GENERAL UNDERSTANDING OF FOREIGN DIRECT INVESTMENT
Foreign direct investment (FDI) has emerged as a highly favored investment method, defined by international economic organizations and national regulations.
Foreign direct investment (FDI) is characterized by a long-term relationship and significant control by a resident entity in a foreign enterprise, as defined by the United Nations Conference on Trade and Development (UNCTAD) The International Monetary Fund (IMF) further clarifies that FDI involves a direct investor aiming to acquire a lasting interest in an enterprise located in another economy, requiring ownership of at least 10% of the company's capital to qualify as a direct investment.
According to Vietnam's Investment Law 2015, Foreign Direct Investment (FDI) refers to foreign investors bringing capital into Vietnam, either in cash or assets, to engage in investment activities FDI encompasses both the investment of capital and active participation in managing those investments Legally, FDI is distinct from Foreign Portfolio Investment and is categorized as private sector investment, unlike Official Development Assistance (ODA) provided by governments and international organizations.
Foreign Direct Investment (FDI) is a long-term international capital movement where foreign investors allocate a portion of their capital, either in cash or assets, to directly engage in the production and management of their investments, aiming to achieve sustainable long-term benefits.
There are two partners involved in FDI:
Host country, also known as recipient country, receiving country or invested country, acquires FDI inflows, which are originated from the home country, or in other words, investing country
Foreign Direct Investment (FDI) primarily involves private investments aimed at generating profit Therefore, developing countries must strategically attract FDI by establishing robust legal frameworks and policies that align with their socio-economic development goals, while also recognizing that the primary motivation for investing countries is profit maximization.
Foreign investors are required to contribute a minimum capital ratio to the legal or charter capital, as mandated by the laws of each state, to obtain full or partial control of recipient enterprises This contribution rate not only defines the rights and obligations of each party involved but also determines the distribution of profits and risks.
Thirdly, the income that an investor earns depends on the invested company’s business results
Fourthly, FDI is often accompanied by technology transfer to recipient countries Via FDI, the host country can receive advanced technology as well as inquire management experiences
Foreign Direct Investment (FDI) typically involves higher risks and longer recovery periods compared to indirect investments, as a significant portion of the investor's capital is directly tied to the factories in the host country.
Sixthly, FDI is less influenced by political relationships between countries as well as governments because it is private investment adjusted by market relations on a global scale
Type of FDI is the form of business organization used by the investor It belongs to one of the following forms:
A fully foreign-owned company is an enterprise entirely funded by foreign investors, granting them complete ownership These companies are responsible for their own establishment, management, and operations, while also being accountable for the outcomes of their production and business activities, all within the context of the host country's political, economic, cultural, and business environment.
A Joint-Venture Company is formed when two or more parties collaborate by contributing capital and sharing the risks and profits of the business according to their investment ratios This type of enterprise operates under a joint-venture contract agreed upon by the involved parties and must be accepted by both domestic and foreign governments.
A Business Cooperation Contract (BCC) is a partnership agreement between two or more parties aimed at jointly conducting business operations This collaboration involves the mutual allocation of responsibilities and the sharing of profits or losses, all without the formation of a new legal entity.
In addition, under the Foreign Investment Law of Vietnam (promulgated in 1996 and amended in 2000), there are also some special types of FDI such as Build-Operate-
Transfer (BOT), Build – Transfer – Operate (BTO) and Build - Transfer (BT) contracts
Investment methods can be executed via wholly foreign-owned or joint-venture companies, partnering with state management agencies in the host country This approach is typically more limited than other foreign direct investment (FDI) options, primarily focusing on infrastructure development projects that offer greater investment incentives Notably, upon contract expiration, the developed infrastructure must be transferred to the host country.
IMPACTS OF FOREIGN DIRECT INVESTMENT
Improving the efficiency of using invested capital
Foreign Direct Investment (FDI) allows investing countries to leverage lower production costs in recipient nations, such as affordable labor and reduced on-site input expenses This strategy not only minimizes production costs but also decreases transportation expenses for manufacturing goods that would otherwise be imported.
Allowing foreign companies to extend the life cycle of products that have been produced and consumed in their domestic market
Foreign Direct Investment (FDI) enables companies from developed countries to transfer industrial products at the end of their life cycle to recipient nations, where these products can be repurposed and utilized as new items This practice not only extends the life of these products but also generates increased profits for investors.
Helping foreign companies to create a market providing plentiful and stable raw materials at a cheap price
Foreign Direct Investment (FDI) firms offer investors access to affordable and readily available materials within the host country, eliminating the high costs and import taxes associated with sourcing raw materials from abroad This approach ensures a stable supply, reducing the risks linked to international trade instability.
Allowing investors to expand their economic strength and influence in the international arena
FDI enterprises gain this advantage by expanding the market for product consumption, avoiding the trade protection fences of the receiving countries, reducing product cost, and increasing competitiveness with imports
Firstly, difficulty in managing capital and technology
Investors face significant risks if they fail to understand market information and local laws Neglecting to thoroughly assess the investment environment can lead to economic and political instability in the host country, ultimately resulting in substantial capital losses for investors.
