INTRODUCTION
Rationale
Capital is crucial for economic development and addressing political, cultural, and social issues in both developed and developing countries While domestic capital is often limited, particularly in developing nations like Vietnam, foreign investment becomes essential for growth Therefore, effectively mobilizing and utilizing foreign direct investment is a key priority for Vietnam to achieve its industrialization and modernization goals.
In recent years, the Vietnamese government has prioritized attracting foreign direct investment (FDI), which has significantly contributed to the country's GDP, total social investment, and export turnover However, challenges and negative impacts related to FDI utilization persist Therefore, implementing effective strategies to enhance FDI attraction is crucial for Vietnam's economic growth and development.
Under the guidance and supervision of thesis advisor, Ms Nguyen Phuong Lan,
“Solutions to attract the inflow of FDI into Vietnam” is chosen for my graduation thesis.
Objective and research questions
This thesis aims to explore the fundamental theoretical framework of Foreign Direct Investment (FDI), analyze the trends and impacts of FDI flows into Vietnam, and propose several solutions and recommendations to enhance FDI inflow into the country.
In attempt to achieve the purpose of this paper, the problem has been shed light on the following questions:
- What is the tendency of FDI flow into Vietnam?
- How does FDI affect Vietnam economic growth?
- What are the solutions and recommendations to seek and use FDI flowing into Vietnam effectively?
Scope and limitations
This thesis focuses on the real situation of attracting and using FDI in Vietnam during 2009 – 2016.
Research methodology
This paper primarily relies on secondary data and information gathered from various sources, including the Internet, domestic and international magazines, newspapers, and statistical annual reports The literature review is derived from books, dictionaries, and prior research All data has been systematically analyzed, synthesized, and organized into distinct sections of this thesis.
Thesis structure
Chapter 3: The inflow of FDI into Vietnam
Chapter 4: Solutions and recommendations to attract FDI flowing into Vietnam
LITERATURE REVIEW
Definition
FDI is the abbreviation of the English phrase "Foreign Direct Investment" and there are many different definitions of FDI
According to the IMF and OECD (April 2004), foreign direct investment (FDI) is defined as an enterprise, either incorporated or unincorporated, where a foreign investor holds 10% or more of the ordinary shares or voting power This 10% ownership threshold establishes a direct investment relationship, indicating that the investor has a significant influence in the management of the enterprise, even without absolute control.
According to the Balance of Payments Manual: Fifth Edition (BPM5) (Washington,
D.C., International Monetary Fund, 1993), “FDI refers to an investment made to acquire lasting interest in enterprises operating outside of the economy of the investor Further, in cases of FDI, the investor´s purpose is to gain an effective voice in the management of the enterprise The foreign entity or group of associated entities that makes the investment is termed the "direct investor" The unincorporated or incorporated enterprise - a branch or subsidiary, respectively, in which direct investment is referred to as a "direct investment enterprise" Some degree of equity ownership is almost always considered to be associated with an effective voice in the management of an enterprise; the BPM5 suggests a threshold of 10 per cent of equity ownership to qualify an investor as a foreign direct investor” (unctad.org, Foreign Direct Investment)
The World Trade Organization (WTO) defines Foreign Direct Investment (FDI) as the acquisition of assets by an investor from one country in another country, along with the right to manage those assets This management aspect sets FDI apart from other financial instruments Typically, both the investor and the managed property are business entities, with the investor known as the "parent company" and the acquired assets referred to as "subsidiaries."
"branch" (Trade and Foreign Direct Investment, WTO, 1996)
According to the Law on Investment in Vietnam (1996), foreign investment is defined as the entry of foreign organizations or individuals into Vietnam through capital contributions in foreign currency or government-owned property Vietnam permits such investments based on contractual agreements, joint ventures, or the establishment of wholly foreign-owned enterprises, all in compliance with the legal framework established by this law.
Foreign direct investment (FDI) primarily involves the transfer of resources between countries to pursue investment activities aimed at achieving tangible or intangible benefits While various definitions exist, they generally converge on the idea that FDI focuses more on the recipient countries of the investment rather than the investors themselves.
Types of Foreign Direct Investment
Foreign Direct Investment (FDI) can be classified through various criteria, primarily from the perspectives of the host country, the investing firm, or the industry types This study focuses on categorizing FDI based on the nature of the investment, the investors' perspectives, and the objectives behind the investment.
2.2.1 By the nature of the investment
Foreign Direct Investment (FDI) can be pursued through two main strategies The first involves establishing new factories and plants from scratch, a method known as greenfield investment.
“Greenfield Investment” Companies like McDonald's and Starbucks tend to use the greenfield approach when expanding overseas The second FDI strategy is through
“Cross-border Mergers and Acquisitions” that involve in acquiring an existing foreign enterprise in the country of interest
Greenfield investment refers to the establishment of new foreign sales offices, manufacturing facilities, or other commercial ventures that have not previously existed, making it the most advanced and riskiest form of foreign direct investment (FDI) This type of investment allows the investing firm complete control over operations and profits, but it is vulnerable to political, economic, currency, and commercial risks, which cannot be easily relocated By creating new operational facilities, parent companies contribute to long-term job creation in the host country Greenfield investments are highly sought after by host nations as they generate new production capacity, create jobs, and facilitate the transfer of technology and expertise, thereby enhancing connections to the global market However, criticisms arise regarding the potential loss of market share for local firms and the perception that profits from these investments may not benefit the local economy, instead flowing back to the multinational's home country, in contrast to profits generated by local industries that are reinvested domestically.
