One of the deepest hopes clinging to foreign direct investment (FDI) is the transfer of technology to domestic firms with which the national economy expects to enhance its technological strength. However, such target has not seemed to be achieved although foreign capital has kept flowing into Vietnam over the past 30 years.

There’s no way FIEs “voluntarily” make technology transfer; instead domestic enterprises must look for a third party for technology procurement on their own

Foreign-invested enterprises (FIEs) have made a significant contribution to Vietnam’s total investment, export, job creation and budget revenue. However, FDI projects have so far mostly been related to assembly and processing projects while achieving a modest localization rate and low added value. Also, FIEs have yet to establish a close link with the local corporate circle to help the latter take part in the value chain together. Nor have them fostered the development of supporting industries in Vietnam. And in the eyes of many Vietnamese policy wonks, the technology and management experience transfer has fallen short of their expectations. That was how Deputy Minister of Planning and Investment Nguyen The Phuong addressed a recent seminar on technology transfer from FIEs.

Deputy Minister Phuong’s remarks are justified. The efficiency of technology transfer from FIEs in Vietnam is very poor and tends to be lagging behind other countries in the region, as per the 2016 World Economic Forum.

Precisely, in 2009, Vietnam ranked 57th globally according to this criterion. In 2014, the country slid to the 103rd position, or down 46 ranks in five years, much lower than regional countries such as Malaysia (13th), Thailand (36th), Indonesia (39th), and Cambodia (44th).

The world’s technology transfer process consists of four steps: distribution agents; assembly and processing; manufacturing under license from the parent company; technology procurement, independent production and technology study, said economic expert Nguyen Minh Phong. After 30 years of FDI attraction, Vietnam is still struggling in the second phase (assembly and processing). Only a few local companies have reached the third stage, manufacturing under license from the parent company.

“We have missed lots of opportunities over the past few decades when believing FIEs will carry out technology transfer voluntarily,” Phong stressed, warning of a challenging period ahead as Vietnam joins the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Then, FIEs are no longer obliged to transfer technology under a preferential policy.

Voluntary tech transfer: a distant dream

There’s no way FIEs “voluntarily” make technology transfer; instead domestic enterprises must look for a third party for technology procurement on their own, Nguyen Thanh Cuong from Goldsun Packaging, the number-one supplier to Samsung Electronics, emphasized.

Talking about the experience gained from his eight years supplying printing and packaging products to Samsung, Cuong said local companies should develop a solid system of processes including those of personnel, production and quality management. More importantly, enterprises also need to set aside some budget for future work force training.

Domestic businesses should take the initiative in providing FIEs with accurate information on their capabilities. “What can you do? Which technology do you have? Your scale of operations? Your products and services? Such information will be of great help for FIEs when they want to cooperate with local firms,” Cuong said.

Moreover, Vietnamese enterprises must constantly improve themselves. To do so, they need to synchronize all sections: machinery, technology, and capacity of the workforce. Only then will FIEs seek domestic firms to place orders and assist the latter in fine-tuning their production and meeting customers’ high standards.

Cuong’s comments coincide with the studies Nguyen Thi Tue Anh, vice president of the Central Institute for Economic Management (CIEM), have conducted over the past years.

FIEs have a far-reaching impact on the economy of Vietnam, but mainly in one direction: FIEs sell inputs to domestic companies. The other way round (local enterprises supply components to FIEs) only works at joint ventures with foreign partners, Anh remarked.

For enterprises which are not joint ventures, the second direction is only workable when the local enterprises involved have remarkable capacity for technology as well as research and development (R&D). At present, the capacity for innovation and improvement among domestic businesses is very limited. More than 70% of the enterprises surveyed said they did not do anything for self-improvement or R&D, while the remainder has improved at a very low rate.

“This suggests the major weakness lies in the fact that the capabilities of domestic businesses remain too inferior to partake in the regional production chains of FIEs,” said Anh.

One of the other limitations of Vietnamese enterprises is contracting. The chance of joint production and technology transfer is higher with long-term contracts. However, most of the local firms when asked said they could only sign short-term contracts.

How to facilitate technology transfer

Currently, 14 FDI projects, including two joint-ventures, are operating in Hoa Lac Hi-tech Park, said Nguyen Trung Quynh, deputy head of the management board of this park. According to Quynh, when it comes to technology transfer, joint-venture projects are often more efficient than wholly foreign-owned projects. The two joint-venture projects mentioned above are both run by Vietnamese employing their own technology.

Therefore, a policy on encouraging FIEs to partner and enter into joint ventures with domestic companies should be considered, according to many experts.

China has adopted a policy that efficiently compels FIEs to form joint ventures with domestic firms. Thanks to this policy, many Chinese enterprises have mastered technology in modern industries such as automobiles, renewable energy, and artificial intelligence. Meanwhile, in Malaysia, 100% foreign  ownership is prohibited in some industries, but joint ventures are encouraged.

Furthermore, it is necessary to request FIEs to undertake R&D activities when doing business in Vietnam, while offering them certain incentives, on the basis that the more they invest in R&D, the greater the incentives are. For example, if FIEs spend 2% of their revenue on R&D, the corporate income tax imposed on them will drop to 18%. Likewise, if 5% of their earnings are invested in such activities, the tax rate will be slashed to 15%. Such incentives should apply to not only FIEs but also domestic enterprises.

SGT