Secondly, the temporary deficit in international balance of payments
In the year of outward investment, the external expenditure of the investing country increases and causes a temporary deficit in the balance of payments
Thirdly, reduction in the investing country’s employment opportunities and domestic labor
Employing cheap labor abroad raises structural unemployment in investor’s country
In addition, investing countries are at risk of being imitated, stolen technology and products
First, FDI promotes economic growth and supplements capital sources for socio- economic development
Investment plays a crucial role in driving economic growth, with capital sourced primarily from domestic savings and foreign investments, including commercial loans and foreign direct investment (FDI) Underdeveloped and developing nations often face capital shortages, hindering their production and investment capabilities To overcome these challenges, these countries must implement a "big push" strategy to enhance investment capital and mobilize resources for economic development, ultimately leading to increased incomes Notably, foreign direct investment offers significant advantages over other foreign investment forms, contributing to sustainable economic progress.
Foreign Direct Investment (FDI) offers a low-risk option for receiving countries, avoiding the political and economic burdens associated with official development assistance (ODA) or other investment forms like commercial loans and bond issuance Unlike indirect investments, FDI is less susceptible to rapid withdrawal, contributing to its stability The 1997 Asian financial crisis highlighted that nations heavily reliant on foreign indirect investment faced greater challenges, underscoring FDI's resilience compared to other investment types.
Foreign Direct Investment (FDI) serves as a vital complement to socio-economic development in Vietnam As of August 2015, the country has attracted 18,500 projects from 103 nations, amassing a total capital of $260 billion The FDI sector significantly contributes to Vietnam's socio-economic development goals, establishing itself as a key component of the national economic framework.
Second, FDI enhances the economic restructuring towards industrialization and modernization
Most of the FDI is invested in industry and services, including key sectors such as infrastructure construction, oil and gas exploitation, processing and manufacturing, consumer goods
Foreign direct investment (FDI) enhances the significance of various industries within the economy while promoting the modernization of agricultural practices and rural development This infusion of capital improves overall economic efficiency and competitiveness Additionally, FDI plays a crucial role in the economic restructuring of the host country, influencing various aspects such as sectoral shifts, regional development, and capital allocation.
Third, FDI contributes to the development of technology and improvement of infrastructures
Developing countries face challenges in science and technology, which hampers labor productivity and product quality, ultimately limiting competitiveness As most advanced technologies originate from developed nations, transferring these innovations is crucial Foreign direct investment (FDI) serves as an effective method for this transfer, enabling the import of technical equipment and the acquisition of manufacturing copyrights This approach significantly accelerates the reduction of the technological gap between countries.
Fourth, FDI contributes to job creation, income generation, poverty reduction, and human resource development
Foreign Direct Investment (FDI) projects generate employment opportunities and enhance the skill sets of workers Additionally, they strengthen the management capabilities of enterprises while providing essential skills training that aligns with contemporary production practices Employees benefit from significant improvements in their skills and knowledge through training programs focused on technology use, quality management, and marketing strategies that adhere to international standards.
Foreign Direct Investment (FDI) enterprises play a crucial role in enhancing employee skills by providing training opportunities, including overseas programs, which address labor challenges in both quantity and quality This competitive environment encourages domestic companies to innovate their technology, enhance management practices, attract talent, and ultimately improve the quality of their human resources.
Fifth, FDI promotes economic reform and international economic integration
Foreign Direct Investment (FDI) encourages recipient countries to liberalize their markets, fostering a conducive investment climate This competitive engagement and outward orientation of FDI facilitate the local economy's integration into global markets, enhance export opportunities, strengthen trade relations, and align with international standards Consequently, FDI serves as a crucial catalyst for international integration, significantly propelling the process of economic globalization.
While foreign direct investment (FDI) is often touted for its potential benefits, there are compelling arguments suggesting that it can negatively affect the host country's economy In many instances, FDI fails to deliver positive outcomes and may even exacerbate existing economic challenges.
Foreign Direct Investment (FDI) can negatively impact the host country's balance of payments This occurs when the import value of Multinational Corporations (MNCs) exceeds the total value of exports, leading to a deterioration in the host nation's payment status.
Foreign Direct Investment (FDI) can hinder the growth of domestic enterprises, particularly as large FDI projects tend to concentrate in urban areas Research indicates that this concentration limits opportunities for local firms, ultimately stifling their development (Azam, 2009) While FDI is often viewed as a catalyst for economic growth, its impact on local businesses cannot be overlooked.
INFLUENCING FACTORS TO FOREIGN DIRECT INVESTMENT
The global flow of investment capital is influenced by various factors, with economic growth leading to increased capital availability, while economic challenges result in tighter capital flows During difficult times, investors tend to seek safer investments, often opting for stable foreign currencies or gold Additionally, economies that are highly interconnected experience faster and more substantial capital inflows compared to those with weaker economic ties.
1.3.2.1 Political – legal environment of recipient country
Preferential policies in the host country significantly influence foreign investors' decisions, encompassing aspects such as FDI encouragement, tax regulations, and foreign currency management When a recipient country offers reasonable incentives, it fosters investment and creates a conducive environment for attracting FDI Conversely, unreasonable policies can act as deterrents, making investors hesitant to commit their resources.
