INTRODUCTION
Rationale of the study
Globalization and regionalization are key trends shaping modern international economic relations, significantly impacting Vietnam since its accession to the World Trade Organization (WTO) in 2008, the establishment of the ASEAN Economic Community (AEC) in 2015, and the signing of the Trans-Pacific Partnership (TPP) These developments have unlocked substantial growth potential and opportunities for the economy The rapid advancement of science and technology, coupled with the increasing influence of multinational corporations, has facilitated specialization and international cooperation, leading to a more integrated global production landscape Foreign direct investment (FDI) has become essential for socio-economic development, particularly in developing nations like Vietnam, where it serves as a crucial source of capital for investment, aids in economic restructuring, enhances management and technological capabilities, and fosters international economic integration However, recent challenges in the mobilization and distribution of FDI in Vietnam have limited its broader economic impact, prompting a closer examination of its role and effectiveness in the country.
The article examines the current state of Foreign Direct Investment (FDI) attraction in Vietnam, focusing on the period from 2011 to 2015 It assesses the role and impact of FDI inflows during this timeframe, highlighting their significance for the country's economic development Additionally, the article proposes several strategic measures aimed at improving Vietnam's capacity to attract and effectively utilize FDI in the coming years.
Research objectives
This graduation thesis provides a theoretical framework on foreign direct investment (FDI) and evaluates Vietnam's strategies for attracting and utilizing FDI from 2011 to 2015.
Finally, some solutions are suggested to enhance the efficiency of foreign direct investment attraction and management of Vietnam in the upcoming years.
Scope of the study
- Subject of the study: Foreign Direct Investment
- Scope of the study: The mobilization and management of Foreign Direct Investment in Vietnam in the period of 2011 – 2015.
Research methodology
The thesis utilizes trustworthy secondary data, including statistics, reports, working papers, and research from reputable institutions and economic experts, to support its conclusions The study employs qualitative data analysis methods, encompassing the entire process from data collection to interpretation.
Thesis structure
The thesis is organized into four chapters: Chapter One outlines the purpose, research objectives, methodology, and structure; Chapter Two provides a literature review that connects theories to Foreign Direct Investment (FDI), discussing its definition, forms, impacts, and related factors; Chapter Three presents a comprehensive overview of FDI flows in Vietnam, highlighting recent trends in inflow, outflow, and utilization; finally, Chapter Four proposes policies and measures to leverage advantages, address shortcomings, and improve the efficiency of FDI in Vietnam.
THEORETICAL BACKGROUND OF FOREIGN DIRECT
Definition of Foreign Direct Investment (FDI)
In recent decades, foreign direct investment (FDI) has significantly contributed to the development of numerous countries by offering long-term financial resources This influx of investment not only facilitates access to international markets but also enhances the competitiveness of domestic manufacturing industries.
Currently, there are many different definition of FDI According to the
Organization for Economic Co-operation and Development (OECD, 2008),
Foreign direct investment (FDI) signifies a lasting interest by a resident enterprise in another economy, establishing a long-term relationship with a direct investment enterprise This relationship entails significant influence over the management of the enterprise FDI encompasses the initial equity transaction, ongoing financial transactions, and positions between the direct investor and the direct investment enterprise, including qualifying transactions between both incorporated and unincorporated entities.
Therefore, FDI is foreign capital investment associated with the management of production and business activities for projects and enterprises that receive capital with long-term duration
The United Nations Conference on Trade and Development (UNCTAD) defines Foreign Direct Investment (FDI) as a long-term investment that indicates a lasting interest and control by a resident entity in one economy over an enterprise in another economy FDI comprises three key components: equity capital, reinvested earnings, and intra-company loans.
- Equity capital is the foreign direct investor’s purchase of shares of an enterprise in a country other than its own
Reinvested earnings refer to the portion of profits that a direct investor earns from affiliates but are not distributed as dividends or sent back to the investor Instead, these retained earnings are reinvested by the affiliates, reflecting the investor's share based on their equity participation.
- Intra-company loans or intra-company debt transactions refer to short- or long- term borrowing and lending of funds between direct investors (parent enterprises) and affiliate enterprises
Foreign Direct Investment (FDI), as defined by the International Monetary Fund (IMF, 1993), involves investments aimed at acquiring long-term interests in businesses outside the investor's home economy This type of investment is characterized by the investor—whether an individual, corporation, or consortium—seeking to exert control, management, or significant influence over the foreign enterprise.
According to Article 2 of the Law on Foreign Investment of Vietnam (1996, amended in 2000): "Foreign direct investment means the bringing of capital into
Foreign Direct Investment (FDI) in Vietnam involves foreign investors utilizing money or assets to engage in investment activities as outlined by local laws Essentially, FDI occurs when an investor from one country acquires and manages an asset in another country Typically, both the investor and the managed asset are business entities, with the investor known as the "parent firm" and the managed asset referred to as the "affiliate" or "subsidiary."
Characteristics of Foreign Direct Investment
Investors prioritize profit, making it essential for host countries, particularly developing ones, to create a robust legal framework and effective policies that guide foreign direct investment (FDI) This approach ensures that FDI contributes to both economic and social development goals, rather than allowing investors to focus solely on their profitability.
Foreign companies are required to meet a minimum ratio of chartered or legal capital as mandated by the laws of each country to gain control or participate in managing foreign direct investment (FDI) enterprises This capital contribution ratio determines the rights and responsibilities of each party involved, with profits and risks being shared in accordance with their respective contributions.