Cross-border Merger and Acquisition: According to IMF and OECD (Ayse
Mergers and acquisitions (M&As) represent a substantial portion of foreign direct investment (FDI), initially prominent in the United States and now prevalent in European and emerging markets As global economic integration expands, the international aspect of M&As has significantly influenced corporate restructuring, enhancing performance and financial stability Companies pursue cross-border operations to tap into competitive markets, driven by factors such as converging consumer preferences, cost recovery from research and development, access to capital, and opportunities arising from the privatization of state-owned enterprises However, opening markets to cross-border transactions introduces higher risks of business failures, as companies may lack familiarity with foreign conditions Cross-border acquisitions involve transferring control of local assets to foreign firms, which can limit long-term benefits for the local economy, as proceeds from sales often do not circulate within it Despite these challenges, M&As remain a critical avenue for multinational companies to engage in FDI.
Companies engaging in foreign direct investment (FDI) often prefer acquiring existing assets over greenfield investments for several reasons Firstly, mergers and acquisitions typically require less time to complete compared to initiating new investments, which is crucial in today’s fast-paced market Many firms are concerned that failing to acquire a target company may result in competitors seizing the opportunity Secondly, foreign firms possess strategic assets—such as brand loyalty, customer relationships, patents, and efficient distribution and production systems—that are more easily and safely acquired than developed from scratch Lastly, companies pursue acquisitions with the belief that they can enhance the performance of the acquired entities by leveraging capital, technology, or management expertise.
In There are three main types of FDI by investors’ perspective: Horizontal FDI, Vertical FDI and Conglomerate FDI
Horizontal Foreign Direct Investment (FDI) involves the foreign production of goods and services that are similar to those offered by a firm in its home market This investment strategy is termed "horizontal" because it entails the replication of the same business activities across different countries Companies often pursue horizontal FDI when exporting to foreign markets becomes too expensive due to high transportation costs or trade barriers Essentially, horizontal FDI occurs when a firm invests in the same industry abroad as it operates domestically, duplicating its home-based activities at the same stage of the value chain in the host country.
Vertical Foreign Direct Investment (FDI) involves multinational enterprises (MNEs) geographically fragmenting their production processes This approach is termed "vertical" as MNEs outsource various stages of production to different countries, optimizing costs based on varying input prices Vertical FDI can be classified into two categories: backward and forward Backward FDI occurs when an MNE establishes its own suppliers for input goods, while forward FDI involves creating foreign affiliates that utilize inputs from the parent company for their production, maintaining a sequential relationship in the production chain.
Horizontal Foreign Direct Investment (FDI) involves direct investments between industrialized nations to bypass trade barriers, enhance local market access, and leverage regional technical expertise by situating near established companies In contrast, Vertical FDI is characterized by firms in industrialized countries relocating production to low-wage countries to reduce costs.
(Philip Luck, University of California, 2008)
Horizontal FDI involves firms replicating similar activities across multiple countries, while vertical FDI refers to the distribution of different production stages in various locations Most foreign direct investment (FDI) is horizontal, particularly among developed countries, where market access often outweighs the desire to reduce production costs In horizontal FDI, the countries involved tend to be of comparable size, contrasting with vertical FDI, where the home country is typically larger than the host Thus, horizontal FDI is more indicative of interactions between developed nations, whereas vertical FDI typically involves a developed country investing in a developing one.
Conglomerate Foreign Direct Investment (FDI) involves the addition of an unrelated business in a foreign market, representing a unique form of investment that tackles the dual challenges of entering a new country and industry This strategy illustrates that internationalization and diversification can serve as alternative approaches rather than complementary ones Mergers between companies with different business types can yield benefits such as asset sharing and risk reduction; however, they also pose risks, particularly for newly established firms that may struggle with the scale or success of the collaboration There are two primary types of corporate mergers: mixed mergers, which involve companies without a shared business focus, and merged syndication, where firms pursue product diversification and market expansion opportunities.
Companies often pursue mergers to enhance market share, consolidate power, and enable cross-selling opportunities Additionally, mergers allow for product diversification and risk reduction However, excessive growth from acquiring smaller businesses can negatively impact the overall performance of the corporation.
2.2.2 By objectives of the investment
Foreign Direct Investment (FDI) can be classified according to the motives driving the investment, which include Resource-Seeking, Market-Seeking, Efficiency-Seeking, and Strategic-Asset-Seeking objectives of the investing firm.
Resource-seeking investments aim to acquire more efficient factors of production than those available in the investor's home economy, often targeting developing countries rich in natural resources or cheap labor These investments typically focus on exploiting abundant natural resources in regions like the Middle East and Africa, or accessing lower-cost labor in Southeast Asia and Eastern Europe Additionally, they leverage brand assets and intellectual property, such as renowned tourist destinations, while also strategically securing resources to prevent competitors from gaining access.
Market-seeking investments focus on penetrating new markets or maintaining existing ones, often driven by the fear of losing market share rather than the pursuit of new opportunities This type of foreign direct investment (FDI) is frequently seen in foreign mergers and acquisitions, particularly among accounting, advertising, and law firms Additionally, market-seeking investments aim to expand market presence and protect against competitors, leveraging economic cooperation agreements between the host and other countries.
Efficiency-seeking foreign direct investment (FDI) refers to investments made by firms aiming to enhance their operational efficiency by leveraging economies of scale and scope, as well as the advantages of common ownership According to Bholanath Dutta (2009), this type of FDI typically follows resource or market-seeking investments, driven by the expectation of increased profitability It is predominantly observed among developed economies, particularly within closely integrated markets like the EU Additionally, efficiency-seeking FDI serves as a means to capitalize on lower input costs in the host country, including affordable raw materials, labor, utility prices, transportation, and favorable tax conditions.