Monetary policy plays a crucial role in influencing currency risk and stability in a recipient country, significantly impacting investor performance Fluctuations in exchange rates directly affect import and export activities, while inflation levels influence production costs, including raw materials, labor, and support services As production costs rise, investor profits decline, potentially deterring foreign investment.
Macroeconomic policies play a crucial role in attracting foreign investors, as stable and favorable policies enhance investment operations Conversely, the absence of effective anti-inflation measures can deter potential investors Additionally, trade policies that involve tariffs, quotas, and trade barriers can either stimulate or hinder foreign direct investment (FDI) in a country.
1.3.2.2 Economic development level and socio – cultural characteristics of recipient country
Cultural differences in lifestyle and customs significantly influence product demand across countries Additionally, variations in economic development and technological advancement stem from the differing levels of productive forces in each nation To ensure effectiveness, businesses must tailor their strategies to align with specific market conditions, product types, and competitive landscapes A stable socio-political environment fosters investor confidence, thereby enhancing a country's appeal to foreign capital.
1.3.2.3 Market attractiveness of recipient country
The market size significantly influences the volume of goods sold and the overall profitability of a project Understanding the market structure is crucial as it reveals the types of products and potential market segments relevant to Foreign Direct Investment (FDI) projects Additionally, recognizing the market limits aids investors in identifying the most advantageous locations for their initiatives.
Human resources play a crucial role in attracting foreign direct investment (FDI), with investors prioritizing skilled labor, discipline, and work ethic The majority of FDI flows, approximately 70%, are concentrated in the three major economic hubs: Western Europe, Japan, and North America However, certain industries or phases that rely on manual labor tend to focus on developing countries like Vietnam, which offer a plentiful and cost-effective labor force.
Technical infrastructure A country or a locality with a developed technical infrastructure will create favorable conditions for production activities
In summary, foreign direct investment (FDI) is shaped by various elements, including national policies and the adaptation of products and technology to local markets To enhance FDI attractiveness, countries must synergize these factors and establish conducive conditions that maximize their effectiveness.
EXPERIENCES OF SOME COUNTRIES AND LESSONS FOR VIETNAM
1.4.1.1 Singapore: Clear policy and specific goals
Despite the global financial crisis, Singapore continues to lead ASEAN in foreign direct investment (FDI) inflows, reaching 81 billion USD in 2014 This growth can be attributed to the country's clear and targeted policies designed to attract FDI.
Singapore strategically focuses on attracting foreign direct investment (FDI) in three key sectors: new manufacturing, construction, and export The country adapts its policies to effectively draw FDI based on the prevailing economic landscape With the fast-paced growth of the electronics industry and other advanced technologies, Singapore is channeling investments into areas such as computer production, civil engineering, oil refining technology, and mining technology.
The Singapore government has established a stable and appealing business environment for foreign investors by implementing a comprehensive, fair, and efficient legal system With a strong stance against corruption, all businesses, whether domestic or foreign, are treated equally Additionally, the government offers competitive salaries to its employees, who contribute a portion of their income to retirement savings each month.
The Singapore government has implemented attractive policies to encourage capitalist investment, allowing foreign investors to freely transfer profits back to their home countries when their businesses are profitable Additionally, investors who maintain a deposit of at least SGD 250,000 and engage in an investment project can secure citizenship for their families in Singapore.
1.4.1.2 Thailand: orientation towards production for export
Thailand is recognized as a key player in attracting foreign direct investment (FDI), significantly stimulating its economy As one of the most competitive and appealing investment markets in Asia, Thailand has consistently drawn global investors According to the United Nations Conference on Trade and Development (UNCTAD), Thailand ranked as the seventh largest recipient of FDI in East Asia in 2012.
Thailand's Board of Investment (BOI) is a dedicated agency that evaluates investment projects based on their economic impact across the country The BOI offers a range of incentives for foreign investors, including tax benefits and non-tax incentives These non-tax incentives allow foreign nationals to enter Thailand to explore investment opportunities, facilitate the entry of highly skilled workers and experts for investment promotion, permit land ownership for foreign investors, and enable the repatriation of profits in foreign currency.
In the area of investment incentives (based on average income indicators); Thailand is divided into 3 regions with different preferences
Table 1.1: The policy of investment incentives according to geographical areas of
Outside Industrial Zone Inside Industrial Zone
Import Tax Zone 1 50% deduction 50% deduction
Zone 2 50% deduction Exemption from import duty Zone 3 Exemption from import duty
Exemption from import duty Corporate income tax Zone 1 No preference Tax exemption for 3 years
Zone 2 Tax exemption for 3 years Tax exemption for 7 years Zone 3 Tax exemption for 8 years Tax exemption for 8 years
Investment procedures consist of two main steps: obtaining a foreign business license and registering the establishment of an enterprise The Board of Investment (BOI) serves as a key resource for investors, offering essential information and issuing incentive certificates However, investors must independently apply for additional licenses, such as enterprise registration certificates from the Ministry of Trade and business licenses from the Ministry of Industry.