Investors are responsible for making critical decisions regarding investments, production, and business operations, bearing the associated risks of profit and loss Foreign companies have the freedom to select their investment sectors, methods, markets, scales, and technologies, enabling them to optimize profitability This approach is not only practical but also economically efficient, as it operates without political interference or the financial burdens often faced by the host country's economy.
- FDI is often accompanied by technology transfers for countries receiving the investment Through FDI, host countries can have access to advanced technology and management experience.
Motivation for Foreign Direct Investment
Direct investors are primarily motivated by the desire to influence the management of their direct investment enterprises, often leading to control over these entities Each enterprise has unique motivations based on its strategies and goals within foreign markets Three key objectives that enterprises typically seek to achieve include maximizing returns, enhancing market presence, and fostering strategic partnerships.
Market-seeking investment is driven by investors' desire to tap into the host market and meet growing demand Companies engage with specific countries to supply goods or services, enhancing their competitiveness and achieving production economies of scale (Narula & Dunning, 1994) This type of investment relies on a sizable population and a market capable of sustaining the anticipated demand Consequently, market-seeking investment is advantageous when there are significant export barriers from the home country or when local markets present opportunities for foreign investors.
Foreign investment aimed at reducing manufacturing costs leverages affordable labor, benefits, and resources available in home countries, enhancing product competitiveness and increasing profit margins.
Resource-seeking investment aims to leverage the comparative advantages of different countries by enabling firms to allocate production resources where costs are lower compared to their productivity levels This type of investment prioritizes access to abundant raw materials, affordable labor (both skilled and unskilled), technological assets, and robust physical infrastructure.
Forms of Investment
The basic forms of Foreign Direct Investment are:
A wholly foreign-owned enterprise is a business in the host country that is entirely funded by foreign investors, who manage operations and bear responsibility for the company's performance This investment model is increasingly favored by foreign investors, as it allows them to maintain full control over management while reaping profits after fulfilling their financial obligations to the host country.
A joint venture enterprise is formed in the host country through a contract or agreement between multiple parties, which may include foreign and local governments or businesses This collaborative approach enables foreign investors to establish a presence in new markets, making joint ventures the most prevalent form of foreign direct investment (FDI) globally By leveraging partnerships, these enterprises facilitate market entry and foster cooperation between local and foreign entities.
Business cooperation based on a Business Cooperation Contract (BCC) involves collaboration between two or more parties without the need to establish a new legal entity This agreement outlines key elements such as the purpose, nature, and duration of the partnership, as well as the rights, obligations, and responsibilities of each party Common forms of cooperation include profit-sharing, production collaboration, and product-sharing arrangements.
In addition, under the Law on Foreign Investment of Vietnam (1996, amended in 2000), there are several other special types of FDI:
A Build-Operate-Transfer (BOT) contract involves a foreign investor who undertakes the construction and management of an infrastructure project for a specified period Once this period concludes, the investor is required to transfer ownership of the facility to the State of Vietnam without any compensation.
A Build-Transfer-Operate (BTO) contract involves a foreign investor constructing an infrastructure facility, which is then transferred to the host country upon completion The host government permits the investor to operate the facility commercially for a specified period, allowing them to recover their investment and earn reasonable profits.
A Build-Transfer (BT) contract allows a foreign investor to construct an infrastructure facility, which is then transferred to the host country upon completion The host government is committed to fostering a conducive environment for the investor to undertake additional projects, enabling them to recoup their investment and achieve reasonable profits.
Parent enterprises hold significant capital in affiliate enterprises, enabling them to exert control over management and administration This influence is often exercised through the ability to appoint members to the Board of Directors, ensuring alignment with their strategic objectives.
The impacts of Foreign Direct Investment to the economy
- Effectively exploiting the advantages of host countries such as natural resources, labor and markets in order to improve the efficiency of capital usage
- Searching and expanding market, especially for multi-national and transnational companies; optimizing revenue and profits, as well as minimizing expense
- Reducing business costs: during investment process, foreign firms actively provide factories or services near material areas and market
- Avoiding increasingly sophisticated protectionism and other trade barriers in host countries by setting up business within the host countries that implement the trade protectionism policy
- Allowing investors to directly taking part in the control and operation of business activities by making a choice of investment that most benefits them
- Participating in the process of monitoring and contributing to the enforcement of economic openness policies based on bilateral and multilateral trade commitments of host countries
This investment opportunity is unique in that it does not impose a maximum contribution ratio for foreign investors As the contribution ratio increases, host countries provide more favorable policies, enabling them to optimize capital utilization from foreign firms.
Recipient countries are anticipated to embrace advanced technologies and management practices from their home countries, demonstrating a strong willingness to learn and implement these innovations effectively.
Foreign Direct Investment (FDI) from home countries fosters a competitive landscape between domestic enterprises and foreign firms, driving innovation and improvement within businesses This dynamic is essential for promoting economic growth and achieving high development rates.
Foreign Direct Investment (FDI) plays a crucial role in enhancing government budgets, boosting export turnover, and increasing Gross Domestic Product (GDP) Additionally, FDI fosters social development by creating jobs and improving the living standards of workers.
Home countries may encounter risks in recipient nations due to changes in legislation or unstable political climates For instance, the threat of terrorism instills fear in investors regarding Muslim-majority countries like Pakistan and Iraq, while the increasing frequency of natural disasters poses significant concerns for investment in the Philippines.
The rise in outward foreign investment correlates with an increase in unemployment rates within host countries, as greater investment leads to decreased domestic labor demand This trend is driven by the shift towards more modern and specialized production methods, which ultimately reduces the need for labor across various industries.