The impacts of FDI in Vietnam
Capital plays a crucial role in economic growth theories, as economies seeking faster growth require increased capital When domestic capital falls short, countries often turn to foreign direct investment (FDI) as a solution FDI not only boosts tax revenues in the host country, contributing to government income, but also generates personal income taxes through job creation and foreign currency collection, even if foreign investors benefit from tax exemptions Additionally, FDI is considered a more stable form of capital compared to other international flows, as it is driven by long-term market perspectives and growth potential Thus, FDI serves as a vital source of capital for developing countries, helping to address capital and foreign currency shortages.
Jobs creation increase and worker training quality improvement
Foreign Direct Investment (FDI) aims to leverage favorable conditions for reduced production costs, leading FDI enterprises to hire more local labor This influx of local employment positively impacts the economic growth of the region During the recruitment process, these enterprises offer vocational skills training, fostering a skilled workforce in countries attracting FDI Both regular workers and local professionals benefit from opportunities to work and gain professional training within foreign companies.
Foreign Direct Investment (FDI) significantly enhances the resource development of a host country's workforce through targeted investment in education and training It provides individuals with opportunities to acquire advanced technology and management skills, leading to personal and professional growth FDI enterprises not only improve the human resources of their own organizations but also positively influence local companies, particularly their customers The transfer of skilled workers from FDI firms to local businesses or the establishment of new ventures further strengthens the local workforce Additionally, foreign companies play a crucial role in training local talent, effectively bridging the gap between education and employability, which ultimately boosts employee productivity.
Acquiring technology and management experience
Technology is a crucial driver of growth and development for nations, particularly in developing countries where its impact is more pronounced Consequently, improving technological capabilities remains a top priority for all nations Achieving this goal necessitates not only financial investment but also a foundational level of scientific and technological advancement.
Foreign Direct Investment (FDI) plays a crucial role in enhancing the technological capabilities of the host country by facilitating the transfer of external technology and fostering local research and application development This technological advancement is a key objective that host countries seek to achieve through foreign investment.
Foreign direct investment (FDI) significantly contributes to technological advancement in developing countries by allowing domestic enterprises to learn to design and manufacture technologies through joint ventures This process enables local firms to adapt foreign technologies to meet local conditions, showcasing a key benefit of FDI Moreover, attracting multinational companies provides access to their extensive technological expertise and business management practices, which have been refined over time However, the effective dissemination of these technologies across the host country is largely influenced by its capacity to absorb and implement them.
Attracting foreign direct investment in all forms is safer and better than directly borrowing commercial loans (including in the form of deferred purchases)
Foreign Direct Investment (FDI) can alleviate investment challenges for host countries and mitigate the difficulties associated with entering new markets and managing international operations However, despite these advantages, FDI also brings to light several hidden negative effects that warrant careful consideration.
The rise of Foreign Direct Investment (FDI) enterprises intensifies competition for domestic firms, often resulting in significant losses and potential bankruptcies As domestic companies struggle to retain their market share and skilled workforce, they may face diminished investment opportunities, leading to inefficient allocation of resources due to their lower technological capabilities The overlapping investments from FDI enterprises can further marginalize local firms, forcing them to either concede market presence or shut down entirely This scenario hinders the development of a robust local industrial base, ultimately stunting the country's economic growth.
Investment plays a crucial role in alleviating inflation by boosting the supply of scarce goods, enhancing imports of spare parts and advanced technology, and increasing the export potential and competitiveness of the host country This, in turn, improves budget revenues and the balance of payments while alleviating pressure on the real exchange rate However, if such investment leads to a bubble economy and fosters excessive consumption beyond the economic capacity of the host country, it can harm growth resources, exacerbate trade deficits, and create current account imbalances, ultimately fueling future inflation Experts suggest that to effectively absorb $1 of foreign investment, recipient countries must also invest between $0.50 to $3 or more in reciprocal capital Moreover, the influx of foreign currency increases the money supply and demand for goods and services, potentially generating new inflationary pressures.
“overheating” nature of economic growth
Thirdly, technology transfer is inefficiency If the transfer of technology (both the
“hard” and the “soft”) is not fully implemented, or only transfer backward technology, then the opportunities of the starting late country will be stripped off
The receiving country often faces a lack of technological advancement and export capability while shouldering the responsibility of managing and eliminating subpar technologies This situation can lead to a one-sided reliance on foreign economic and technical partners, resulting in a return on investment that falls short of expectations and does not align with the financial, human, and environmental costs incurred by the host country.
The receiving country must consider the socio-economic and environmental impacts of foreign direct investment (FDI) projects, particularly those that utilize agricultural land, create unemployment, and lead to significant environmental pollution Projects such as golf course developments in fertile deltas and "shore sale" initiatives for foreign tourism can jeopardize the long-term benefits for future generations These negative consequences pose serious threats to both the environment and human well-being.
Foreign Direct Investment (FDI) can exacerbate income inequality by widening the gap between the wealthy and the impoverished Regions that attract FDI often experience accelerated development compared to those that do not, leading to a disparity in economic opportunities and resources Consequently, this investment trend contributes to an increasing divide between affluent and less fortunate individuals and areas.
Foreign Direct Investment (FDI) plays a crucial role in enhancing industries that need advanced technologies from high-income nations However, it should only be allowed when local companies are competitive, ensuring a fair and equitable market environment.