One of Thailand ‘s worth learning points is that it has developed a very supportive industry to be ready for large projects, increasing the spread of FDI
In September 2014, Thailand adopted a new strategy to enhance foreign direct investment (FDI) by focusing on sectors such as agriculture, processing and distribution of agricultural products, mining, and light industry The country has implemented three key changes in its foreign investment policy, shifting from a past strategy that relied heavily on import substitution—which resulted in a trade deficit—to a more export-oriented production model aimed at attracting investment.
Thailand has streamlined its investment incentives, reducing them from 240 sectors to a more focused approach The primary emphasis is now on three key areas: high technology development, advanced technology training and research and development (R&D), and the growth of small and medium enterprises (SMEs).
Thailand is actively promoting foreign investment in rural areas and regions outside of Bangkok to bridge the development gap Additionally, in response to the rising cost of living and a shortage of raw materials, the Thai government is encouraging local businesses to invest overseas, particularly in ASEAN countries.
In the 1950s and 1960s, Malaysia implemented a three-year income tax reduction to attract foreign direct investment (FDI) in export industries Since 1996, the country has shifted its focus to promoting investment in high-tech sectors, including biotechnology, optoelectronics, wireless technology, and advanced materials.
The Malaysian government aims to foster the growth of information technology by establishing a national information technology center in a strategically located area This initiative is designed to create a favorable business environment and robust ecosystems that attract investors while supporting the advancement of local companies into industry leaders.
Thirty information technology centers and approximately 3,000 companies have been acknowledged for achieving business standards in the IT sector These organizations benefit from a 10-year exemption from corporate income tax and gain access to non-refundable research and development funds.
To initiate a new production project, foreign investors must obtain a production license and a business registration certificate Companies with a minimum equity capital of 2.5 million RM or those employing over 75 staff are required to apply for this license The approval criteria for investment projects hinge on the capital-to-labor (K/L) ratio, with projects having a K/L below RM 55,000 classified as labor-intensive and ineligible for tax incentives However, exceptions can be made if the project meets at least one of the following conditions: a value added of 30% or more, a manage-to-staff (MTS) ratio of 15% or higher, involvement in activities or products listed in the "List of Products and Activities Encouraged," or if the company has previously held a production license.
To boost export value, Malaysia implements a 10% VAT reduction on export products and a 5% decrease in domestic input costs for producing these goods, along with support for advertising and market research Aiming to create jobs and attract foreign direct investment (FDI), the country offers regular employment incentives for businesses that employ at least 500 workers or have a minimum disbursement of RM 25 million.
Based on the FDI attracting methods of some countries in the Asia region, Vietnam should pay attention to the following issues
OVERVIEW OF FOREIGN DIRECT INVESTMENT IN VIETNAM
2.1.1 Development investment capital and position of FDI
2.1.1.1 The scale of social investment
Investment capital is crucial for the socio-economic development of any country In recent years, Vietnam has seen a consistent increase in total social investment, with an average investment capital per GDP of approximately 32.75% from 2011 to 2015, the highest in East and Southeast Asia Notably, during the 2007 global crisis, Vietnam's investment capital per GDP ratio was only surpassed by China (44.2%), significantly exceeding that of South Korea (29.4%), Thailand (26.8%), and Indonesia (24.9%).
In the following years, this proportion tended to decrease in most countries, while in Vietnam, it was quite stable and maintained high
Between 2011 and 2015, total social investment experienced an annual growth of 10-15%, surpassing 1.3 trillion VND by 2015, significantly exceeding previous levels This rise in investment capital across society highlights the capital-driven growth pattern characteristic of this period.
Figure 2.1: Total investment of the whole society in 2011-2015
In particular, the proportion of social investment from the budget only accounts for
The total investment capital of society has been increasing rapidly, currently accounting for approximately 25% of GDP This figure highlights that 75% of the remaining GDP is mobilized from various economic sectors and investment channels This indicates that, in addition to state funding, diverse financial resources from multiple sectors play a crucial role in the restructuring of capital for investment purposes.
2.1.1.2 Structure of investment capital and position of FDI
Recent trends indicate a significant shift in investment capital across various economic sectors, with a noticeable decline in the proportion of funds allocated from the state sector Specifically, investment from the state sector has decreased from 40.3%, reflecting a broader transition towards alternative areas of investment within society.
Between 2011 and 2015, the investment from the non-state and foreign sectors remained stable, with a noticeable increase in their proportions This trend is illustrated in the investment capital structure depicted in Figure 2.2.
Figure 2.2: Investment capital for the Vietnamese economy by economic sector
State sector capital encompasses central and local budgets, economic groups, state corporations, and other state-owned enterprises (SOEs) The state budget for development investment has notably transformed technical infrastructure, fostering economic growth and enhancing the quality of life for citizens Nevertheless, the effectiveness of state budget investments remains relatively low.
