INTRODUCTION
Background
Foreign direct investment (FDI) is crucial for the development strategies of multinational companies and is viewed by host countries as a key source of external capital for economic growth amid globalization While foreign enterprises seek profits through their investments, governments aim to attract substantial FDI flows to stimulate economic growth and enhance state revenues Developing countries often present more appealing opportunities for foreign investors compared to developed nations, thanks to their potential sectors, abundant labor force, and various incentives offered by host governments.
Vietnam has emerged as a leading destination for multinational corporations, attracting significant foreign direct investment (FDI) over recent decades As reported by the Foreign Investment Agency (FIA) under the Ministry of Planning and Investment (MPI), registered FDI reached an impressive $24.115 billion by December 2015, marking a 110% increase compared to 2014 Additionally, the implemented FDI totaled $14.5 billion, reflecting a 116% rise from the previous year.
2014 The number of new projects in 2015 also increased by 115% compared to
Since 2014, Vietnam has seen significant foreign direct investment (FDI) inflows, with projects ranging from 1843 to 2120 This investment has notably impacted the country's economy and society by boosting economic growth, facilitating access to international markets, and improving the quality of life for employees These accomplishments reflect the continuous efforts of Vietnamese leaders and businesses to effectively attract and utilize FDI However, challenges remain in various sectors, necessitating reforms and policies from the Vietnamese government to address these issues.
In addition, Vietnam is in the process of recovery after the global crisis in
In 2008, Vietnam's economy became highly sensitive to minor changes, coinciding with its efforts toward industrialization and modernization Each identified issue serves as a valuable lesson, prompting the need for effective solutions to enhance investment activities To address existing drawbacks, various measures have been implemented This study not only analyzes the achievements and limitations of foreign direct investment (FDI) attraction from 2010 to 2015 but also offers recommendations for future improvements.
Research objectives
This study aims to analyze the landscape of foreign direct investment (FDI) attraction in Vietnam from 2010 to 2015 and provide recommendations for enhancing FDI in the future To achieve this goal, various criteria have been researched and evaluated.
Thesis structure
The thesis is organized into four chapters as follows:
This chapter shows some background of issue, the research aims and hypotheses
This chapter is divided into two sections: the first part provides a theoretical framework for foreign direct investment (FDI), covering its definition, classification, entry modes, and the effects on host countries, home countries, and foreign investors The second part presents empirical studies on FDI, focusing on global trends as well as specific insights related to Vietnam.
Chapter III: FDI inflows in Vietnam, 2010 - 2015
This chapter is divided into two key sections The first section provides an overview of Vietnam's economic situation and examines the factors influencing foreign direct investment (FDI) inflows during a specific timeframe The second section evaluates the achievements and limitations of FDI attraction in Vietnam.
Chapter IV: Solutions and recommendations for foreign direct investment inflows in Vietnam
Chapter III concludes with an analysis of government policies aimed at attracting foreign direct investment (FDI) inflows It highlights key strategies and offers solutions to enhance future FDI attraction across several main categories.
LITERATURE REVIEW
THEORETICAL FRAMEWORK OF FDI INFLOWS
Foreign Direct Investment (FDI) is defined as the net inflows of investment aimed at acquiring a lasting management interest, typically defined as 10 percent or more of voting stock, in an enterprise operating outside the investor's economy According to the World Bank (2012), FDI encompasses equity capital, reinvested earnings, other long-term capital, and short-term capital, as reflected in the balance of payments.
Foreign Direct Investment (FDI) is characterized as a long-term investment that reflects a lasting interest and control by a foreign entity in a local enterprise According to Vietnam's Law on Investment (2005), FDI involves the transfer of capital or lawful assets by foreign investors into Vietnam for various investment activities These activities include establishing wholly foreign-owned enterprises, forming joint ventures with domestic investors, engaging in contractual investments such as BCC, BO, BTO, and BT, contributing to business development, purchasing shares for management participation, and executing mergers and acquisitions.
Foreign Direct Investment (FDI) refers to the inflow of capital from a home country to a host country, where investors gain control over the invested enterprise or assets Foreign investors utilize their capital for business activities and hold rights to make significant decisions regarding the company's operations In cases where foreign investors own 100% of the capital, they fully control the enterprise, while in joint ventures, management levels depend on capital contribution ratios Beyond capital investment, foreign investors also commit to transferring infrastructure, technology, and management expertise, aiming to establish new companies or enhance existing ones, which includes technology transfer, experience sharing, and workforce training.
Foreign Direct Investment (FDI) can be categorized into two main types: horizontal and vertical FDI Horizontal FDI involves multinational companies manufacturing products and services similar to those offered in their home markets, effectively replicating their business operations in various countries In contrast, vertical FDI occurs when multinationals geographically fragment their production processes, allowing for greater efficiency and specialization across different locations.
It is called “vertical” because MNE separates the production chain vertically by outsourcing some production stages abroad (Alexander, 2003)
From the perspective of host countries, Foreign Direct Investment (FDI) can be categorized into three main types: import substituting FDI, export-increasing FDI, and government-initiated FDI Import substituting FDI focuses on producing goods that were previously imported, leading to a reduction in imports and exports between the host and investing countries, influenced by market size, transportation costs, and trade barriers Conversely, export-increasing FDI aims to source new inputs, resulting in an increase in the host country's exports of raw materials and finished goods to investing and other countries Lastly, government-initiated FDI occurs when governments provide incentives to foreign investors to address balance of payment deficits.