THE INFLOW OF FDI INTO VIETNAM
The inflow of FDI into Vietnam
3.1.1 The scale of FDI flowing into Vietnam
After nearly 30 years of renovation, Vietnam's economy has experienced significant success, emerging as a country with moderate development and stable growth The expansion of the economy and enhanced economic integration have contributed to improved living standards for the population These achievements are vital for the business community and the foreign direct investment (FDI) sectors in Vietnam, particularly since the implementation of the Law on Foreign Investment.
Since the implementation of the 1987 law, amended in 2005, Vietnam has successfully attracted foreign direct investment (FDI) This legislation has provided a comprehensive framework that outlines the sectors prioritized for investment, aligning with contemporary economic conditions.
During the period 2009 - 2016, the average size of a project tended to increase which was illustrated in the below Table 3.1
Table 3.1 The inflow of FDI into Vietnam during 2009 - 2016
Total implemented FDI (million USD)
(Source: General Statistics Office Of Vietnam)
During the specified period, Vietnam experienced significant fluctuations in Foreign Direct Investment (FDI), reflected in the number of projects and the volume of registered and implemented capital Notably, registered FDI peaked in 2009 but gradually declined until 2012, primarily due to the repercussions of the 2008 Global Financial Crisis, which altered multinational enterprises' investment strategies The Ministry of Planning and Investment identified the lack of large-scale projects as a key factor contributing to this decline, leading to a sharp decrease in registered capital For instance, in 2011, foreign investment registration fell to USD 14.669 billion, representing only 74% of the previous year's figures.
In the context of the global economic recession, a significant influx of foreign direct investment (FDI) has been observed, with 1,100 new projects launched, totaling a registered capital of $7.85 billion This figure represents a 64.9% increase compared to the same period in 2011, highlighting a robust recovery in investment activity.
Vietnam experienced a notable increase in foreign direct investment (FDI), with registered FDI reaching 21.628 billion USD in 2013, marking a 54.5% rise from 2012 The Foreign Investment Agency reported that in 2014, new registered FDI amounted to 6.65 billion USD, constituting 30.5% of the total investment in 16.5 billion USD across four billion-dollar projects Significant contributions came from Samsung, which invested 3 billion USD in Thai Nguyen, 1 billion USD in Bac Ninh, and 1.4 billion USD in Ho Chi Minh City This upward trend continued, with Vietnam attracting 15.8 billion USD in FDI in 2016, a 9% increase from the previous year and the highest FDI disbursement to date.
From 2009 to 2016, Vietnam saw a consistent increase in both the number of foreign direct investment (FDI) projects and the total implemented FDI, indicating a steady growth in attracting foreign investment despite some fluctuations in registered FDI This trend highlights Vietnam's emergence as a promising and appealing investment destination for foreign investors.
3.1.2 The structure of FDI by investment partners
According to investment partners structure, Vietnam has received FDI from more than 90 countries all over the world after more than 20 years of attracting FDI
As of December 31, 2012, Taiwan led foreign direct investment (FDI) in Vietnam with 2,234 projects and registered capital of $27.129 million, accounting for 16.231% of the total Japan followed closely with a peak investment of $28.699 million, representing 17% of the total In 2013, the Foreign Investment Agency reported a significant increase in FDI, with total new and additional registered capital reaching $22.35 billion, marking a 35.9% improvement from 2012 That year, 57 countries and territories invested in Vietnam, with Japan leading at $5.875 billion (26.3% of total investment), followed by Singapore with $4.76 billion (21.3%), and South Korea at $4.46 billion (20%).
Figure 3.1 Top 10 biggest investors in Vietnam accumulated up to 12/2012
Figure 3.2 Top 3 largest investors in Vietnam during 2014 – 2016
In 2014, Vietnam attracted investment projects from 60 countries and territories, with South Korea leading the way thanks to significant contributions from Samsung, amounting to 7.32 billion USD, which represented 36.2% of the total foreign direct investment (FDI) in the country Hong Kong ranked second with a total capital of 3 billion USD, accounting for 14.8% of the overall investment, while Singapore followed closely in third place with 13.8% of the total investment Japan secured the fourth position with new and additional registered capital of 2.05 billion USD, making up 10.1% of Vietnam's total investment.
In 2015, South Korea emerged as the leading investor in Vietnam, launching 702 new projects and 260 projects with increased capital, totaling 6.72 billion USD, which represented 29.6% of Vietnam's overall investment capital In contrast, Malaysia secured the second position with an investment of 2.47 billion USD, accounting for 10.9% of the total investment, largely due to the Duyen Hai Hydropower 2 project in Tra Vinh province, which alone contributed 2.4 billion USD.
South KoreaHong KongSingaporeJapanMalaysia
Janakuasa Sdn Bhd is set to design, construct, operate, and transfer a coal-fired thermal power plant in Malaysia, boasting a capacity of 1,200 MW, comprised of two units each designed for 600 MW Japan ranks third in investment with a capital of 1.84 billion USD, accounting for 8.1% of the total investment, while Taiwan follows in fourth place with an investment of 1.39 billion USD, representing 6.1% of the overall investment.
In 2015, seven ASEAN countries—Malaysia, Singapore, Thailand, Brunei, Indonesia, the Philippines, and Laos—invested in Vietnam Malaysia led with 22 new projects and a total capital of $2.5 billion, including $2.44 billion in newly registered capital and $91 million in additional projects However, Singapore recorded the highest number of FDI projects among ASEAN nations, with 119 new projects and a total capital of $1.03 billion, comprising $852 million in newly registered capital and $180 million in additional investments.