Insufficient scientific planning in attracting foreign direct investment (FDI) can lead to ineffective investments, overexploitation of natural resources, and significant environmental pollution Additionally, poor management practices may result in future debt burdens and contribute to currency crises due to excessive capital withdrawals This scenario could also lead to domestic companies being merged or acquired by foreign firms, which possess substantial economic and business expertise.
Indicators to measure the ability to attract and use FDI
- Total registered FDI projects over the years: showing the ability to attract FDI in
Vietnam and the interest of foreign investors in Vietnam's economy.
- Total implemented FDI projects over the years: showing the level of actual FDI disbursement over the years.
- Total implemented FDI projects/Total registered FDI projects over the years: the indicator showing the pace of FDI disbursement, an important measure of the effectiveness of FDI
- The number and scale of FDI projects: the indicator to assess the use of FDI in
- FDI capital structure: to evaluate the contribution of FDI to Vietnam’s economy and society Currently, the investment structure is evaluated on four aspects:
+ FDI capital structure by sectors and industries
+ FDI capital structure by forms of investment
+ FDI capital structure by province or economic regions
+ FDI capital structure by main counterparts
The incremental capital output ratio (ICOR) is a key metric that evaluates the additional investment capital required for an entity to produce one more unit of output A high ICOR suggests inefficiency in production, making it an undesirable outcome for entities This measure is primarily utilized to gauge a country's production efficiency, calculated by dividing the annual investment by the annual increase in GDP.
The same amount of capital can yield varying output levels based on its effective utilization Inefficient workforce management or insufficient raw material supply can diminish the performance of capital units Consequently, output levels from capital investments differ across countries The connection between investment and economic growth is relevant not only at the macroeconomic level but also within specific industries and economic entities.
- The level of contribution from FDI sector to the economic growth
Foreign Direct Investment (FDI) serves as a vital solution for developing countries facing foreign currency capital shortages, complementing domestic investment Relying solely on internal capital is insufficient; thus, foreign investment plays a crucial role in addressing capital deficits without incurring debt Unlike loans, which often have fixed and potentially short repayment terms, FDI offers greater flexibility in duration As a significant source of additional funding, FDI is essential for social investment, helping to fulfill the growing demands for development investment.
- The level of contribution from FDI sector to the export turnover
Investing in a country involves more than just financial capital; it includes the provision of machinery, equipment, raw materials, and essential knowledge in science and management Foreign Direct Investment (FDI) brings advanced technology and expertise that can stimulate the growth of high-tech industries, facilitating the economic transition of host nations This infusion of resources enhances labor productivity and production quality, enabling products to meet stringent export standards and thereby expanding market opportunities.
- The level of contribution from FDI sector to job creation
Foreign Direct Investment (FDI) enables countries to engage more actively in the global division of labor Enterprises with foreign investment drive domestic companies to innovate in technology and management, improving the quality and competitiveness of their products and services in both local and international markets Additionally, FDI contributes to job creation and provides stable income for segments of the population.
- The level of contribution from FDI sector to the government budget
Government budget revenue encompasses the total revenue receipts, including tax and other revenues, necessary to meet national spending requirements without the obligation to repay contributors In developing countries, the economic growth driven by foreign direct investment (FDI) enterprises plays a significant role in enhancing government budget revenue.
Factors affecting Foreign Direct Investment
A stable macroeconomic environment—encompassing economic, political, and social stability—is crucial for the success of foreign investment enterprises When host countries maintain a stable macroeconomic climate, it fosters and enhances the operations of foreign businesses In contrast, an unstable macroeconomic environment can negatively impact business performance, reduce profitability, and increase risks Therefore, the macroeconomic environment plays a pivotal role in either facilitating or obstructing investor activities To boost the effectiveness of foreign direct investment (FDI), it is essential for host countries to prioritize the stabilization of their macroeconomic environment.
Infrastructure plays a crucial role in facilitating foreign investment and driving economic development in host countries Adequate infrastructure supports socio-economic growth, enabling foreign firms to lower indirect production costs and effectively execute their investment plans Evidence shows that foreign direct investment (FDI) achieves greater efficiency in regions with well-developed infrastructure that meets the operational needs of investors Additionally, the educational level of the host country's population significantly influences the success of these investments.
The level of education significantly influences the quality of human resources and the advancement of science and technology in a country Nations with a high educational standard attract foreign investors who are more likely to introduce modern technology, which enhances added value Conversely, countries with low education and literacy levels often see foreign investors exploiting cheap labor for labor-intensive industries, resulting in lower added value To boost economic development and investment efficiency, it is crucial to improve education and literacy levels.
2.7.1.4 The legal system in host countries
The legal framework in host countries encompasses various laws related to investment activities, including investment, enterprise, and environmental protection laws, along with specific regulations for foreign investments This framework is essential for ensuring the smooth operation of foreign firms and fostering a favorable investment climate To enhance effectiveness, legal documents should be harmonized to minimize overlaps and align with international standards Additionally, the judicial system must be systematically organized and decentralized to streamline licensing processes, enforce strict measures against tax evasion and transfer pricing, thereby reducing government budget losses and promoting economic efficiency.
Effective planning for Foreign Direct Investment (FDI) mobilization and allocation is essential to prevent excessive investment and structural imbalances in host countries' industries By establishing clear guidelines on investment distribution across sectors and geographic regions, such planning fosters balanced development, leverages economic strengths, and enhances capital efficiency Consequently, strategic policies for attracting and utilizing FDI are crucial for optimizing investment effectiveness.