When considering foreign direct investment (FDI), businesses typically evaluate two primary entry modes: Greenfield investment and Mergers and Acquisitions Greenfield investment involves establishing a new enterprise from the ground up, offering advantages such as economies of scale and scope across various business functions, enhanced control over operations, and solid market commitment supported by vendor financing This mode allows companies to maintain full control over their brand and staff while exploring new opportunities However, it also presents challenges, including higher initial costs for building facilities and hiring employees, as well as competition from local and foreign firms and lengthy entry processes Despite these obstacles, Greenfield investment remains a popular choice among foreign investors.
Mergers and Acquisitions (M&A) involve the consolidation of companies, where a merger combines a domestic and a foreign company to form a new multinational entity, while an acquisition entails one company purchasing another without creating a new firm M&A is favored by enterprises due to several advantages, including the creation of a more valuable combined entity with increased capital, resources, and market share This mode of entry also facilitates access to new international markets and can help prevent bankruptcy for struggling companies, thereby protecting jobs However, M&A comes with drawbacks, such as the potential increase in debt from merging companies and cultural differences that may hinder business operations Additionally, layoffs may occur to reduce costs post-merger Despite these challenges, M&A remains a popular strategy for multinational corporations looking to invest abroad.
Foreign Direct Investment (FDI) inflows are crucial for the development strategies of host countries, significantly impacting their socio-economic environments On the positive side, FDI fosters economic growth by injecting substantial capital, improving the balance of international payments, and alleviating capital and foreign currency deficits, particularly in developing nations These countries often struggle to stimulate investment due to low income levels, which limit savings and investment capabilities compared to developed nations Therefore, attracting FDI is essential for these countries to boost economic growth, offset budget deficits, enhance business competitiveness, expand exports, and increase profits from investment activities.
Foreign Direct Investment (FDI) significantly enhances the host country's technological landscape by facilitating the transfer of advanced technologies from multinational corporations While these corporations often retain their most competitive technologies to protect intellectual property, they contribute to developing local technology by adapting it to the host country's economic environment This collaboration allows domestic investors and engineers to learn essential design and production skills, ultimately improving local technology, productivity, and quality Additionally, FDI creates numerous job opportunities, reducing unemployment and enhancing the labor force's quality With substantial FDI inflows, new enterprises are established or expanded, providing job seekers with diverse options to support themselves Furthermore, FDI boosts the efficiency of economic activities and restructuring, promoting exports and facilitating easier access to international markets for the host country.
Foreign Direct Investment (FDI) can bring both benefits and drawbacks to host countries While it opens the door to global cultures, it may also introduce lifestyles that clash with local traditions Additionally, FDI often encourages foreign companies to engage in mass production, leading to the overuse of renewable and non-renewable resources, which poses environmental challenges Furthermore, although FDI can reduce unemployment, it raises concerns about labor standards The shift towards advanced technology in multinational corporations diminishes the need for unskilled labor, leaving these workers struggling to find jobs and facing poor working conditions and low wages To address these issues, authorities must implement labor policies that promote income equality among workers.
Foreign Direct Investment (FDI) significantly impacts the home country, offering numerous benefits It enhances capital efficiency by encouraging corporations to invest abroad, leading to increased profits from export earnings and a substantial influx of foreign currency Additionally, these investment activities can strengthen diplomatic relations between the home and host countries.
Foreign Direct Investment (FDI) can have several negative impacts on the home country, particularly concerning the balance of payments and the labor market One significant issue is the potential for a temporary deficit in the balance of payments, as an excessive focus on foreign investments can lead to increased export activities that may incur higher costs than imports Additionally, FDI can contribute to rising unemployment rates at home, as enhanced foreign investment may hinder domestic economic growth, resulting in fewer job opportunities for local residents.
Foreign Direct Investment (FDI) presents both advantages and disadvantages for foreign investors and corporations A key benefit is market expansion, allowing businesses to extend their reach beyond their home country and enhance global brand recognition Additionally, investing in developing countries enables firms to sidestep domestic competition and introduce their products to new markets where demand may exist Multinational corporations can also capitalize on favorable conditions such as low labor costs, abundant resources, and potential profit gains from favorable foreign exchange rates Furthermore, businesses can profit from transferring technology that may be outdated in their home markets but remains relevant in host countries Lastly, host governments often provide various incentives for foreign investors, including tax breaks and reduced fees, creating a more favorable investment climate that may not be available in the investors' home countries.
Foreign Direct Investment (FDI) poses challenges for investors, as they must compete with established local businesses that are already familiar to residents This competition can be difficult, as local products may be preferred over those from foreign companies Additionally, investors face hurdles related to cultural differences, customs, and legal frameworks in host countries, making it crucial to understand the local market thoroughly For instance, Japanese corporations often approach investments in Vietnam with caution due to complex administrative processes and an incomplete legal system Therefore, conducting comprehensive research on the host country's market is essential for successful FDI.