Capital from the foreign investment sector
Capital from non-State sector
Capital from the State economic sector through the ICOR coefficient of the state sector is always at the highest level in the economic sectors
Figure 2.3: ICOR Vietnam coefficients through stages
Foreign investment in Vietnam encompasses ODA, commercial loans, and FDI From 2011 to 2015, Vietnam secured approximately 45 billion USD in ODA and preferential loans, which played a crucial role in funding socio-economic development priorities However, following Vietnam's classification as a middle-income country in 2012, non-refundable aid has been declining, and the World Bank is expected to cease ODA loans to the country Additionally, commercial loans remain limited in availability Despite fluctuations in state and non-state investments, foreign investment has remained stable at around 20% and is on the rise Notably, the Incremental Capital-Output Ratio (ICOR) for the FDI sector is significantly lower than that of the public sector, indicating greater investment efficiency.
Vietnam's economic growth has been significantly driven by foreign direct investment (FDI), especially as other capital sources, like state budget investments and loans from financial markets, have shown low efficiency or limited development Additionally, the trend of reducing official development assistance (ODA) loans further emphasizes the vital role of FDI in enhancing the country's economic landscape.
2.1.2 The stages of development of FDI inflows
State economy Non - State economyForeign - invested economy
The history of foreign direct investment (FDI) attraction in Vietnam began in 1977 with the issuance of the Charter of Foreign Investment This was further solidified by the establishment of Vietsovpetro in 1981, marking significant milestones in the country's efforts to create a conducive environment for foreign investors.
1987, Foreign Investment Law passed by the National Assembly marked the beginning of attracting foreign investment process
Based on the fluctuations, the process of developing FDI inflows can be divided into phases:
- Inception period 1988-1997: FDI inflows into Vietnam remained modest; within
Over the past decade, Vietnam's registered capital reached $35.6 billion, while the actual implemented capital was only $13.37 billion During this period, the country was just beginning its economic reforms and opening up to foreign investment, but the legal framework remained incomplete, and incentives were limited However, in 1991, a significant surge in foreign investment occurred, with registered capital increasing by an average of 50% annually and implemented capital rising by 45%, both exceeding the overall social investment capital growth rate of 23%.
- The decline period 1998 - 2004: total registered capital was only 23.88 billion
In the context of the Asian financial crisis, Vietnam's foreign investment reached 18.74 billion USD, predominantly sourced from Asian countries The effects of the revised Foreign Investment Law of 1996, which mandated an increase in localization rates and shifted the focus of foreign investment from import substitution to export promotion, along with changes in certain tax incentives, contributed to a slowdown in FDI inflows.
Between 2005 and 2008, Vietnam experienced a high-growth and stable economic period, with total registered capital reaching $111.918 billion and implemented capital at $26.934 billion, marking a significant increase compared to previous years This growth was fueled by a favorable investment environment and the positive impacts of international agreements, including the Vietnam-US Bilateral Trade Agreement and the Vietnam-Japan Investment Promotion and Protection Agreement, alongside Vietnam's accession as the 150th WTO member in 2007 These developments led to a surge in foreign direct investment (FDI), enhancing both the quality and quantity of inflows However, the legacy of past capital flows and technology disparities resulted in uneven competition among localities in attracting FDI, highlighting the need for improved overall efficiency in the investment landscape.
From 2009 to the present, Vietnam has seen a total registered foreign direct investment (FDI) capital of 67.1 billion USD, with 39.28 billion USD implemented, representing 58.5% of the registered amount This period has been marked by challenges such as the global economic recession and public debt crises, alongside a weakened domestic economy Factors that once made Vietnam attractive for FDI, like abundant natural resources and a cheap labor force, have diminished, leading to a shift towards prioritizing labor quality, investment environment, supporting industries, and technological advancement Despite these challenges, the gap between registered and implemented capital has narrowed, indicating a more tangible flow of FDI Regulators have progressively identified past uncertainties and adopted policies to stabilize FDI size and structure, while the government has developed a clearer perspective on FDI's role, aiming to set sustainable and appropriate directions for investment attraction in the new era.
2.1.3 The attractions and limitations of the investment environment in Vietnam
Vietnam has emerged as a leading destination for foreign direct investment (FDI) in recent years, largely due to its significant advantages These benefits include a strategic geographical location, a young and dynamic workforce, and favorable government policies that promote investment.
The social and political environment ‘s stability
Political and social stability is the first and most important and decisive requirement for attracting investment The country having stable political environment can creates a stable psychology for investors
Vietnam, a socialist-oriented nation led by the Communist Party, enjoys significant social and political stability Foreign investors recognize Vietnam for its low potential for religious or ethnic conflict, which creates a favorable environment for economic growth and attracts international investment.
Extensive and positive foreign policy
EVALUATION OF FOREIGN DIRECT INVESTMENT
Vietnam's economy has significantly evolved over the past 25 years, largely due to foreign direct investment (FDI), which has played a crucial role in its growth and development Despite the global economic recession from 2008 to 2012, Vietnam remained an appealing destination for international investors, evidenced by a sustained increase in FDI inflows and the continued commitment of multinational corporations to invest in the country.