2.7.2.1 Financial potential of foreign investors
The financial capacity of foreign investors is crucial for their ability to engage in investment activities Even with favorable conditions in host countries, foreign firms require adequate financial resources to proceed with investments Therefore, it is essential for host countries to assess the financial strength of foreign investors prior to granting investment licenses This evaluation ensures that projects are executed as planned, minimizing the risk of investors obtaining permits without sufficient capital, which could lead to project abandonment and potential losses for the host nation.
2.7.2.2 Business capacity of foreign investors
Profit is the primary objective for foreign investors, but achieving this profit largely depends on the investors' business capabilities Successful enterprises generate profits, while those facing challenges may incur losses Host countries assessing the business capacity of foreign firms can identify promising investors, leading to more efficient capital utilization Thus, the attributes of foreign investors significantly impact enterprise operations, making accurate evaluations of their capabilities crucial for enhancing the effective use of corporate funds.
CURRENT SITUATION OF FOREIGN DIRECT
Current situation of Foreign Direct Investment flows in Vietnam
3.1.1 Current situation of Foreign Direct Investment inflows
3.1.1.1 The amount of capital and scale of FDI projects
The fluctuation in registered FDI and implemented FDI
Figure 3.1: FDI inflows into Vietnam during period of 2011 – 2015
(Source: General Statistics Office of Vietnam)
Overall, from 2011 to 2015, the registered FDI and the newly licensed projects were in the upward trend, meanwhile the implemented FDI remained stable
The year 2011 marked the beginning of the 2011-2015 Socio-Economic Development Plan and the 2011-2020 Socio-Economic Development Strategy, presenting numerous challenges for Vietnam's economy A key internal factor contributing to the decline in Foreign Direct Investment (FDI) was the significant delays in the execution of FDI projects, attributed to both investor capacity and the implementation capabilities of Vietnam.
Total registered capital of both newly and additionally financed projects Estimated realized FDI capital
Vietnam's registered foreign direct investment (FDI) reached only $14.7 billion, reflecting a 21% decline from 2010, despite a 12.6% increase in newly licensed projects This highlights ongoing challenges in land acquisition and suggests that the target of attracting $20-21 billion in FDI remains unmet.
In 2011, the Ministry of Planning and Investment set ambitious goals for foreign direct investment (FDI), but the actual FDI reached only 11 billion USD, representing 25.9% of the total social realized investment capital Amidst stringent fiscal and monetary policies and a decline in state sector capital, the implemented FDI capital emerged as a crucial supplementary source for development investment.
In 2012, Vietnam experienced a decline in foreign investor inflow due to challenging consumption conditions and stagnant production, with FDI inflow reaching 16.3 billion USD, marking a 10.9% increase despite the ongoing global financial crisis Although implemented FDI capital slightly decreased to 10.46 billion USD, representing 95.1% of the previous year's figures, the target of 10-11 billion USD was still achieved, surpassing the average FDI of 10.31 billion USD from 2007 to 2011 This performance amidst global economic difficulties signaled a positive outlook for Vietnam's economy.
After 4 years without breakthrough, FDI inflows in 2013 increased considerably The registered FDI stood at 21.6 billion USD, increasing by 32.5% compared to that of 2012 The reason for this increase was preferential policies to attract FDI capital, especially tax incentives, and land rent fees reduction by the Ministry of Planning and Investment Another reason was the expectation of investors on Vietnam's participation in the Tran-Pacific Partnership The implemented FDI was 11.5 billion USD, accounting for 9.9% of total social realized investment capital
In 2014, the registered capital for newly registered and additionally financed projects in Vietnam fell to 20.2 billion USD, marking a 6.5% decrease from 2013 Experts suggest that this decline is not alarming, as it reflects improved oversight in project feasibility during the approval process Additionally, the sluggish recovery of the global economy contributed to the reduction in foreign direct investment (FDI) capital flowing into Vietnam.
The increase in implemented Foreign Direct Investment (FDI) reflects the Ministry of Planning and Investment's emphasis on the quality and timely disbursement of investment projects, rather than merely focusing on the registered capital amount The amended investment and enterprise laws have established a solid foundation to boost the attraction of foreign capital flows.
In 2015, registered Foreign Direct Investment (FDI) reached 22.76 billion USD, marking a 12.5% increase from 2014 The completion of the Trans-Pacific Partnership and participation in the ASEAN Economic Community heightened foreign investor expectations Investors increasingly favored countries with abundant human resources and advantageous geographical locations, as well as those exhibiting high GDP growth and stable socio-political environments, such as our country Actual FDI rose by 17.4% to 14.5 billion USD, the highest level recorded between 2011 and 2015, representing 19.9% of the total social realized investment capital.
The number and scale of FDI projects
The number of newly licensed projects in Vietnam has seen a significant increase, rising by 84.5% from 2011 to 2015, from 1,091 to 2,013 projects This surge highlights Vietnam's growing attractiveness as a destination for foreign direct investment (FDI).
In 2011, the majority of foreign direct investment (FDI) projects in Vietnam were small to medium-sized, with the average project scale decreasing to 13.47 million USD Notable large projects licensed during that year included several significant investments.
+ Jaks Hai Duong Power Company Limited Project (BOT Hai Duong Thermal Power Plant), total investment of 2.26 billion USD
+ Vietnam First Solar manufacturing Co., Ltd Project in processing industry invested by Singapore in Ho Chi Minh City, total investment of more than 1 billion USD
+ Mobile Information & Telecommunication S-Telecom Co., Ltd Project in construction, network operators and mobile communication service providers sector; total investment of 452.38 million USD
In 2012, foreign investment predominantly focused on small and medium-sized projects, with only one real estate venture exceeding 1 billion USD in total investment Additionally, there were 55 medium-sized projects licensed that year, highlighting a trend toward smaller-scale investments in the market.