EMPIRICAL STUDIES
Recent empirical studies have examined the impact of foreign direct investment (FDI) inflows on economic growth in developing countries Research by Wang (2003) indicated that FDI in manufacturing sectors significantly boosts economic growth in 12 Asian economies from 1987 to 1997, while FDI in non-manufacturing sectors shows minimal impact Additionally, Alfaro et al (2002) found that FDI contributes to economic growth, particularly in countries with well-developed financial markets, suggesting that stronger financial systems enhance the benefits derived from FDI This conclusion is further supported by Hermes and Lensink (2003) and Aghion et al., emphasizing the crucial role of financial infrastructure in maximizing FDI's positive effects on growth.
A study conducted in 2006, analyzing data from 118 countries between 1960 and 2000, highlights the importance of reforming domestic financial systems in less developed nations prior to liberalizing their capital accounts This approach is essential for attracting increased foreign direct investment (FDI), which can significantly boost economic growth in these countries.
A study by Baharumshad and Thanoon (2006) utilizing annual panel data from eight East Asian countries, including Malaysia, the Philippines, Singapore, Thailand, Korea, China, Myanmar, and Fiji, reveals that foreign direct investment (FDI) significantly boosts economic growth in both the short and long term The research indicates that the positive impact of FDI on growth surpasses that of domestic savings, highlighting that nations that effectively attract FDI experience faster economic growth compared to those that discourage it.
Basu and Guariglia (2007) analyzed a panel of 119 developing countries and discovered that foreign direct investment (FDI) stimulates economic growth while reducing the agricultural sector's contribution to GDP They identified FDI as a key driver of growth in the industrial sector but noted that it may increase inequality, particularly when the poor lack access to modern FDI-driven technologies due to insufficient human capital This issue is often exacerbated by imperfect credit markets that hinder the financing of education for disadvantaged groups To address this, public policies focused on education, such as providing educational subsidies, could enable the poor to acquire the necessary human capital to become entrepreneurs, ultimately allowing them to benefit from FDI in the long run.
Vu and Noy (2008) analyzed sectoral data from six OECD countries between 1992 and 2003, finding that foreign direct investment (FDI) positively influences economic growth, both directly and through its interaction with labor However, this impact varies by country and sector, with significant effects observed only in certain areas, while some sectors showed no evidence of FDI contributing to economic growth (Nguyen Phi Lan, 2008).
Andreas Waldkirch (2002) used data of FDI flows into Mexico from 1994 to
In recent years, foreign direct investment (FDI) into developing countries has surged significantly, highlighting the need for a deeper understanding of multinational activity in these regions Despite this growth, there remains a scarcity of reliable data and a comprehensive theoretical framework to analyze such investments Additionally, much of the existing research has predominantly focused on the United States, both as a source and host of investment, underscoring the necessity for studies that explore the dynamics of FDI in developing nations.
Regarding the studies on Vietnam, there is not much empirical analysis of FDI flows into Vietnam compared to other developing countries Christian Delaunay and
C Richard Torrisi (2012), by using data from the General Statistical Office and various regression models, examined the FDI inflows on Vietnam The most three significant models tested are domestic market and the 1997 – 1998 financial crisis; currency impact and the 1997 – 1998 financial crisis and impact of the ASEAN membership Through this paper, the authors appreciated “the relative success of the Doi Moi policy” The authors stated that “as a nation of 89 million people and a member of ASEAN and WTO, it succeeded in attracting significant inward FDI while avoiding most of the effect of the currency crisis of the late 1990s Its policies oriented FDI toward domestic priorities (manufacturing, infrastructure, communication and tourism) while keeping natural resources in State’s hands”
Most of researches on FDI in Vietnam use qualitative methods For example:
Nguyen Phuong Hoa (2002) analyzes the impact of foreign direct investment (FDI) on the economic growth of 51 provinces in Vietnam from 1996 to 2000 using a panel data approach Her pooled regression analysis, which includes labor growth and various control variables, reveals that FDI significantly enhances provincial economic growth during this period Additionally, she explores the interaction between FDI and human capital, finding a positive and statistically significant relationship, suggesting that Vietnam's human capital surpasses the threshold needed to effectively leverage FDI for economic advancement.
Between 1988 and 2002, Le Viet Anh (2002) analyzed the relationship between foreign direct investment (FDI) and economic growth, concluding that FDI significantly enhances economic growth and encourages domestic investment Building on this, Phan and Ramstetter (2006) utilized an endogenous growth model to assess the effects of FDI on local economic growth in 59 Vietnamese provinces from 1995 to 2003, employing instrumental variables to address simultaneity issues They found that while many instruments were weak, the coefficient for FDI's impact on economic growth remained positive and statistically significant Additionally, Le Quoc Hoi (2006) expanded on the endogenous growth model proposed by Borensztein et al (1998) to investigate the influence of foreign technology diffusion on Vietnam's economic growth, using the same panel data from 59 provinces.