First, FDI promotes economic growth and enhances the efficiency of resource use
Foreign Direct Investment (FDI) plays a crucial role in supplementing Vietnam's development investment capital, accounting for 30% of total social development investment from 1991 to 1995 However, this proportion decreased to 23.4% between 1996 and 2000, and further to approximately 16.7% from 2001 to 2006, largely due to the growth of the private sector following the 1999 Enterprise Law Notably, FDI inflows surged from $21 billion in 2007 to a peak of $71.3 billion by 2009 Despite a global economic downturn from 2010 to 2012, FDI in Vietnam remained resilient, with registered capital recovering in 2013 By 2014, foreign investors registered $22.3 billion across 1,530 projects, marking a 30% increase compared to 2012, with total FDI reaching $21.92 billion.
In 2015, foreign direct investment (FDI) inflows in Vietnam reached 24.1 billion USD, accounting for approximately 25% of the country's total social investment The government's policy to promote foreign investment, particularly in exports, has significantly enhanced Vietnam's export capabilities, enabling the nation to gradually integrate into and strengthen its position within the global value chain.
Foreign Direct Investment (FDI) has transformed Vietnam's export structure by decreasing the share of mining and primary products while increasing manufactured goods It has expanded export markets, particularly to the United States and the EU, establishing the U.S as Vietnam's largest export market Additionally, FDI stabilizes the domestic market and reduces the trade deficit by supplying high-quality products from local enterprises, reducing reliance on imports.
Foreign Direct Investment (FDI) enterprises play a significant role in enhancing the state budget, with their contributions rising from $1.8 billion between 1994 and 2000 to $14.2 billion from 2001 to 2010 In 2014, total tax revenue from FDI enterprises reached 3,940 billion, and by 2015, taxes from this sector comprised 37% of the corporate income tax collected nationwide, despite some instances of fraudulent tax liabilities.
Second, FDI promotes economic restructuring towards industrialization and modernization
Currently, approximately 60% of foreign investment is concentrated in the industrial and construction sectors, which exhibit a higher technology level than the national average The foreign investment sector has achieved an impressive average growth rate of 18% per year, outpacing the overall sector growth To date, this sector accounts for nearly 45% of the industrial production value, playing a crucial role in the development of key industries in the economy, including telecommunications, oil and gas exploitation and processing, electricity, and information technology.
The Foreign Direct Investment (FDI) sector has transformed the landscape of high-quality services, including hotels, offices, rental apartments, banking, insurance, auditing, legal consulting, overseas transportation, logistics, and supermarkets This evolution has not only enhanced consumer goods distribution but also stimulated domestic trade and boosted export turnover.
Third, FDI creates jobs, enhances the quality of human resources, and changes the structure of labor
The Foreign Direct Investment (FDI) sector has generated more than 2 million direct jobs and approximately 3 to 4 million indirect jobs, significantly influencing labor restructuring towards industrialization and modernization.
FDI enterprises play a crucial role in enhancing the skills of workers, technicians, and managers through on-site and off-site training, enabling local departments to partially replace foreign experts Additionally, the continuous skill updates for both suppliers and buyers contribute to workforce quality improvements, driven by positive spillover effects.
Fourth, FDI is an important channel for technology transfer, contributing to improve the technological level of the economy
The FDI sector in Vietnam leverages advanced technology through effective technology transfer contracts, significantly enhancing the country's technological capabilities across various industries Notably, the processing and manufacturing sectors have seen the most impactful technology transfers According to the Ministry of Science and Technology, industries such as oil and gas, electronics, communications, informatics, mechanics, automobiles, motorcycles, and textiles and footwear have excelled in technology transfer, with telecommunications, oil, and gas being recognized as the most effective sectors.
The spillover effects of technology transfer in the foreign direct investment (FDI) sector occur through the connections between foreign-invested and domestic enterprises, enabling local businesses to engage in technology transfer activities Generally, foreign investment indirectly influences the domestic manufacturing sector within the same industry and the service sector across different industries Additionally, it contributes to the development of other manufacturing and service industries in the country, supporting the operations of foreign-invested enterprises.
Fifth, foreign investment affects enhancing competitiveness at all three levels like national, enterprise, and product
Foreign Direct Investment (FDI) has significantly strengthened the competitive position of Vietnamese export products in key markets such as the US, EU, and Japan Analysis of various indicators, including capital, technology, management, market access, and global production network participation, reveals that the competitiveness of the FDI sector surpasses that of the domestic sector Additionally, the FDI sector enhances the competitiveness of the domestic industry and contributes to the global economy by increasing productivity, driving export growth, improving international payment balances, upgrading technology, and enhancing labor skills and restructuring.
Sixth, FDI has made an important contribution to international integration
Foreign Direct Investment (FDI) has played a crucial role in helping Vietnam break free from economic isolation and expand its international relations, facilitating the country's integration into ASEAN Additionally, FDI has been instrumental in enabling Vietnam to secure agreements with the European Union, the United States, the Pacific Partnership Agreement, and various other Free Trade Agreements (FTAs).
While foreign direct investment has yielded positive outcomes, it has also revealed several shortcomings that must be addressed in the coming years to enhance investment efficiency.