+ Tokyu Binh Duong Garden City Project by Japanese investors located at Binh Duong with total registered investment capital of 1.2 billion USD
Wintek Vietnam Co Ltd is investing an additional 870 million USD in its project located in Bac Giang, while Samsung Electronics Vietnam Co Ltd is allocating 830 million USD for its project in the Bac Ninh Industrial Zones.
+ Bridgestone Tire Sales Vietnam LLC in Hai Phong, with total investment of 574.8 million USD
By the end of 2013, Vietnam successfully attracted seven foreign direct investment (FDI) projects, each exceeding 1 billion USD This increase not only reflects a rise in investment volume but also signifies an improvement in the quality of FDI, highlighted by several large-scale projects that were not present in 2012 Notable projects licensed in 2013 further underscore this positive trend in Vietnam's investment landscape.
+ Nghi Son Refinery and Petrochemical LLC Project in Nghi Son (Thanh Hoa) by Japanese investors, investment capital additionally financed of 2.8 billion USD
+ Samsung Electronics Vietnam – Thai Nguyen Co., Ltd project Samsung Electronics by Korean investors with total investment capital of 2 billion USD for manufacturing and assembling electronic products
+ LG Electronics Vietnam – Hai Phong Co., Ltd project by Korean investors with total investment capital of 1.5 billion USD for manufacturing and assembling electric and electronic products
Samsung Electro-mechanics Vietnam Co., Ltd, backed by Korean investors, has invested a total of 1.23 billion USD to manufacture and assemble High-Density Interconnect Printed Circuit Boards in Thai Nguyen.
In 2014, the number of large-scale projects accounted for a small proportion
Vietnam has attracted 4 over-1 billion USD projects, 22 projects of over 100 million
In 2014, 87% of newly licensed projects had capital investments of under 10 million USD, with the average foreign direct investment (FDI) project amounting to approximately 9.8 million USD, significantly lower than the overall average of 14 million USD Notably, several large projects were licensed during this year.
Assessment of current situation of Foreign Direct Investment flows in
- FDI mobilization and disburse situation has significantly improved
Despite global economic challenges, foreign direct investment (FDI) in Vietnam has shown satisfactory disbursement results, with investors continuing to inject capital and expand operations From 2011 to 2014, FDI implementation remained stable, indicating a focus on quality and efficient disbursement processes within the sector This trend is a positive signal for the country, which must strive to meet investor expectations to encourage further capital disbursement in the future.
The structure of Foreign Direct Investment (FDI) has become more balanced, particularly with significant growth in the North Central and Central coastal regions While the majority of FDI continues to focus on the manufacturing and processing sectors, reflecting ongoing industrialization and modernization efforts, there has been notable progress in attracting investment in service industries such as real estate, electricity and gas production and distribution, as well as accommodation and restaurant services.
- FDI capital has supplemented important source for development investment, contributing to the exploitation and improvement of the efficiency in using domestic resources to meet the needs of economic growth
Foreign Direct Investment (FDI) has steadily increased over the years, playing a crucial role in driving economic growth and helping to mitigate current account deficits while enhancing the international payment balance By harnessing domestic resources such as labor, land, and natural assets, FDI effectively contributes to the overall development of the economy.
Foreign Direct Investment (FDI) primarily stems from private enterprises seeking profitability, targeting industries and regions with favorable conditions To maximize FDI benefits, the government should develop a balanced investment strategy across various sectors and regions By leveraging FDI, the government can enhance its budget allocation for investment structures and socio-economic infrastructure, while also promoting domestic investment in underdeveloped areas, fostering cohesive growth nationwide.
Foreign investment was an important additional source in total realized social investment capital of Vietnam from 2011 to 2015 In average, FDI accounted for
In recent years, foreign direct investment (FDI) has played a crucial role in social investment, maintaining a stable ratio of FDI capital to total realized social investment, which was 23.65% This ratio showed slight fluctuations from 2011 to 2015, with figures of 25.9% in 2011, 23.3% in 2012, 22% in 2013, 21.7% in 2014, and returning to 23.3% in 2015 Despite challenges posed by the global economic crisis, this relatively high ratio highlights the significance of foreign investment as a vital source of capital for social initiatives.
Figure 3.12 FDI capital & total realized social investment capital (2011 – 2015)
(Source: General Statistics Office of Vietnam)
Table 3.6 The proportion of GDP from FDI sector in GDP of Vietnam (2011 –
(Source: General Statistics Office of Vietnam)
Total realised social investment capital FDI capital
- FDI creates favorable conditions for approaching and expanding the international market, raising export capacity and foreign currency revenue
The export scale of the Foreign Direct Investment (FDI) sector in Vietnam has significantly increased over the years, with FDI enterprises contributing over 50% to the country's total export value from 2011 to 2015 Notably, these enterprises consistently generated an export surplus, which has shown an upward trend, positively impacting Vietnam's current account and international payment balance.
Table 3.7 Export surplus of FDI sector from 2011 to 2015
(Source: General Statistics Office of Vietnam)
Key export commodities include agricultural products such as fruits, vegetables, coffee, rice, and rubber, along with aquatic products, textiles, footwear, telephones and components, coal, and crude oil Furthermore, foreign direct investment (FDI) has played a significant role in expanding the domestic market and accelerating the growth of service sectors, particularly in hotels, tourism, legal consultancy, and technology.
