressed a hope that they would contribute to improving the quality of FDI in Vietnam.
This includes boosting technology transfer and raising the capacity of domestic industry through joining global supply chains and utilizing opportunities from Industry 4.0. His call was part of a move towards next-generation FDI attraction, as the foreign sector is a key part of the economy and Vietnam hopes it will develop in the long term and be truly beneficial.
Investment coming in
According to the Ministry of Planning and Investment (MPI), Vietnam has attracted 26,500 FDI projects from 129 countries and territories in the last 30 years, with total capital standing at $350 billion. Major projects include those invested by Siemens, Novatis, Carlsberg, Mitsubishi, Toyota, LG, GE, and Ford. With disbursed capital at $185 billion, FDI has contributed notably to development and boosted economic growth and local resources. It has accounted for 25 per cent of all social development investment capital in this time and 20 per cent of GDP.
In the context of global trade and investment flows fluctuating due to US-China trade tensions, FDI in Vietnam reached $35.46 billion in 2018; virtually unchanged from the record level received in 2017. This is very much a positive sign for the economy, according to local economists. Of all FDI capital last year, $18 billion went to 3,064 new projects and $7.59 billion was in additional capital in 1,169 existing projects.
“Foreign investors are keen on pouring investment capital into Vietnam,” said Dr. Nguyen Mai, Chairman of the Vietnam Association of Foreign Invested Enterprises (VAFIE).
“This keenness has a foundation: the changes in the country’s business environment. Over the last two years, the government has made significant efforts to improve the business environment and reform and simplify administrative procedures.”
One attribute of FDI is that it alters the economic structure and accelerates modernization and industrialization in different localities. Twenty years after being re-established, economic growth in southern Binh Duong province has reached about 14.5 per cent, partly thanks to the FDI sector, according to the Chairman of the Provincial People’s Committee Tran Thanh Liem.
The province has attracted more than 3,500 FDI projects in total, with registered capital of over $32.5 billion; the third-highest in the country, according to MPI. In 2018 alone, the FDI sector contributed more than 49.6 per cent of the province’s social investment capital and 20 per cent of its budget revenue.
The northern province of Bac Ninh, meanwhile, ranked seventh out of Vietnam’s 63 cities and provinces in terms of total FDI attraction as at 2018. FDI has become a dynamic economic sector that makes a major contribution to the province’s socioeconomic development, helping to increase its gross regional domestic product (GRDP) and creating 285,000 jobs for local people.
The province has also been the most-favored investment destination of Japanese investors such as Canon, Sumitomo, and Acecook in recent years.
The FDI sector has generated 72 per cent of total export value to date and created some 3.5 million direct jobs and 5 million indirect jobs, MPI reports. In the last 30 years, a host of foreign investment projects have transferred advanced technology and management experience and had certain spillover effects on domestic industry, contributing to improvements in technology and governance.
Despite its achievements, issues remain for the FDI sector to overcome. Links with and the spillover effects on domestic industry remain low and fall short of expectations. Barriers include a lack of qualified domestic suppliers in terms of innovation capacity and management, an absence of industry-ready skills such as technical, language, soft, and quality management skills, and there being too few integrated local supply chains, which affect the competitiveness of local firms, Mr. Kyle Kelhofer, IFC Country Manager for Vietnam, Laos and Cambodia, told a conference on FDI policy held in February in Binh Duong province.
Numerous matters relating to policies and its business climate also hinder Vietnam in realizing the potential FDI offers, he went on. While the overall policy framework is clear, implementation remains weak, as evidenced by the recurrence of challenges identified several years ago. Horizontal weaknesses include extensive overlaps between ministries, manifested in a lack of convening power, and extensive fragmentation as a result of poor cooperation and coordination. Vertically, ineffective coordination and synchronization along with potentially wasteful overlaps between national and sub-national levels perpetuate a “race to the bottom” when it comes to incentives.