In 2016, South Korea maintained its position as the leading investor in Vietnam, contributing a total registered capital of $7 billion, which represented 28.8% of the country's total investment Japan and Singapore followed as significant investors, with total capital contributions of $2.58 billion and $2.41 billion, respectively.
In recent years, South Korea has consistently been a leading investor in Vietnam, highlighted by significant projects such as Samsung Electronics in Thai Nguyen, Samsung CE Complex in Ho Chi Minh City, and Samsung Display in Bac Ninh This strong investment presence underscores the robust relationship between Vietnam and South Korea amid global economic integration.
3.1.3 The structure of FDI by investment sectors
Table 3.2 FDI projects were licensed in Vietnam by sectors in 2012
Production and distribution of electricity, gas, hot water, steam and air conditioning
Water supply; Waste and waste water management and treatment
Wholesale and retail; Repair of automobiles, motorcycles, motorbikes and other motor vehicles
Financial, banking and insurance operations 76 1321,7
Professional activities; Science and technology 1336 1101,5
Health and social work activities 82 1222,2
An analysis of foreign direct investment (FDI) inflows into Vietnam reveals that FDI is present across nearly all sectors of the national economy, significantly contributing to the country's industrialization and modernization efforts As of December 31, 2012, the manufacturing and processing industry led in attracting foreign investors, with 8,072 projects totaling approximately $105.94 billion Following this, the professional, scientific, and technological activities sector had 1,336 projects, but with a much lower registered capital of $1.1 billion Additionally, the real estate sector ranked second in terms of registered capital, amounting to $49.76 billion.
In 2013, foreign investors directed their focus towards 18 industries, with the manufacturing and processing sector leading by attracting 719 new projects and a capital influx of $17.14 billion, representing 76.7% of the total registered capital The electricity, gas, water, and air conditioning sector followed, securing $2.037 billion in newly and additionally registered capital, which accounted for 9.1% of the total The real estate sector came in third, with 23 new investment projects totaling $951.9 million in registered and additional capital.
Achievements and problems of FDI in Vietnam
Foreign investment in Vietnam has successfully achieved key objectives such as attracting capital, restructuring the economy, creating jobs, enhancing labor productivity, and acquiring modern technology and management practices This success underscores the effectiveness of the Party and State's policies in fostering economic development and international integration Since the introduction of the 1987 Law on Foreign Investment, the foreign direct investment (FDI) sector has become pivotal, significantly contributing to the growth of Vietnam's economy and society over the past 25 years.
Promoting economic growth and capital increase
Over the past 25 years, Foreign Direct Investment (FDI) has played a crucial role in our economy, particularly during its early stages when funding was scarce To achieve rapid growth, a significant influx of capital is essential, as domestic resources are often limited FDI has emerged as a vital source of investment, contributing approximately 10% of GDP and accounting for about 40% of total societal investment capital This influx of foreign capital has been instrumental in driving economic development, enabling us to reach a national income of nearly $2,000 per person, a milestone that would not have been possible without FDI.
Looking at the Figure 3.4, GDP Growth Rate in Vietnam averaged 5.8% from 2009 to 2015, reaching an all time high of 6.68% in 2015 and a record low of 4.24% in
2011 Until now, FDI inflows not only contribute to the economic restructuring but also provide additional capital for Vietnam as a developing country with a low rate of capital accumulation
Dr Do Nhat Hoang, Director of the Foreign Investment Department, emphasizes the crucial role of foreign investment in stimulating domestic investment and facilitating Vietnam's integration into the global economy According to the Ministry of Planning and Investment (MPI), foreign direct investment (FDI) reached $21.92 billion in 2014, highlighting its significance amidst various challenges This capital is vital for Vietnam's economic and social development, playing a key role in export and import activities while ensuring foreign exchange supply and maintaining the national balance of payments.
Foreign Direct Investment (FDI) has emerged as a crucial growth driver for the Vietnamese economy, with projects like Samsung in Bac Ninh and Thai Nguyen generating significant momentum in the northern provinces According to Prof Nguyen Mai, Chairman of the Association of FDI Enterprises, these investments are vital for the region's development Director Do Nhat Hoang further highlighted that the foreign investment sector plays a key role in contributing to the country's capital influx, GDP growth, and export performance.
Figure 3.4 Vietnam GDP & Economic Growth Rate during 2009 – 2015
Vietnam's GDP and economic growth rate have shown significant increases in recent years, largely driven by foreign direct investment (FDI) enterprises Notably, provinces such as Bac Ninh, Ho Chi Minh City, and Binh Duong have benefited greatly from the contributions of the FDI sector to the national economy.
On account of foreign direct investments, in 2013, the agricultural structure has fallen from 22% to 18% and services have increased from 40% to 44% In the first
In the first ten months of 2014, Vietnam's total foreign trade value reached $244.27 billion, with exports amounting to $123.07 billion and imports totaling $121.2 billion, resulting in an export surplus of $1.87 billion The foreign direct investment (FDI) sector contributed $13.82 billion, while the domestic trade deficit stood at $11.95 billion.
In the first quarter of 2015, the FDI sector's exports, including crude oil, are projected to hit 25.08 billion USD, reflecting a 12.9% increase from the same period in 2014 and constituting 70% of the nation's total export turnover Meanwhile, imports for this sector are expected to reach 23.09 billion USD, marking a 24% rise compared to the previous year.