1996 – 2003 and the fixed effect estimator He finds that the coefficient of foreign technology diffusion on Vietnamese economic growth is positive and significant”
Another empirical study on FDI in Vietnam is made by Tran Trong Hung
A study conducted in 2005 analyzed panel data from 12 provinces in Vietnam between 1992 and 2002, employing two regression models to explore the relationship between foreign direct investment (FDI) and economic growth, as well as their effects on poverty reduction The findings revealed that FDI inflows significantly boost economic growth at the provincial level, which in turn positively influences poverty reduction Furthermore, the study concluded that FDI directly and strongly contributes to decreasing poverty rates in provinces, supporting the notion of both direct and indirect impacts of FDI on alleviating poverty.
While empirical studies on foreign direct investment (FDI) in Vietnam are limited, they consistently highlight the significant impact of FDI inflows on economic growth, particularly at the provincial level To maximize the benefits of FDI, Vietnam needs to enhance its human capital, technology, and market liberalization.
FOREIGN DIRECT INVESTMENT INFLOWS IN VIETNAM,
REALITY OF FDI INFLOWS IN VIETNAM, 2010 - 2015
Eight years after the onset of the 2008 global economic crisis, the world economy continues to experience significant fluctuations, characterized by unstable growth, elevated unemployment rates, reduced trade activities, and rising public debt levels.
Global economic growth declined to 3.9% in 2011 from 5.1% in 2010, continuing a downward trend with rates of 3.2% in 2012 and 2013, before a slight recovery to 3.4% in 2014 and 3.9% in 2015 This overall growth rate remained significantly below the pre-financial crisis average of 5% In developed countries, growth was sluggish from 2011 to 2012, with only a modest increase in 2013 Similarly, developing economies faced low growth rates during this period, despite their previous role as key drivers of global economic recovery before 2010.
Table 3.1 GDP growth from 2010 to 2015
Latin America and the Carribbean 2.7 2.6 1.3 2.4
(Source: World Economic Outlook, IMF)
Global commerce has experienced a significant slowdown, with growth consistently falling below 5%, a stark contrast to the average of 15% seen between 2005 and 2007 Additionally, global industrial production remains unstable, as evidenced by the Purchasing Managers' Index, which has frequently dipped below 50, indicating a contraction in production activities.
Figure 3.1 The World's Purchasing Managers' Index from 2007 to 2015
In the aftermath of the global financial crisis, developing countries faced significant budget deficits as they implemented economic stimulus packages aimed at boosting government spending, reducing taxes, and supporting their financial systems.
In 2011, developing countries had an average public debt ratio of 100% of GDP, with European nations notably affected Japan experienced the highest public debt ratio at 200% of GDP, grappling with prolonged deflation following the burst of its bubble economy This situation was exacerbated by rising welfare costs, which negatively impacted tax revenues and increased public debt Additionally, the financial crisis and the devastating tsunami earthquake further contributed to Japan's escalating public debt.
Figure 3.2 The public debt – to – GDP in some countries
Between 2011 and 2015, the global economy experienced notable improvements, particularly with a decline in inflation rates that fell below the targets set by developed nations, raising concerns about potential deflation In 2011, inflation peaked at 5.2% due to supply pressures, but subsequently, the rate consistently decreased and stabilized.
From 2011 to 2015, inflation rates in developed countries consistently stayed below 2% and showed a downward trend, while emerging and developing economies experienced varying levels of inflation decline Countries like Brazil, Indonesia, and India implemented measures to address their high inflation rates, whereas China and Thailand saw a significant reduction in their inflation levels.
3.1.2 The situation of FDI flows, 2010 - 2015
Between 2010 and 2012, there was a notable decline of 18% in registered Foreign Direct Investment (FDI), followed by a recovery in 2013, although the trend slightly dipped again afterward.
2014 Implemented FDI fluctuated from 10 to 12 billion USD, and the number of FDI projects went up over this period of time
The year 2011 posed significant challenges for Vietnam's economy, particularly in attracting foreign direct investment (FDI) due to various international factors such as the European public debt crisis, fiscal imbalances in developing nations, and natural disasters in Japan that curtailed its foreign investments Domestically, slow implementation of FDI projects stemmed from the capabilities of foreign investors and local authorities, while rising inflation and input costs, alongside unconsulted government regulations, further dampened the investment climate However, by 2014, confidence among foreign investors, particularly from Japan, the United States, and Europe, began to recover as reforms in the Investment and Enterprise Laws facilitated increased FDI flows The introduction of Public-Private Partnership protocols opened new avenues for investment in sectors like environment, healthcare, and education, previously dominated by state enterprises This resurgence in FDI in 2014 marked a significant milestone in Vietnam's economic development, laying a foundation for future growth By 2015, Vietnam witnessed a positive trend, with total FDI inflows reaching nearly 23 billion USD, reflecting a 12.5% increase.
In 2014, many investors restructured their global investment strategies, focusing on economies with abundant human resources and favorable geographical locations for exporting goods Vietnam emerged as an attractive destination, boasting a high GDP growth rate and a stable political and social environment.