Firstly, the overall efficiency of investment capital is not high
The construction industry in Vietnam is characterized by a heavy concentration on assembly, resulting in low value addition and a scarcity of infrastructure projects Despite agriculture, forestry, and fishery being key strengths for the country, their representation in project distribution remains minimal In the service sector, the slow disbursement and progress of large-scale real estate projects contribute to wasted resources, including land and loans, while limiting the effectiveness of preferential policies Furthermore, there is a notable lack of projects targeting high-benefit sectors such as education, healthcare, and the environment.
VIEWS AND ORIENTATIONS OF THE GOVERNMENT IN ATTRACTING
The Vietnamese government recognizes foreign-invested enterprises as a crucial component of the economy, significantly contributing to innovation, industrialization, and modernization To foster long-term development and mutual benefits, the State actively encourages foreign investment, ensuring legal rights and equal treatment in accordance with Vietnam's international commitments.
Attracting foreign investment should align with centralized government planning while allowing for reasonable decentralization to local areas with suitable socio-economic conditions and managerial capabilities It is crucial to focus on the effectiveness of state management in evaluating and overseeing investment projects, ensuring strict compliance with legal requirements.
To enhance the competitiveness of the country while attracting foreign investment, it is essential to amend the legal framework governing these activities This process should focus on providing more incentives and favorable conditions for investors, all while safeguarding national interests.
The government is focusing foreign direct investment (FDI) efforts on high-value projects that utilize modern and environmentally friendly technologies This strategy particularly emphasizes sectors such as information technology and biotechnology, which are essential for advancing agriculture, research, and the development of high-quality human resources.
The State is enhancing large-scale projects featuring competitive products to strengthen its involvement in the global value chain of multinational corporations This includes fostering the growth of subsidiary industries, facilitating the transfer of outsourcing to local production, developing financial markets, and attracting significant investors, while also considering small and medium-sized projects tailored to local conditions.
The Vietnamese government actively promotes stronger connections between foreign-invested enterprises and local businesses to enhance learning and technology transfer efficiency It strategically plans Foreign Direct Investment (FDI) projects in sectors that align with the unique economic advantages of each locality, ensuring consistency with the national master plan while safeguarding national interests and restructuring the economy under a new growth model.
3.1.3 The current trend of Foreign Direct Investment
3.1.3.1 The trend of FDI in the world
The United States held the world's number 1 in attracting foreign investment in
Since the 1980s, the United States has consistently been the largest recipient of foreign direct investment (FDI), although China briefly surpassed it in 2014 According to the United Nations Conference on Trade and Development (UNCTAD), FDI in the US surged by nearly 40% in 2015, reaching $1.7 trillion, marking the highest level since the 2009 financial crisis.
Since the global financial crisis, foreign capital has increasingly flowed into high-growth economies like China, Brazil, and India However, recent trends indicate a shift back to developed and stable markets, with over 55% of total global investment capital in 2015 directed towards these regions Experts predicted that in 2017, foreign direct investment (FDI) inflows might decline slightly due to the ongoing weak recovery of the global economy and instability in financial market demand, particularly affecting the growth rates of major emerging economies such as China, Brazil, Russia, Turkey, and South Korea.
Foreign Direct Investment (FDI) is increasingly returning to industrialized countries due to the diminishing labor advantages in developing nations and the robust infrastructure, skilled workforce, and consumer markets in developed regions Rising labor costs in "world factories" like China and India, where wages have surged by 10-20%, contrast with the relatively stable wages in the United States and Europe This shift suggests that relocating production back to the U.S is a strategic long-term decision Despite rising manufacturing costs in countries like China, Brazil, and India over the past decade, U.S production costs have remained stable, attributed to consistent wages, lower energy expenses, and advancements in industry that enhance productivity Currently, the cost of production in the U.S is nearly equivalent to that in China, at $0.96 for every dollar spent.
3.1.3.2 The trend of FDI in Vietnam
An analysis of foreign direct investment (FDI) data reveals that inflows into Vietnam rose steadily until the global economic crisis of 2008, after which they experienced a decline However, by 2015, Vietnam's ability to attract foreign investment improved significantly, driven by favorable government policies, including Resolution 103/NQ-CP aimed at enhancing FDI management and utilization, along with the establishment of free trade agreements Notably, in the first four months of 2016, FDI inflows into Vietnam surged to an impressive $6.88 billion.
Vietnam's potential to attract foreign direct investment (FDI) is influenced by various external factors, including the volatility of neighboring Chinese markets, which may redirect FDI flows to other countries Currently, Vietnam captures only 1% of global FDI, indicating significant room for growth Additionally, Vietnam's recent integration into the ASEAN Economic Community has expanded its economic landscape, enhancing the investment climate through strategic free trade agreements with the EU, USA, and Korea.
Vietnam faces intense competition from other Asian countries with similar conditions in attracting foreign direct investment (FDI) The country's position is at risk due to the inadequacies of its subsidiary industries in meeting investor demands, restrictive commercial policies, and the complexity of investment procedures.
Vietnam is poised for a significant increase in foreign direct investment (FDI) inflows in the near future, driven by its advantages However, to effectively harness this potential, the country must enhance its business environment, improve human resources, and streamline policies and procedures.