2014 and accounted for 62% of total import turnover nationwide
Figure 3.5 Vietnam FDI, percent of GDP during 2009 – 2015 (%)
Vietnam FDI,percent of GDP
The emergence and growth of various sectors, including petroleum, information technology, chemicals, automobiles, and textiles, are significantly influenced by foreign direct investment (FDI) This influx of capital not only enhances technology application across these industries but also boosts labor productivity and shifts the economic sector distribution.
Job creation and human resource development
Foreign Direct Investment (FDI) plays a crucial role in job creation and vocational training in Vietnam, generating over 2 million direct jobs and an estimated 3-4 million indirect jobs, including skilled workers and highly qualified managers Workers in the FDI sector enjoy salaries that are 30% to 50% higher than those in other sectors, significantly enhancing their livelihoods The Ministry of Planning and Investment highlights the FDI sector's profound impact on labor restructuring towards industrialization and modernization, with the working capital of FDI enterprises increasing to over 3.2 million people by the end of 2013, eight times more than in 2000 This growth is vital as Vietnam adds over 1 million workers to its labor force Additionally, the FDI sector facilitates the transfer of knowledge and management skills, improving both the quality and quantity of the workforce, essential for the country's industrial and modernization efforts.
Minister of Planning and Investment Bui Quang Vinh emphasized the significance of foreign direct investment (FDI) as a crucial element of Vietnam's economy He highlighted the impressive impact of FDI projects, citing Samsung Taiyuan, which created over 200,000 jobs The Minister underscored that attracting FDI is vital for generating millions of employment opportunities and maintaining social stability and economic growth, thus reinforcing the need to support FDI enterprises.
Vinh Phuc's advantageous geographical location, robust infrastructure, and abundant human resources have made it an attractive destination for foreign direct investment (FDI) As of October 2016, the province hosted 226 active FDI projects with a total registered capital of $3.473 billion, of which approximately 58% had been implemented In the first nine months of 2016, FDI enterprises in industrial zones experienced stable operations, generating revenues of $1.836 billion, a 34% increase compared to the same period in 2015 The sector employed nearly 57,000 individuals in garment, electronics, and related industries, with local workers making up 75% of the workforce.
In 2016, significant foreign direct investment (FDI) in Hoa Binh city came from Japanese and Korean companies specializing in the assembly of electronic components and garments These enterprises established operations in Luong Son Industrial Park, Song Da left bank, significantly enhancing the province's income and export value They also created approximately 15,000 jobs for local residents, with an average monthly income of around 4 million VND per person.
In recent years, Thai Nguyen has witnessed a steady increase in direct employment opportunities within foreign direct investment (FDI) enterprises, significantly enhancing job creation for local workers In 2010, the employment distribution among various enterprise types was as follows: state-owned enterprises employed 18,044 workers, non-state enterprises employed 47,133, and foreign-invested enterprises accounted for 2,003 employees.
2014, this number increased in turn of 18,327; 57,004; 8,316 people
The significant growth of the labor force in the FDI sector, along with non-state enterprises, highlights the positive influence of foreign direct investment on the local economy The presence of FDI enterprises has spurred the development of related sectors such as infrastructure and services, generating numerous job opportunities for residents This influx of investment not only enhances employment prospects but also fosters entrepreneurship, leading to increased incomes and improved living standards Furthermore, FDI plays a crucial role in establishing and developing the labor market within the province.
Acquisition, renewal and technology transfer
Foreign Direct Investment (FDI) plays a crucial role in attracting investment capital and advanced technology from developed nations to Vietnam This influx of technology significantly enhances the overall technological capabilities of the economy and specifically boosts the performance of Vietnamese enterprises Without access to high technology, Vietnam struggles to compete effectively, narrow the development gap with other countries, and achieve its goals of industrialization and modernization.
SOLUTIONS AND RECCOMANDATIONS TO ATTRACT FDI
Solutions to improve FDI flowing into Vietnam
Vietnam faces significant challenges that could lead to serious repercussions without timely intervention To address these issues, it is crucial for the country to develop effective strategies that not only tackle existing obstacles but also leverage its advantages in attracting and implementing Foreign Direct Investment (FDI) projects.
The Ministry of Planning and Investment is set to leverage its FDI attraction strategy to identify key sectors and multinational companies that are prioritized for capital investment These lists will be developed with input from top economic experts and both local and foreign regulators Various selective investment attraction methods will be employed to optimize the process.
FDI attraction selectively by sector
To enhance the quality of human resources and boost efficient production in labor-intensive industries, Vietnam should implement policies that encourage significant foreign investment By attracting large multinational corporations, Vietnam can gain access to valuable expertise and professional management skills, fostering sustainable growth and development.
To enhance the real estate sector and golf course development in Vietnam, the Ministry of Construction must collaborate with the Ministry of Natural Resources and Environment, as well as the State Bank of Vietnam, to establish a streamlined real estate process for organized investors It is crucial to implement strict regulations on capital mobilization and loans throughout project execution Additionally, promoting the creation of specialized industrial zones and investing in warehouse and yard development is essential for facilitating logistics activities, ultimately attracting multinational corporations to invest in Vietnam.
Vietnam's technology and manufacturing sectors should adopt a selective approach to attract advanced investments It is crucial for the country to thoroughly analyze the potential for development and associated risks, ensuring that it does not accept outdated or inferior technologies This strategy aims to prevent Vietnam from becoming a digital dumping ground, ultimately fostering sustainable growth and innovation in the industry.