Figure 3.3.FDI flows into Vietnam from 2010 to 2015
(Source: FIA – MPI) 3.1.2.2 Forms of FDI in Vietnam
In general, from 2010 to 2015, the main form of FDI in Vietnam has been
In the realm of foreign direct investment (FDI), registered FDI reached millions of USD, with implemented FDI also in the millions Notably, enterprises with 100% foreign capital constituted 60% of the total number of FDI projects, while the remainder involved joint ventures and investments under Build-Operate-Transfer (BOT) contracts.
BT (Build – Transfer Contract) and BTO (Build – Transfer – Operate Contract) are less common forms of investment compared to 100% foreign-owned enterprises, which provide investors with significant control over business strategies and financial policies, along with substantial annual profits In contrast, joint venture companies, formed through agreements between foreign and domestic investors, offer limited liability but facilitate better understanding of the local economic and legal environment While they may not provide the same level of control as wholly foreign-owned enterprises, joint ventures are encouraged by host countries to prevent excessive foreign dominance in the market and to foster technology transfer, leading to more favorable policies for this investment model.
The Business Cooperation Contract (BCC), as outlined by the 2005 Law on Investment and Circular No 108/2006/ND-CP, is a collaborative agreement between investors, requiring at least one domestic partner in Vietnam This contract delineates rights, profit-sharing, and joint risk responsibilities among parties involved, all while avoiding the establishment of a separate legal entity Primarily utilized in infrastructure projects, particularly public transportation, the BCC has gained increased interest from foreign investors in the 21st century, contrasting its lesser focus in the 20th century.
2015, the proportion of FDI in this form has gradually increased (from 0.37% in
From 2010 to 2014, investment in the forms of Build-Operate-Transfer (BOT), Build-Transfer (BT), and Build-Transfer-Operate (BTO) has shown significant positive growth With enhanced supervision and support from authorities, Public-Private Partnership (PPP) investments have notably improved compared to other investment types This progress was particularly influenced by the enactment of Decision No 71/2010/QĐ – TTg, which took effect on January 15, 2011.
Table 3.2 The proportion of FDI flows by the form of investment
Investment in the form of
Joint venture company 20.43% 21.92% 18.40% 21.98% 9.05% 12.88% Joint stock company 0.37% 0.22% 1.00% 0.10% 0.52% 0.00%
Figure 3.4.The proportion of FDI flows by the form of investment from 2010 to 2015
(Source: FIA – MPI) 3.1.2.3 Distribution of FDI by major provinces and cities
Ho Chi Minh City consistently ranks among the top five localities in Vietnam for foreign direct investment (FDI) inflow, reflecting its status as a rapidly developing region The city's appeal to investors is attributed to its favorable investment climate, effective FDI policies, abundant natural and human resources, and convenient transportation infrastructure.
EVALUATION OF FDI INFLOWS
3.2.1.1 The impact of FDI on increasing the investment fund for economic development and improve the efficiency of using domestic resources
The surge in foreign direct investment (FDI) has played a crucial role in driving economic growth and addressing current account deficits, thereby enhancing the international balance of payments This influx of FDI has enabled the effective exploration and utilization of various domestic resources, including labor, land, and natural resources.
Foreign Direct Investment (FDI) primarily originates from private enterprises seeking profitability and is directed towards projects in favorable sectors and regions In contrast, the government is tasked with managing investment strategies across various areas Consequently, FDI enables the government to actively allocate investment capital, increase budget spending on social and economic infrastructure, and promote domestic investment in challenging regions.
Table 3.5.The proportion of FDI in the total capital of investment development
The first nine months of
Capital of the State budget 152.3 220.4 106.1
Investment capital from stated-owned enterprises
3.2.1.2 The impact of FDI on creating favorable conditions for the approach to and expansion of international market, the improvement of export capacity and the increase in foreign exchange earning
The export scale of Foreign Direct Investment (FDI) sectors in Vietnam has seen rapid growth, with FDI enterprises contributing over 50% to the country's total export value since 2012 Key export items include agricultural products, seafood, textiles, electronic components, coal, and crude oil, which are now sold in numerous countries, including the United States and European nations This success enhances Vietnam's integration into global trade and strengthens its international position Additionally, FDI has expanded the domestic market and spurred significant growth in service sectors such as tourism and legal consulting Consequently, Vietnam has witnessed a steady increase in foreign tourist arrivals, with renowned attractions like Ha Long Bay and Phong Nha Ke Bang gaining recognition as World Wonders.
Table 3.6.The proportion of FDI in the total national exports from 2010 to 2015
The proportion of FDI in the total national exports
(Source: Vietnam Customs, FIA – MPI) 3.2.1.3 The impact of FDI on promoting economic growth in Vietnam
Foreign Direct Investment (FDI) has significantly increased its contribution to GDP, rising from 18.6% in 2010 to 23.3% in 2015, showcasing its growing impact on the economy Additionally, the FDI sector has led to a remarkable 796% increase in taxes and budget remittances in 2013 compared to 2000, alongside a staggering 1838% rise in net sales This influx of funds not only helps reduce unemployment but also provides substantial resources for the government and domestic enterprises to undertake vital investment projects, ultimately enhancing the standard of living for residents.