Table 3.8 Proportion of export turnover from FDI sector in Vietnam’s total export turnover (2011 – 2015)
- One of the important contributions of FDI is technology transfer
Technology transfer through foreign direct investment (FDI) not only enhances personnel training but also cultivates a skilled workforce The manufacturing and processing sectors have demonstrated the highest levels of technology transfer efficiency, particularly in industries such as oil and gas, electronics, telecommunications, computer science, mechanical engineering, automobiles, motorbikes, and textiles, with telecommunications and oil and gas leading the way Additionally, domestic companies can leverage their relationships with foreign enterprises to adopt similar technologies for producing replacement products and innovative services, thereby reducing competition and fostering the growth of supporting industries that aid foreign investors' operations.
- FDI has created jobs and improved the quality of human resources
Mr Bui Quang Vinh, former Minister of Planning and Investment, emphasized the significant impact of foreign direct investment (FDI) on the economy, citing the Samsung Thai Nguyen project, which has created over 200,000 jobs He highlighted that FDI mobilization plays a crucial role in generating millions of employment opportunities, contributing to social stability and economic growth, and underscored the importance of continued support for FDI initiatives.
Foreign Direct Investment (FDI) enterprises lead in on-site training, achieving the highest labor productivity In key stages of specific technological processes, Vietnamese workers are often trained in technical and professional skills at their overseas parent companies Currently, the FDI sector employs the most advanced technology and highly skilled workers Foreign investment enhances national competitiveness, boosts business and product quality, and improves economic management and corporate governance, while also fostering a more dynamic business environment.
- FDI has taken Vietnam to fully integrate into the international economy and expand foreign relationships
Foreign Direct Investment (FDI) has significantly strengthened Vietnam's position in the global market by introducing innovative business investment methods that create positive spillover effects across various economic sectors This investment facilitates the transfer of technology, management expertise, and business skills from FDI enterprises to domestic firms, fostering valuable partnerships Additionally, FDI has spurred competition among local businesses, driving them to adapt to globalization and enhance their capabilities Furthermore, FDI plays a crucial role in promoting Vietnamese products in international markets, boosting their competitiveness and contributing to increased trade openness and a favorable trade balance for the country.
- The overall effect of FDI is not high; the ability to absorb capital was modest, while Vietnam has a great demand
Foreign Direct Investment (FDI) in Vietnam's manufacturing and construction sectors primarily centers on assembly, resulting in low value addition and insufficient infrastructure Despite Vietnam's advantages in Agriculture, Forestry, and Aquaculture, the proportion of FDI projects in these areas remains minimal While the services sector sees numerous large-scale real estate projects, many are slow to implement, leading to land wastage and increased domestic loans Additionally, FDI in high-value-added services such as healthcare and education is still relatively restricted.
Foreign investment tends to concentrate in areas with favorable infrastructure, skilled labor, and robust consumer markets, leading to regional imbalances and hindering efforts to attract investment in less advantaged areas Economic zones, industrial parks, and high-tech zones have not established unique advantages for individual provinces and regions The actual foreign direct investment (FDI) capital implemented is significantly lower than the registered capital, with an annual growth rate insufficient to reach the desired target of 11-12 billion USD, resulting in a notable discrepancy between registered and implemented capital.
- The capital structure is exposed to some shortcomings
FDI capital structure by economic regions focuses on some key economic zones only
The Vietnamese government has outlined a development strategy that includes tailored policies for each region to enhance the effectiveness of export processing zones, industrial parks, and open economic zones However, the distribution of foreign direct investment (FDI) projects remains slow and imbalanced, predominantly favoring regions with robust infrastructure and labor resources, such as the Southeast, Red River Delta, North Central, and Central coastal areas In contrast, the Northern midlands, mountainous regions, Central Highlands, and Mekong River Delta have struggled to attract FDI, resulting in disappointing outcomes This regional disparity in FDI attraction and utilization is a significant factor contributing to uneven socio-economic development and widening the gap between affluent and impoverished areas.
FDI capital structure by sectors and industries are not logical
The current investment structure in Vietnam is irrational, resulting in inefficient foreign direct investment (FDI) mobilization in key sectors like transportation, infrastructure, energy, and high technology This inefficiency hampers sustainable development and limits the country's ability to take initiative Consequently, Vietnam struggles to attract high-quality projects that possess international competitiveness and the capability to integrate into global value chains, which is essential for enhancing the nation's economic competitiveness.
SUGGESTED SOLUTIONS ON IMPROVING THE
The experience of some countries in attracting Foreign Direct Investment
Foreign Direct Investment (FDI) plays a crucial role in helping countries, including Vietnam, address government budget deficits for national development and infrastructure projects As competition to attract FDI intensifies, exploring effective strategies to draw in foreign investments can offer valuable insights and guidance for nations seeking economic growth.
Despite the 2008 global financial crisis, Singapore remains the leading destination for foreign direct investment (FDI) in the region, with FDI rising from $24 billion in 2009 to $64 billion in 2011 and reaching $81 billion in 2014 This significant growth can be attributed to several key factors.
Singapore has strategically mobilized Foreign Direct Investment (FDI) in three key areas: new manufacturing sectors, construction, and exports The country's policies are tailored to specific conditions of each period, focusing on sectors that align with its rapid advancements in the electronics industry and other advanced technologies Key investment areas include computer production, electronics, electronic appliances, oil refining, and mining techniques, aimed at leveraging Singapore's geographical advantages and addressing natural resource limitations Additionally, mobilizing FDI seeks to establish a robust service system that promotes international investment.
