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New criteria developed for selection of FDI projects

Experts said that Vietnam’s policy to lure foreign investment in the past 30 years has not been as successful as expected because it has been too easy and not binding.




By late 2021, Vietnam had attracted 408 billion USD in registered foreign capital, ranking 18th in the world and 2nd in Southeast Asia. However, more than half of foreign-invested (FDI) enterprises continually report losses, and the contribution of this sector to the economy is still limited.

Experts said that Vietnam’s policy to lure foreign investment in the past 30 years has not been as successful as expected because it has been too easy and not binding.

According to a report of the Ministry of Finance, of 25,171 active FDI firms in Vietnam, only 10,125 enterprises reported profits, accounting for 40.2%, while 14,108 companies reported losses, equivalent to 56%.

The losses incurred in 2020 by FDI enterprises were up to 151,064 billion VND. By the end of 2020, there were more than 16,100 FDI firms reporting losses, accounting for about 64% of declared enterprises. The total value of accumulated losses of FDI companies by the end of 2020 was more than 623 trillion VND.

According to the Ministry of Planning and Investment’s report, the current FDI projects in Vietnam are mainly of small scale. By the end of December 2021, the country had 1,254 FDI projects with capital of 50 million USD or more. The remaining tens of thousands of projects had investment capital of less than 50 million USD, accounting for 96.4% of the total number of FDI projects.

The land use efficiency of many FDI projects is low. The average investment rate per 1 hectare of land in the field of processing and manufacturing industry is only 3.7 million USD.

Currently, FDI projects in Vietnam mainly have medium technology, mostly focusing on certain stages in labor-intensive industries such as garment and textile, footwear, wood processing, electronics, automobile assembly and some food processing industries. Most spare parts, input materials and accompanying services for production in the FDI sector are imported.

The Ministry of Industry and Trade said the spillover effects of the FDI sector on domestic enterprises have been limited. Efficiency and technology transfer from FDI enterprises in Vietnam are lower than in other countries in the Southeast Asian region.

The link between FDI and domestic enterprises is very loose, leading to the situation of having two economies in one country. This makes the ability of Vietnamese industrial products to participate in the global supply chain under expectation. Vietnamese enterprises are mainly engaged in the processing and assembly stage with low added value.

For example, the electronics industry’s export turnover is about 80 billion USD/year, but the localization rate is very low, only 5-10%. The link between domestic suppliers and FDI enterprises is still weak. Samsung Vietnam has about 40 Vietnamese suppliers; Canon Vietnam has about 20 Vietnamese suppliers; and Panasonic Vietnam has only four Vietnamese suppliers.

The question is: if all foreign electronic corporations withdraw from Vietnam, what is left for the Vietnamese electronics industry? It will go to “zero”, and this is called “disindustrialization”.

Waking up late

In the past three decades of attracting investment, Vietnam has lacked binding mechanisms with FDI enterprises so they still prioritize suppliers with a long history of cooperation or those of the same nationality, so it is difficult for Vietnamese enterprises to ‘get in’.

A survey by the Vietnam Chamber of Commerce and Industry (VCCI) shows that, in recent years, the size of FDI enterprises has been decreasing. While the number of FDI enterprises in Vietnam is increasing, the average capital and labor size is getting smaller. In 2020, the rate of FDI enterprises with fewer than five employees exceeded 10%, and the rate of enterprises with 5-9 employees increased from 10.6% to 11.3%.

This “reverse” sign also occurs for the equity of FDI enterprises. In 2019, the proportion of FDI enterprises with capital of less than 0.5 billion VND was only 9.8%, but in 2020 it rose to 13.1%.

Meanwhile, the percentage of FDI enterprises switching to using Vietnamese suppliers gradually decreased. Specifically, in 2015, 68.9% of FDI enterprises purchased goods from private enterprises and 19.3% purchased goods from business households. The rates fell to 62.5% and 14.8%, respectively, in 2020. Small-scale FDI enterprises entered Vietnam to serve as suppliers for large FDI enterprises, VCCI concluded.

If Vietnam can only attract capital from foreign investors who do not intend to form links with the domestic economy, and operate with short-term goals, then Vietnam is facing the risk of being caught in the “low value-added trap”.

In fact, in 1951 - 1989, emerging economies in Asia all attracted large investment sources from developed countries. However, after 20-30 years, South Korea and Taiwan built their own strong industry able to compete globally. For example, Taiwan has developed automotive and electronics supporting industries thanks to a policy on localization, forcing foreign manufacturers to transfer technology to local enterprises since 1960.

The Ministry of Planning and Investment said that it is developing criteria to select foreign investors to submit to the Prime Minister for approval.

Foreign investors will be selected based on seven criteria: investment unit rate/hectare of land; number of employees; technology content; technology transfer commitment; the ability to link with domestic businesses; environmental protection; and ensuring national defense and security.

Experts say that Vietnam has joined many free trade agreements, and FDI enterprises are the beneficiaries. FDI enterprises invest in Vietnam to take advantage of low labor costs and low energy prices, as well as attractive incentives.

Attracting foreign investment in an easy way for a long time is costing the country. Vietnam must have strict and binding standards and conditions in FDI attraction to serve the country's development goals. Unfortunately, this has received attention only until now.

Tran Thuy

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