Table 3.7.The proportion of contribution of FDI in the total GDP
GDP FDI in the total
(Source: GSO) Table 3.8.The number of taxes and budget remittances from FDI enterprises
Foreign Direct Investment (FDI) inflows have led to significant achievements but also present notable drawbacks in four key areas: legal framework, administrative procedures, infrastructure, and labor quality The legal system governing investments has seen improvements, yet it remains fragmented and ambiguous, leading to varied interpretations While incentive policies are regularly reviewed, they often fail to target sectors that require investment, with high-tech investment incentives proving less attractive to investors Additionally, the lack of substantial policy breakthroughs for critical investment areas and the loose regulations surrounding incentives have allowed FDI enterprises to exploit benefits related to land, loans, and export-import procedures.
The second one is drawbacks on administrative procedures It is undeniable that it takes FDI companies a lot of time carrying out administrative procedures in Vietnam
To successfully navigate customs, export goods typically require an average of 3 days, while imports take about 4 days This delay can negatively impact businesses, especially those dealing with perishable items Consequently, foreign investors may lose interest in Vietnam due to the excessive time and costs associated with these customs processes.
Foreign Direct Investment (FDI) inflows into Vietnam face significant challenges due to inadequate infrastructure, particularly in transportation, which raises concerns among investors about potential profit reductions Additionally, the slow development of the ancillary industry fails to meet the demand for necessary production materials, forcing companies to import 70-80% of their input components This reliance on imports increases costs and decreases business efficiency, ultimately hindering the attractiveness and effective utilization of FDI in Vietnam.
Foreign Direct Investment (FDI) has generated approximately 1.7 million jobs in Vietnam, yet 1.1 million of these positions are held by untrained or minimally trained female workers Dr Edmund Malesky's 2010 study of 1,155 FDI enterprises revealed that labor quality is a significant concern for foreign investors Notably, 40% of these companies incur training costs averaging 8% of their total business expenses before employees can begin work Despite this investment, only 65% of trained employees remain with the company, indicating that Vietnam's labor costs are higher than anticipated Consequently, only 18% of FDI enterprises express satisfaction with the education quality of unskilled workers in the country.
SOLUTIONS AND RECOMMENDATIONS FOR FOREIGN
THE ORIENTATION OF THE VIETNAMESE ECONOMIC
Foreign Direct Investment (FDI) inflows are crucial for Vietnam's socio-economic development, prompting leaders to explore various strategies to enhance these investments Vietnam's industrialization and modernization efforts focus on increasing the industrial and service sectors' contributions to the national economy, while also recognizing agriculture's vital role in social stability and food security Restructuring the manufacturing and service sectors, particularly through the development of supporting industries and high-quality services, is essential for creating competitive products that can engage in global value chains The government aims to revitalize state-owned enterprises and foster a dynamic private sector, encouraging businesses to adapt to technological and market changes to improve productivity and efficiency Additionally, emphasis on strengthening the domestic market through local enterprise distribution networks is necessary for establishing a foothold in international markets and maximizing opportunities from free trade agreements Finally, the government seeks to optimize economic structure and investment efficiency, prioritizing human resource development, socio-economic projects, and environmentally sustainable manufacturing, while limiting investments in resource-extractive industries that contribute to pollution.
In Directive No 1617/CT-TTg issued on September 19, 2011, the Prime Minister outlined key goals for attracting and managing foreign direct investment (FDI) in Vietnam from 2011 to 2020 The directive emphasizes the need to enhance the quality and efficiency of FDI to align with Vietnam's socio-economic development strategy, prioritizing high-tech, environmentally friendly projects that effectively utilize resources and collaborate with domestic entities Focus areas include the supporting industry, high-quality workforce sectors, information technology, and education Projects in the non-manufacturing sector are discouraged due to potential increases in import surplus and environmental pollution Additionally, the directive calls for improved state management to ensure the quality of future foreign investments, highlighting the importance of collaboration between the Ministry of Planning and Investment and other governmental bodies to streamline investment processes The government remains committed to promoting FDI as a vital component of Vietnam's economic growth.
4.2 GOVERNMENT POLICIES ON ATTRACTING FDI INFLOW IN VIETNAM
Resolution No 103/NQ-CP, dated August 29, 2013, outlines key orientations for enhancing the efficiency of foreign direct investment (FDI) in Vietnam It emphasizes that the foreign-invested economy is a vital component of the national economy, supported by the State for sustainable development, with guaranteed rights and equal treatment to foster mutual benefits and meet international commitments FDI is recognized as a crucial economic resource that, alongside domestic resources, strengthens national industrialization, modernization, and economic restructuring goals The resolution mandates that FDI attraction aligns with government planning and centralized direction, while also allowing for rational decentralization based on local socio-economic conditions and administrative capabilities Furthermore, it stresses the importance of effective state management through rigorous inspection and supervision to uphold legal compliance Lastly, revisions to foreign investment policies and laws should focus on enhancing competitiveness and providing favorable conditions for investors.
The table outlines the legislative process for implementing laws concerning foreign investment in Vietnam, including the Land Law, Foreign Investment Law, and Law on Enterprises, alongside key milestones in the country's international integration efforts.