The Singaporean Government has established a stable and appealing business environment for foreign investors by implementing a comprehensive and equitable legal system Corruption is strictly penalized, ensuring that both domestic and international companies are treated equally under the law Additionally, government officials receive competitive salaries, with a portion set aside for retirement that is forfeited if they are found guilty of embezzlement during their tenure.
The Singaporean government has implemented policies to attract foreign investment by offering preferential treatment to foreign capitalists These incentives include the ability to freely transfer profits back to their home countries when businesses are profitable, as well as granting investors residency and citizenship privileges Additionally, investors who deposit capital of SGD 250,000 or more and engage in investment projects are eligible for citizenship for their families.
Foreign Direct Investment (FDI) plays a crucial role in driving Thailand's economic growth, positioning the country as a competitive investment hub in Asia Notably, Japan leads the way in investment, with approximately 7,000 Japanese companies operating in Thailand, highlighting the nation's appeal to international investors.
Thailand has strategically developed sub-industries to enhance foreign direct investment (FDI) and has implemented a new government strategy since September 2014 to attract more FDI The country prioritizes investments in key sectors such as agriculture, agricultural processing and distribution, mining, light industry, machinery, transport equipment, electronics, chemicals, plastics, paper, services, and infrastructure Additionally, Thailand has introduced three significant policy changes aimed at boosting FDI.
Historically, Thailand's foreign investment policies focused on developing import-substituting production, resulting in a significant reliance on imported machines and raw materials, which contributed to a trade deficit Currently, however, these policies have shifted to prioritize the development of export-oriented production to enhance the country's economic growth.
The recent policy change has narrowed the eligible conditions for investment incentives from 240 sectors to just 100 This strategic shift emphasizes support for three key areas: high-technology development, research and development (R&D), and the operation of advanced technology training, alongside a focus on fostering the growth of small and medium-sized enterprises (SMEs).
To bridge the development gap, the Thai government is promoting foreign investment in remote and rural areas beyond Bangkok Additionally, in response to rising living costs and a shortage of raw materials, there is a strong push for businesses to invest abroad, particularly in ASEAN countries.
Since 1996, Malaysia has actively promoted investment in high-technology sectors such as biotechnology, optoelectronics, wireless technology, and advanced materials To attract both domestic and foreign technology enterprises and foster the growth of the information technology industry, the government introduced the initiative of national information technology development, establishing designated information technology areas These areas offer a conducive business environment and a robust ecological system aimed at attracting investments and supporting the advancement of local enterprises to international standards Currently, Malaysia boasts 30 information technology areas and nearly 3,000 companies operating within the information technology sector.
Malaysia employs investment incentives to attract foreign investment and boost export turnover Key policies include a 10% reduction in value-added tax for export products, a 5% decrease in domestic input prices for export goods, and support for advertising and market research costs Additionally, the country encourages enterprises to invest in human resource development by providing incentives for vocational training initiatives and the establishment of educational centers.
Malaysia has initiated programs to boost investment in high-tech industries and strategic projects, particularly in the automotive sector and palm oil biomass utilization Key manufacturing sectors benefiting from pioneer investor and investment tax allowance policies include agricultural product processing, rubber product manufacturing, palm oil derivatives, chemicals, pharmaceuticals, wooden furniture, pulp and paper production, textiles, iron and steel, non-ferrous metals, machinery, electrical and electronic products, as well as scientific and protective equipment.
Direction of increasing the efficiency of FDI attraction and management
Since the enforcement of the Law on Foreign Investment and the implementation of various government policies to promote an open economy, Vietnam has attracted investments from over 100 countries and territories Numerous foreign corporations are actively seeking business and investment opportunities in the country Vietnam is currently in a strategic phase aimed at becoming an industrialized nation by 2020.
On September 29, 2013, the Government announced Resolution No 103/NQ-CP, outlining strategies to enhance the efficiency of attracting, utilizing, and managing Foreign Direct Investment (FDI) The resolution emphasizes key directions for the upcoming years to optimize FDI impact.
To enhance foreign direct investment (FDI) attraction, it is essential to prioritize high-quality, value-added projects that leverage advanced and eco-friendly technologies, aligning with the economic restructuring goals of various regions and sectors Key focus areas include information technology and biotechnology for agriculture, infrastructure development, high-quality human resource training, research and development, and modern services FDI should target high-value processing industries, export-oriented production, supporting industries, high-tech sectors, energy-saving initiatives, clean technology projects, and the establishment of medical facilities and modern healthcare infrastructure.
To enhance competitiveness and integration into the global value chain, it is essential to attract large-scale projects and high-value products from transnational corporations This involves developing a robust system of auxiliary sectors and enterprises, encouraging a gradual shift from processing to production in industrial projects, and selecting reputable investors to bolster the financial market Additionally, special emphasis should be placed on supporting medium- and small-scale projects tailored to the specific needs of each industry and locality.
Thirdly, encouraging, facilitating and strengthening the links between FDI enterprises with one another and domestic enterprises
To enhance investment efficiency across various localities and regions, it is essential to strategically plan foreign direct investment (FDI) attraction by sector and counterpart, aligning with the unique advantages of each area This approach should consider the growth of domestic businesses and the interplay between local and export markets, while ensuring national benefits and facilitating economic restructuring in line with a new growth model.
Some solutions to improve the efficiency of FDI flows in Vietnam
In light of the challenges facing foreign direct investment (FDI) flows in Vietnam, it is essential to align with the government's strategy aimed at enhancing the effectiveness of FDI attraction and management Drawing on successful approaches from various ASEAN countries, several recommendations are proposed to optimize FDI mobilization in Vietnam.