Vietnam has decided to give top priority to high-quality FDI inflows, in a move to trigger spillover effects in domestic industry. Minister of Planning and Investment Nguyen Chi Dung has firmly stated that Vietnam will no longer seek FDI at any cost. Disbursed capital increased last year while registered capital was down, indicating that the government is indeed determined to achieve sustainable economic development and has prioritized high-tech projects and those causing less environmental pollution. It will also seek to lure large projects of transnational corporations that are strong enough to promote the development of the domestic economic sector and of support industries by connecting FDI enterprises with domestic partners, he said, adding that this requires consistent cooperation between relevant authorities and localities.
CPTPP in play
Despite the fact that the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) will boost investment flows into Vietnam, there is still a question of how the country takes advantage of the benefits from capital inflows to develop the local business community.
“We do not want to see a scenario where the country attracts more investment and achieves an increase in exports, but local firms only earn a small share of the profits,” said Mr. Nguyen Anh Duong from the Central Institute for Economic Management. “Vietnam should select appropriate partners and focus on sectors with potential and advantages.”
Local economists said a new approach to FDI strategy is needed for the country to be active in promoting and attracting FDI. “Investment promotion activities need to be focused, implemented at the national, interdisciplinary, and inter-regional level, and follow product value chains,” said a representative from MPI’s Foreign Investment Agency.
“For priority sectors and areas targeted to attract investment from multi-national corporations, investment in specific sites should be promoted to meet investors’ requirements regarding accurate information, which they use in decision making.”
Mr. Kelhofer also said that most FDI projects in Vietnam are focused on manufacturing and should be shifted to high added value sectors such as finance and research and development (R&D), among others.
In the new context, Vietnam’s existing advantages in attracting FDI will be gradually diminished, requiring a new approach in next-generation FDI attraction with better corporate governance, highly-skilled workers, and higher quality standards.
He also recommended that Vietnam ensure the efficient operation of FDI enterprises and the utilization of free trade agreements.
Similarly, Mr. Young-sup Joo, former Minister of Small-and Medium-Sized Enterprises and Startups in South Korea, said Vietnam should focus on attracting FDI in R&D. He expects local enterprises to become partners instead of being “contractors” for FDI enterprises in various fields.
The government must continue to improve business and investment transparency and safeguard intellectual property rights, because investors from developed countries, including the US, often demand a transparent and consistent investment and legal environment, according to Mr. Nguyen Van Toan from VAFIE.
“It is also necessary to put investment protection regulations into laws, since multinationals with high-tech projects are particularly interested in this,” he said. “They must be assured that their legitimate rights will be protected.”
Japanese firms operating in Asia see Vietnam as the most attractive investment destination, thanks to the country’s high economic growth, strengthening position as a production hub, and large consumer market, according to the latest survey from the Japan External Trade Organization (JETRO) released on March 4.
“Both newly-founded firms and those established prior to 2010 want to expand operations, which means Vietnam continues to be an important investment destination for Japanese enterprises,” Mr. Kitagawa Hironobu, Chief Representative of JETRO Hanoi, told a press conference in Hanoi on the survey’s release.
The survey revealed that many Japanese enterprises were profitable last year, with the number being in the black rising 0.2 percentage point compared to 2017, and that the result is the fourth-highest among the 20 surveyed countries and regions, preceded by the Philippines, China and Malaysia.
Of 630 respondents across East Asia, Southeast Asia, India, and Australia, 35.7 per cent chose Vietnam as the most promising economy for investment - far above the 17.8 per cent that selected second-ranked India.
Once firms establish themselves in Vietnam, they believe they can then consider expanding their operations into Cambodia, Laos and Myanmar, the survey found.
FDI inflows from Japan are expected to increase, according to local economists, thanks to the CPTPP. As such, along with trade improvements, the markets open to Vietnam are huge, and investment expansion is the way Japan will utilize the opportunities from the agreement.
Japanese investors are especially focused on investing in industry, manufacturing, and high-tech, in which the government will facilitate projects based on high technology, source technology, and high added value.
VN Economic Times