FDI attraction selectively by regions
To enhance economic growth and sustainability, provinces like Ho Chi Minh City, Hanoi, Dong Nai, Binh Duong, and Ba Ria - Vung Tau, which host over 500 FDI projects and utilize more than 50% outsourced human resources, must develop a strategic roadmap This roadmap should prioritize attracting high-tech and eco-friendly projects while avoiding those that contribute to water and air pollution Additionally, it is essential to actively promote investment in underdeveloped areas to elevate economic awareness and progress Local governments should establish tailored strategies to attract FDI by identifying capital sources in regions with similar natural and economic conditions.
Localities must actively train their workforce and prioritize foreign direct investment (FDI) projects aligned with strategic plans to attract more capital Both central and local governments should enhance infrastructure development to meet the needs of domestic and foreign investors Provinces and cities need to carefully select investors and FDI projects that align with local socio-economic development goals, focusing on sectors such as infrastructure, agriculture, finance, education, health, culture, and personal services Strengthening collaboration between domestic and foreign enterprises, along with promoting labor training and technology transfer, is essential for sustainable growth.
FDI attraction to develop machine-building industry
Provinces with over one million residents transitioning from agriculture to industry, such as those in the North Central and Central Coast regions, should focus on attracting projects related to agriculture, fisheries, and marine resource exploitation Meanwhile, provinces in the Mekong Delta and Red River Delta should seek foreign direct investment (FDI) in the garment, footwear, and agricultural sectors It is crucial to prohibit FDI projects that harm water sources or degrade land quality and quantity The Central Highlands and mountainous areas should leverage their strengths in water resources and forest products, while also implementing regulations to prevent the destructive exploitation of these resources.
4.1.2 Tightening the legal and management system
Vietnam can effectively balance foreign direct investment (FDI) and environmental protection by implementing stringent regulations for FDI companies This approach ensures that investments contribute positively to environmental goals Additionally, the government must enforce strict penalties on projects that violate laws and utilize harmful, outdated technologies, thereby safeguarding the environment while promoting sustainable development.
The current legal framework in Vietnam lacks strict regulations for local businesses, agencies, and leaders, creating opportunities for corruption This has led to the acceptance of foreign direct investment (FDI) from companies employing outdated and environmentally harmful technologies, rather than eco-friendly projects As a result, leaders have prioritized personal gain over environmental protection, contributing to the degradation of Vietnam's ecosystem It is essential to implement effective management and oversight not only for FDI enterprises but also for government agencies in Vietnam.
Vietnam's current legal system lacks sufficient qualifications, as evidenced by numerous FDI projects leading to significant environmental harm Therefore, it is crucial to enhance and amend existing laws Authorities must adopt a serious approach to managing FDI projects with strictness and transparency By doing so, Vietnam can effectively address the environmental impacts that have already occurred and prevent future damage to its people and natural resources.
Vietnam faces challenges in effectively monitoring and controlling the performance of foreign direct investment (FDI) enterprises, particularly regarding environmental and human health issues, as seen in the Vedan and Formosa cases To address these problems, it is crucial for Vietnam to implement management measures that enhance inspection and supervision of FDI operations, enabling the early detection of violations This proactive approach will help prevent and address issues such as environmental pollution, the use of outdated technologies, tax evasion, and the mistreatment of local workers Additionally, building a skilled team of inspectors equipped with modern technology for detecting violations is essential for enforcing compliance with Vietnamese laws and ensuring accountability among FDI enterprises.
4.1.3 Promoting investment using clean technology
To attract Foreign Direct Investment (FDI) by 2020, the focus should shift from quantity to quality, emphasizing the importance of utilizing FDI to modernize the economy and enhance growth competitiveness Priority must be given to projects that incorporate modern technology and high-quality services, particularly in energy efficiency, low carbon emissions, and eco-friendly practices, to foster a green economy and sustainable development Additionally, attracting FDI in agriculture and establishing value chains and production networks is crucial, along with classifying economic and industrial zones to ensure socio-economic efficiency and minimize land and investment waste As competition among enterprises for investment intensifies, it is vital to promote clean and eco-friendly technology projects.
In Vietnam, significant projects are emerging in the clean technology sector, including the Pallet and Power Plant Project by Truong Thanh Company and the Power Plant by DOHWA-Korea Corporation at Hon La Seaport IP Additionally, LICOGI13 Joint Stock Company is developing a modern MDF factory in Dong Hoi IP, utilizing state-of-the-art technology Major cities like Hanoi, Danang, and Ho Chi Minh City, along with other provinces, are actively promoting foreign investment in high-tech and clean technology initiatives.
To enhance foreign direct investment (FDI) in clean technology, Vietnam can implement special preferential policies to attract regional and global support These policies will not only foster the growth of existing clean technology FDI projects in the country but also entice new investments that align with sustainable standards By focusing on these incentives, Vietnam can effectively position itself as a prime destination for investors interested in clean technology initiatives.
Recommendations for further FDI flow into Vietnam
In parallel with addressing the existing negative issues in FDI attraction, it is strongly important to have some solutions on policies and measures to enhance further FDI as follow:
4.2.1 Completing the Law on investment
Vietnam's foreign investment law requires amendments to enhance the attractiveness and competitiveness of its investment environment compared to regional counterparts It is essential for these laws to align with international standards, ensuring equitable treatment for both domestic and foreign investors Additionally, maintaining stable laws and policies is crucial for fostering trust among foreign investors.
To enhance foreign investment in Vietnam, it is essential to revise legal provisions that currently hinder enterprises This includes allowing foreign investors to use their assets linked to land use rights as collateral at Vietnamese banks, joint venture banks, and foreign bank branches, thus facilitating business loans for production and development Additionally, adjusting income tax requirements for employees in the FDI sector can encourage more Vietnamese professionals to pursue higher positions and qualifications, ultimately fostering greater responsibility in their roles Furthermore, implementing stricter regulations on labor contracts within foreign-invested enterprises is crucial to protect the interests of Vietnamese workers and prevent conflicts related to mental and physical well-being.