4.3.1 The government should attract FDI capital under a radical structure
Thailand has successfully attracted foreign direct investment (FDI) to its remote and rural areas, effectively reducing the economic disparity between provinces To replicate this success, Vietnam should focus on enhancing FDI inflows to smaller provinces that currently receive limited investment Key strategies include revitalizing investment promotion activities, providing training for skilled workers, and improving essential infrastructure such as power, water supply, and connectivity These efforts align with the Prime Minister's vision for FDI attraction tailored to the unique advantages of each region.
To enhance foreign direct investment (FDI), ministries and sectors must develop policies that attract multinational corporations from key partners like the EU, the United States, and Japan, as well as those with minimal investment This includes directly inviting large corporations in specific industries to negotiate and engage in projects Vietnam can leverage Thailand's outward investment policy to draw potential Thai investors, particularly to bolster domestic manufacturing sectors where Vietnam lacks a comparative advantage.
The experience of three countries reveals that foreign direct investment (FDI) capital is evenly distributed across manufacturing, agriculture, and services sectors In contrast, Vietnam has yet to achieve this balanced distribution in its FDI structure.
The Ministry of Planning and Investment must expedite the planning of industries and economic regions to ensure consistency across the country It is essential to leverage resources to attract more foreign direct investment (FDI) in service sectors and light industries, particularly in food processing and textiles, to enhance participation in the global value chain In the agriculture sector, where FDI has been limited, Vietnam should prioritize the processing and distribution of agricultural products from Thailand and Malaysia while focusing on the development of agricultural machinery.
To promote investment in this sector, it is essential to implement incentive policies for businesses, including exemptions from import taxes on technology, value-added tax exemptions, preferential state credits, land use tax relief, and additional investment support measures.
4.3.2 Technology transfer situation should be improved to live up to expectations
The governments of Thailand, Singapore, and Malaysia are prioritizing the growth of high-tech and environmentally friendly industries through targeted investment programs Similarly, Vietnam's Prime Minister Nguyen Tan Dung emphasizes the significance of this development As a result, Vietnam is amending its legal frameworks on science, technology, and technology transfer to establish a comprehensive long-term roadmap This roadmap will include various measures to attract foreign technology while ensuring alignment with Vietnam's specific conditions, ultimately fostering favorable policies for technology transfer.
The regulations governing the importation of machinery and equipment, including used items, must be revised to enhance the use of evaluation and re-evaluation tools This includes implementing stringent import standards and regularly assessing the technological advancements across various economic sectors The goal is to phase out outdated machinery that consumes excessive energy, poses environmental risks, and threatens public health, while also identifying priority areas for foreign direct investment (FDI) attraction.
It is necessary to form the high-tech zone, clean technology in the appropriate regions in the country with a clear regulatory framework to create attractive factors for foreign investors
4.3.3 The workforce quality needs to be improved corresponding with the FDI attracted
To enhance workforce development, it is essential for Vietnamese enterprises to implement action programs focused on human resource training that align with their employment needs This includes preparing a labor force skilled in international business collaboration, demonstrating both confidence and competence in engaging with foreign partners Additionally, regulations should be established to streamline the licensing process for foreign workers in specialized fields where domestic labor falls short, while also encouraging companies to invest in training local employees to fill these roles.
To enhance national development and integration, the education and training system must undergo gradual reform to cultivate a highly skilled workforce It is essential to establish long-term training plans that ensure an adequate quantity and a balanced structure of qualified personnel, ultimately supporting the economy's sustainable growth The government should focus on upgrading the vocational education system to meet regional and global standards, while also increasing the number of vocational schools and training centers Collaboration with international organizations is vital for launching management training courses and developing high-tech worker training centers.
4.3.4 The National Assembly needs to improve the legal system and policies to be synchronized and consistent
4.3.4.1 Legal documents involving investment activities and business of FDI enterprises to be amended and reformed Singapore has done very well in creating an attractive business environment for foreign firms by building a complete and effective legal system This is a disadvantage of Vietnam compared to Singapore, though law on investment and law on enterprises were amended by Congress in 2014 in the direction of continuing to create a favorable, transparent legal framework for the establishment and operation of enterprises in all economic sectors
Policy-makers should regularly review and reform legal documents to ensure alignment with the Law on Investment, addressing any shortcomings through necessary decrees Additionally, the legislation governing mergers and acquisitions involving foreign entities must be evaluated for greater synchronization and clarity It is essential for officials to monitor and supervise the implementation of investment and enterprise laws to promptly identify and resolve emerging issues.
4.3.4.2 Administrative procedures to be simplified
To enhance foreign investment, it is essential to simplify and publicize administrative processes and procedures, implementing a one-stop-shop mechanism for investment settlements Ensuring consistency across localities while accommodating specific conditions is crucial Investment agencies must collaborate to facilitate foreign business registration, promptly addressing issues in the licensing process and investment certificate adjustments, thereby overcoming bureaucratic stagnation.
Customs procedures are being revised and made more accessible to help businesses address challenges and effectively manage feedback or complaints Additionally, enhanced coordination among ministries and departments, including trade, customs, and environmental technology, is essential for improving overall efficiency.
The General Department of Land Administration, along with relevant authorities, is tasked with promptly drafting regulations for ground clearance and compensation related to foreign capital projects, as well as establishing guidelines for the transfer of land use rights.
4.3.4.3 Appropriate, flexible and attractive incentive policies to be established