Table 4.1 Some typical events on enacting laws and international integration in
June, 2000 Congress passed Law on Amendments and supplemented a number of articles in Vietnam Foreign Investment Law
July, 2000 Trade Agreement between Vietnam and the United Stated was officially signed
June, 2001 Congress passed Law on Amendments and supplemented a number of articles in Land Law
In March 2003, the Central Committee of the Communist Party of Vietnam IX adopted a resolution aimed at advancing the reform of land policies and laws, aligning them with the country's industrialization and modernization efforts.
Congress passed the third Land Law and the second Law for state – owned Enterprises
June, 2004 Congress passed Bankruptcy Law
Congress passed Law on Enterprises and Investment Law
Protocol on joining in the World Trade Organization of Vietnam was signed
January, 2007 Vietnam became an official member of WTO
Government passed Decree on investment in the form of BOT contract, BTO contract, BT contract
Prime Minister singed Decision on promulgating regulations on investment in the form of public – private partnership
Prime Minister’s Directive on enhancing to implement and adjust FDI management
August, 2013 Resolution on orientations for higher efficiency of foreign direct investment attraction, use and management in the upcoming period
January, 2014 Decision on promulgating regulations on management of investing promotion activities
June, 2014 Congress passed the Bankruptcy Law for the second time
Decision on import tax exemption to give priority to manufacture, assemble medical products and equipments
Congress passed the Law on Enterprises the second time and amended Investment Law
SOLUTIONS TO INCREASE FDI INFLOWS IN VIETNAM
To improve the effectiveness of foreign direct investment (FDI) attraction, the government aims to capitalize on its advantages while addressing existing challenges To achieve this, a set of targeted policies and measures has been proposed.
To enhance foreign investment in Vietnam, it is essential to revise outdated laws and policies, ensuring equal rights for both foreign and domestic investors The government must provide clear guidelines for enterprises and localities to facilitate the investment certification process Additionally, authorities should actively monitor and enforce investment legislation, promptly addressing any issues and disseminating updates on new laws Promoting investment incentives for welfare projects, such as housing, hospitals, and schools for employees in industrial and economic zones, is crucial Furthermore, developing targeted policies to attract multinational corporations and offering tailored incentives for different sectors is necessary Lastly, training Vietnamese enterprises on international commitments will empower them to engage confidently in the global market.
To enhance foreign investment, it is crucial to decentralize state management, particularly in the approval and issuance of Investment Certificates, while ensuring effective monitoring and supervision of FDI projects Improving the qualifications of staff and civil servants is essential for timely administrative procedures that align with the investment environment Furthermore, simplifying and publicizing foreign investment processes, implementing a one-stop mechanism, and ensuring consistency across local procedures are vital Authorities must also address issues in the licensing and adjustment processes of Investment Certificates promptly and strengthen coordination in FDI flow management between central and local entities, as well as among relevant ministries and agencies.
To attract investment and foster development, it is crucial to conduct a comprehensive review and approval of infrastructure planning while enhancing its implementation, particularly in transportation and energy projects Additionally, the government must mobilize all available resources, especially external funding, to invest in infrastructure Prioritizing sectors such as water supply, drainage, and environmental cleanup, including solid waste treatment, is essential, alongside improving and optimizing the transportation system for greater efficiency.
To ensure uninterrupted power supply for manufacturing factories, it is crucial to focus on providing clear direction and resolving energy issues This includes enhancing research and proposing policies that promote the production and use of renewable energy sources like wind, tidal, and solar power Additionally, there is an urgent need to develop mechanisms that encourage economic sectors to invest in infrastructure improvements, particularly in transportation, seaports, and power generation facilities The country should also consider expanding the scope of port rental agreements and allowing more investment opportunities in port services, especially logistics, to boost the competitiveness of Vietnam's seaport system Lastly, attracting investment in telecommunications and information technology projects is essential for developing new services and enhancing network infrastructure.
To enhance the vocational training system, it is essential to elevate schools to international standards while establishing more training centers through diverse funding sources Additionally, the labor workforce must be aligned with economic restructuring efforts Leaders should enforce laws to mitigate illegal strikes and strengthen labor relations by refining labor and wage policies that reflect social development Increased inspections are necessary to ensure employers comply with labor laws, thereby improving working conditions for employees Furthermore, both employers and employees should receive education on employment laws, particularly in foreign direct investment (FDI) enterprises, to ensure the proper implementation of labor policies and wage regulations.
RECOMMENDATIONS FOR THE GOVERNMENT ON FDI INFLOW
To enhance foreign direct investment (FDI) inflows, it is essential to implement targeted strategies that benefit not only the government but also relevant ministries and agencies, ensuring a coordinated effort to effectively boost FDI flows.
4.4.1 Ensuring rational sector structure when attracting FDI flows
Many provinces and cities aim to attract Foreign Direct Investment (FDI) across various sectors and products, rather than concentrating on key industries This broad approach often leads to an oversaturation of FDI in areas like food processing and consumer-related industries, while sectors such as material production and services receive insufficient investment Consequently, this imbalance in capital allocation can hinder overall economic growth and development.