Vietnam must develop a cohesive and appealing investment law framework to streamline investment processes This involves improving related legal areas, including civil law, commercial law, environmental protection law, corporate bankruptcy law, land law, and competition law Additionally, it is crucial to evaluate both legal and significant factors to strengthen the nation's economic and political independence.
To attract foreign direct investment (FDI), it is crucial to create a favorable investment environment that encourages foreign investors to reinvest profits and expand their projects Key strategies include developing FDI support services such as job placement centers and skilled worker introductions, enhancing service quality in areas like food, accommodation, and entertainment, and improving infrastructure by constructing special economic and export processing zones Additionally, promoting anti-corruption measures among officials involved in FDI processes and publicly announcing development plans for prioritized industrial products will further enhance the investment landscape in Vietnam.
To attract investment, Virginia B Foote, Chairman of AmCham, emphasized the need for Vietnam to enhance its investment climate by fostering a safe and secure business environment Additionally, improving the quality of labor resources is crucial for sustainable economic growth The United States is prepared to collaborate with the Vietnamese government to modernize educational curricula, particularly at the undergraduate and vocational levels, to bridge the education gap with neighboring countries Furthermore, Tomaso Andreatta, Vice President of the European Business Association in Vietnam, highlighted the importance of simplifying administrative procedures and reducing regulatory abuses to create a more favorable business environment that attracts foreign investment and strengthens domestic SMEs.
Vietnam is dedicated to enhancing its business investment environment through a series of strategic initiatives directed by the Government Key focus areas include perfecting the institutional market economy and legal framework, developing a modern infrastructure system—particularly in transportation—and improving human resources The Government is committed to fulfilling international obligations and actively pursuing new free trade agreements Additionally, it aims to maintain a stable socio-political climate, safeguard the rights of foreign direct investment (FDI) investors, and create favorable conditions for FDI enterprises operating in Vietnam.
Administrative procedures significantly impact the attractiveness of Vietnam's investment environment, making their reform essential for enhancing foreign investment Simplifying these procedures, streamlining customs and tariffs, and expediting processes at key points will facilitate investment flow Vietnam should also broaden sectors permitting 100% foreign investment and promote fully foreign-owned enterprises, particularly in high-tech projects Additionally, it is crucial to quickly establish guidelines for issuing land use right certificates for businesses in industrial or export processing zones and amend the land law to align with trade agreement commitments, enabling foreign investors and overseas Vietnamese to purchase homes linked to land use rights for long-term investment.
The government should continue to revise the high two-price regime for foreigners and infrastructure costs to foster competition This includes gradually aligning the prices of goods and services, such as airfares, railways, and utility charges, between domestic and foreign enterprises Additionally, it is essential to assess the starting level and personal income tax for foreigners to facilitate the gradual replacement of foreign employees with Vietnamese workers, thereby supporting local enterprises in implementing this policy.
Vietnam must enhance its nationwide road infrastructure to support the growth of the aviation sector, focusing on modernizing key airports such as Noi Bai, Da Nang, and Tan Son Nhat to accommodate both domestic and international flights Additionally, ensuring flight safety and improving urban transport systems are crucial, alongside the development of transportation networks in rural and remote areas Collaborating with neighboring countries is essential to expand the international transportation system, particularly by establishing routes to Laos, Cambodia, and China, while also renovating the seaport system to improve the operational efficiency of Saigon and Vung Tau ports.
Vietnam's railway system requires significant renovation and upgrades, including widening tracks and replacing outdated infrastructure with modern, high-quality materials This enhancement aims to improve communication, increase international information channels, and align information and postal charges with user needs and regional standards Additionally, expanding the nationwide internet network, especially in economic development centers, is crucial Infrastructure improvements should also focus on water supply projects to ensure affordable and sufficient access for daily life Furthermore, the government should invest in modern facilities for production, public services, and recreational areas to meet the growing demand for leisure and entertainment.
4.2.3 Promoting investment promotion, trade promotion activities and preparing for implementation of investment projects
Investment and trade promotion require a thorough review of their content and implementation methods It is essential to develop more specific and effective plans for both implementation and action Additionally, these initiatives should be recognized as significant responsibilities for both central and local agencies.
The government should establish trade promotion initiatives across key ministries, including Foreign Affairs, Trade, Planning and Investment, Industry, Finance, and local People's Committees, to enhance foreign investment mobilization Additionally, a targeted program must be developed to actively engage multinational companies, potential investors, and overseas Vietnamese for approved investment projects, ensuring specific promotion strategies for each initiative.
To effectively attract foreign direct investment (FDI), policies must be adaptable to the unique characteristics of each country and multinational corporation State agencies should thoroughly analyze the economic landscape, investment climate, and legal frameworks of other nations, while also implementing selective investment attraction strategies to develop timely and justifiable policies.
Every six months, government ministries, branches, and the People's Committee should hold meetings with investors involved in projects in Vietnam These meetings aim to gather feedback, facilitate discussions, and address challenges to provide timely support This initiative is crucial for attracting and securing effective investments from new investors.
Foreign Direct Investment (FDI) is now crucial for the global integration of production and distribution While FDI is a widespread concern, it is essential to identify and assess its dynamics to enhance its inflow into Vietnam This article aims to provide a comprehensive overview of FDI and its effects on Vietnam's socio-economic development.