SOLUTIONS TO ENHANCE ATTRACTION AND EFFICIENT USE OF
The effectiveness of investment in Vietnam hinges on the capabilities of its businesses and the specific projects they undertake The limitations faced by Vietnamese enterprises diminish investment efficiency and restrict Vietnam's attractiveness as an investment destination To attract reliable partners, Vietnamese companies must present themselves as trustworthy collaborators This involves equipping their teams with expertise in international business cooperation and fostering confidence and competence in working alongside foreign investors.
Vietnamese enterprises must develop and explore cooperative strategies while formulating investment proposals to attract partners This proactive approach not only builds trust with potential collaborators but also accelerates investor cooperation and capital contributions.
Integrating into the ASEAN Free Trade Area (AFTA) offers favorable business and investment conditions, making it crucial for enterprises to focus not only on attracting capital but also on establishing investment exploration and cooperation projects with ASEAN businesses in Vietnam Historically, ASEAN enterprises have contributed the largest projects and capital investments in the country Although foreign direct investment (FDI) from this sector has declined in recent years due to the financial crisis, it remains a vital component of Vietnam's FDI landscape Collaborating with regional businesses enhances Vietnamese enterprises' chances of success, leveraging macro-level integration advantages, cultural and social proximity, and lower trade promotion costs, such as transportation and communication expenses compared to more distant markets.
Vietnamese enterprises can enhance their competitiveness by forming joint ventures with major ASEAN conglomerates, facilitating discussions on the strategic allocation of production investment sites within the regional specialization plan This collaboration allows for shared benefits from foreign direct investment (FDI) For example, each ASEAN nation can concentrate on producing specific automotive components, leveraging their unique advantages to develop a cohesive regional automotive sector.
If the micro solution group targets to the enterprise, the macro solution group is related to the views and policy directions from the State, ministries, and localities
3.2.2.1 Group of legal and policy solutions
The ongoing review of investment and business laws in Vietnam aims to amend inconsistencies and supplement missing elements while aligning with the country's commitments to Free Trade Agreements (FTAs) A key priority is to eliminate barriers faced by foreign investors and manufacturers, focusing on streamlining regulations and administrative procedures related to business start-up, market entry, taxation, social insurance, and access to essential resources such as land, electricity, and water.
The revision of ambiguous regulations concerning investment and business procedures is essential Ministries and sectors must proactively amend and enhance regulations within their jurisdiction, including sector codes, lawful legalization requests, reporting systems, post-inspection mechanisms, and investment supervision Additionally, they should recommend necessary amendments to the Government and the Prime Minister to improve regulatory clarity and efficiency.
Effective monitoring and supervision of investment and enterprise laws are essential for promptly identifying and addressing emerging issues It is crucial to urgently issue guidance documents on newly approved legislation by the National Assembly regarding investment and business operations.
Attracting investment from the world's top 500 transnational corporations (TNCs) is essential due to their technological, research, and managerial advantages The Prime Minister's proposal for implementing Decree 103/NQ-CP, dated September 28, 2013, aims to enhance the effectiveness of foreign direct investment attraction, utilization, and management in the future.
To encourage investment in welfare facilities such as housing, hospitals, schools, and sports complexes, it is essential to establish incentives specifically targeted at laborers in industrial parks, export processing zones, high-tech zones, and economic zones.
To enhance disbursement for backward technology projects, it is essential to establish a robust licensing framework while carefully assessing the environmental impacts Projects that require extensive land use should undergo thorough verification, and land allocation should be conditional on project progress to prevent large-scale projects from hoarding land without implementation Additionally, it is crucial to evaluate the investment-to-land area ratio, particularly for industrial land, to ensure efficient land utilization.
Tax policy and financial incentives:
Tax policy and financial incentives play a crucial role in enhancing the appeal of foreign direct investment (FDI) To improve the FDI environment, it is essential to effectively implement value-added tax and corporate income tax laws These two tax regulations are fundamental in the initial phase of stabilizing tax collection for foreign investment projects.
To enhance foreign investment in domestic sectors like electricity, water, and transportation, it is crucial to strengthen financial incentives through a well-structured pricing system Improving the efficiency of these incentives involves promptly addressing tax issues, facilitating smooth profit repatriation, and simplifying capital contribution processes Additionally, it is important to avoid imposing cash contribution requirements on foreign investors, especially during challenging times influenced by financial crises.
Projects with investment licenses must adhere to new regulations regarding taxation, including updated income tax rates, revised land tax rates, and provisions for sales tax exemptions and reductions for businesses facing actual capital losses.
To support foreign-invested enterprises facing challenges, it is essential to utilize foreign currency effectively Attracting foreign capital should not be limited by strict regulations on contributed capital; instead, leveraging all available capital for development is crucial Additionally, considering the equitization of foreign-invested enterprises can enhance their capital for production and business growth.
Accelerating the development and approval of essential regulations is crucial for facilitating investor engagement and project development It is imperative to regularly review and update backward planning to create an investor-friendly environment Additionally, the new provisions of the Investment Law must be uniformly implemented in planning efforts, ensuring that sectoral and domain plans, along with products, align with international commitments.