Focusing on sectors that require a significant workforce and exhibit high competitiveness is crucial for reducing unemployment and stimulating economic growth Additionally, it is essential for the National Innovation Center (NIC) to establish a self-sufficient product structure that minimizes reliance on foreign imports Attracting foreign direct investment (FDI) in high-tech and profitable goods is also vital The growing popularity of "smart" products, such as smartphones and smart televisions, highlights the demand for modern technology Therefore, investing in the development of high-tech products is an effective strategy to enhance productivity, increase market share, and maximize profits.
4.4.2 Researching and building policies controlling technology transfer for FDI projects
Vietnam lacks a formal policy governing technology transfer, unlike countries such as China and Korea As a result, despite attracting numerous renowned global car manufacturers over the past decade, the country struggles to establish its own automotive industry The high cost of domestically manufactured vehicles, driven by a localization rate of only 2-10%, exacerbates this issue Without an official technology transfer policy for foreign direct investment (FDI) projects, Vietnam risks remaining merely a large consumer market for the automotive sector, serving a population of over 90 million.
4.4.3 Reconsidering the price policy, making it more proper and competitive to that of other countries in Asia and in the world
Vietnam's pricing policy remains inadequate, resulting in high investment costs that diminish the competitiveness of local products and deter potential investors According to the Japan External Trade Organization (JETRO), telecom charges in Vietnam are significantly elevated, with international call rates approximately seven times higher than in Singapore, nearly six times higher than in Malaysia, and double that of China Additionally, container shipping costs in Vietnam are three times those in Singapore, about 2.5 times higher than in Malaysia, and nearly twice that of China Furthermore, fees associated with shipping and receiving goods at airports and seaports are exorbitant, while electricity and water prices in Vietnam exceed those in ASEAN countries and China by 50% and 71%, respectively.
To minimize input costs, it is essential to prevent the shift from government monopoly to corporate monopoly within government-owned corporations Additionally, authorities must prioritize the establishment and swift implementation of competition laws.
4.4.4 Having a better solution to keep track and supervise the real estate market
In recent years, real estate fees have been on the rise, reflecting the dynamic nature of the market since 1996 As property prices continue to escalate, so do compensation fees and leveling expenses Notably, real estate prices in Vietnamese cities surpass those in neighboring countries, with land rental costs in Ho Chi Minh City being 4-6 times higher than in China and six times higher than in Thailand This situation poses challenges for foreign direct investment (FDI) attraction, as investors face substantial rental costs that may not align with their revenue expectations.
Thus, the government needs to tightly control the real estate market, because it is an imperfect market, which can easily lead to monopoly in competing, create
In "super high demand" scenarios, prices exceed realistic levels, leading to elevated investment costs in Vietnam compared to neighboring countries To attract and enhance investment from Vietnamese expatriates, it is essential to improve the investment information system.
4.4.5 Improving the investment information system to encourage and promoting the investment funds from overseas citizen
The limited flow of information, inadequate mechanisms, and lack of collaboration between Vietnamese entrepreneurs abroad and domestic companies hinder the attraction of investment from overseas Vietnamese.
Mr Nguyen Ngoc My, president of The Vabis Corporation and a Vietnamese expatriate in Australia, highlights a significant challenge faced by overseas Vietnamese investors: the lack of reliable information on investment opportunities in Vietnam With 20 years of experience in the Vietnamese market, he notes that insufficient databases and handbooks from the government and relevant ministries hinder investors from identifying viable projects As a result, potential investors often invest considerable time and resources in research to find suitable investment opportunities.
Building a local-level database is essential, including a comprehensive handbook on annual investment policies and projects categorized for easy access Additionally, increasing the frequency of workshops, exhibitions, and conferences focused on investment in Vietnam—both domestically and internationally—will enable overseas Vietnamese to participate and discover investment opportunities These initiatives also demonstrate the Vietnamese government's commitment to its citizens living abroad.
Vietnamese investors overseas have an overview of the country’s market or encourage them to invest the inward cash flow more
4.4.6 Actively supporting, assisting and introducing law and policies for FDI companies
Newly established foreign direct investment (FDI) enterprises in Vietnam often face challenges in comprehending and adhering to the country's evolving laws and policies, which can be attributed to language and cultural differences Additionally, even FDI companies with a longer presence in Vietnam struggle to stay informed about frequent legal changes, largely due to the government's unclear and inefficient communication regarding these updates.
To enhance foreign direct investment (FDI) in Vietnam, it is crucial for ministries and authorities to actively support FDI companies in understanding and complying with investment laws and policies This can be achieved through regular training sessions, either in-person or online, held quarterly or monthly, along with timely dissemination of materials that highlight legal and policy changes Additionally, the government should leverage social media platforms, including television, the Internet, and newspapers, to effectively communicate updates on new or revised laws and policies.
This thesis analyzes the attraction of foreign direct investment (FDI) inflows in Vietnam from 2010 to 2015 by collecting and examining data from various reliable sources The findings provide a comprehensive understanding of the factors influencing FDI in the region during this period.
This thesis provides a comprehensive overview of Foreign Direct Investment (FDI), covering its definition, classification, entry modes, and impacts It also presents empirical research on FDI, highlighting both international studies and specific findings related to Vietnam.