Some situation and measures taken to attract japanese foreign direct investment in viet nam.doc

Some situation and measures taken to attract japanese foreign direct investment in viet nam

On January 1973, Paris Agreement was signed, declaring terminationof United State Military’s presence in Vietnam It’s an important politicprerequisite for Japan to set up diplomatic relation with DemocraticRepublic of Vietnam on September 21st 1973.

Two years later, however, American’s failure in Vietnam War forcedit to change its strategies in the South East Asia and created a power blank,is considered a favorable international factor encouraging Japan to expandits influence out to all over the South East Asia In such background, Japanput forth Fukuda theory, formally confirming Japan’s post- Vietnam Warforeign policies in the South East Asia According to Fukuda theory,together with consolidation and expansion of multi-lateral co-operativerelations with ASEAN countries, Japan continues to reach out to Indochinacountries (including Vietnam) for relations through economic assistance inorder to help the 3 Indochina countries to reconstruct themselves after thewars.

On October 1975, Japan signed Agreement on Non- refundable aid of49 millions USD in favor of Vietnam, and opened Japanese Embassy inHanoi On December 1976, it was the first time in the two countries’history of relationship, a delegation of Japanese officials from all fields ofindustry, services, investment, finance, trade, forestry and transportationlead by Mr Arita – a diplomatic official , visited Vietnam.

But it’s possible to say that Fukuda theory’s idea about economicassistance for Indochina countries, including Vietnam was not doable untilVietnam enters its way of “Innovation” and economic reform However,Japan had basic approaching steps to Vietnamese market, although theUnited State had not abolished its embargo against Vietnam Japan was notvigilant of US embargo in expanding economic- commercial relations withVietnam They did not come late in both areas of Investment and Trade as

the US did, but for long, Japan has become the greatest partner, the largestODA provider, and one of the largest FDI prospective suppliers in Vietnamin the recent time.

I have covered one year for studying Japanese language,understanding Japanese culture, civilization, economic development, so Iwould like to choose the subject: “ SOME SITUATION ANDMEASURES TAKEN TO ATTRACT JAPANESE FOREIGN DIRECTINVESTMENT IN VIET NAM ”

The purpose of this subject is to give the reader an overview of theactual situation and the measures taken to attract Japanese Foreign DirectInvestment in Vietnam in order to promote Vietnamese economic growthrate in the next years.

Besides the Introduction, Conclusion, the thesis includes 4 chapters:Chapter1.An Overview of Foreign Direct Investment in Vietnam(2004-2006)

Chapter2.Japanese Foreign Direct Investment in Viet Nam-RealSituation

Chapter3.Research Methodology

Chapter4.Some Measures Taken to Attract Japanese Foreign DirectInvestment in Viet Nam

Chapter 1

An Overview of Foreign Direct Investment (FDI) inVietnam (2004-2006)

Theoretical aspect1.What is Foreign Direct Investment?

Foreign Direct Investment (FDI) is the process whereby residents of one country (the source country) acquire ownership of assets for the

purpose of controlling the production, distribution and other activities of a firm in another country (the host country).

The International Monetary Fund’s Balance of Payments Manual

defines FDI as “ an investment that is made to acquire a lasting interest in

an enterprise operating in an economy other than that of the investor, the investor’s purpose being to have an effective voice in the management of the enterprise ”.

The United Nations 1999 World Investment Report (UNCTAD,

1999) defines FDI as “ an investment involving a long – term relationship

and reflecting a lasting interest and control of a resident entity in oneeconomy (foreign direct investor or parent enterprise) in an enterpriseresident in an economy other than that of the foreign direct investor (FDIenterprise, affiliate enterprise or foreign affiliate) The term “ long – term ”

is used in the last definition in order to distinguish FDI from portfolioinvestment, the latter characterized by being short – term in nature andinvolving a high turnover of securities

The common feature of these definitions lies in terms like “control”and “controlling interest”, which represent the most important feature thatdistinguishes FDI from portfolio investment, since a portfolio investor doesnot seek control or lasting interest There is no agreement, however, onwhat constitutes a controlling interest, but most commonly a minimum of10 per cent shareholding is regarded as allowing the foreign firm to exert a

significant influence (potentially or actually exercised ) over the keypolicies of the underlying project For example, the US Department ofCommerce regards a foreign business enterprise as a US foreign “affiliate”if a single US investor owns at least 10 per cent of the voting securities orthe equivalent Both equity and debt- financed capital transfers to foreignaffiliates are included in the US Government’s estimates of FDI.Sometimes, another qualification is used to pinpoint FDI, which involvestransferring capital from a source country to a host country For thispurpose, investment activities abroad are considered to be FDI when thereis control through substantial equity shareholding; and there is a shift ofpart of the company’s assets, production or sales to the host country.However, this may not be the case, as a project may be financed totally byborrowing in the host country.

2.Basic Forms of Foreign Direct Investment in Viet Nam

In order to carry out direct investment overseas, investors may buildan entirely new production – business entity, or acquire operating ones inthe host country Some basic forms of FDI in Vietnam which are oftenimplemented by the investors:

2.1Business Co- operation Contract

It is a written document duly signed by two or more parties, which arereferred to as business co – operating parties to jointly perform one orseveral activities outcomes to each party Under this form, no joint –venture or any other legal corporate is established Its characteristic is thatno new company or enterprise is established The main content shows title,responsibilities of each party to the other without mentioning the parties’capital.

2.2Joint- venture Enterprises

It is the enterprise established by a Vietnamese party with one or moreforeign parties on the basic of joint – venture contract, and carries outbusiness operation in Vietnam’s national economic fields This form’scharacteristic is establishment of new enterprise and operation on the basicof independence principle in the form of a company limited There is nomaximum limit for foreign parties’ contribution, but it must be at leastmany or equal to 30 % of the enterprise’s legal capital Divisions of profit,risks of the enterprise are prorated according to capital contribution ratio.

2.3 100% Foreign- owned Enterprises

It is the enterprise belongs wholly to established and managed byforeign organization, individual, which is responsible for businessoutcomes This type of enterprise is established in the form of companylimited.

2.4 Other Forms

2.4.1Export Processing Zone

It is the zone, which is separated from the territory by natural orartificial hedge and operates according to specific rules Enterprises operatemainly to process goods for export Goods are exempted from export dutiesand subject to other incentives regarding taxes, levy.

2.4.2Build- Operate- Transfer (BOT)

It is investment form implemented on the basic of a written documentsigned between the foreign investor with competent governmental agencyto build infrastructure projects In this type of investment, the investorconstructs the project in such a long time enough to retrieve investment andproper profit Then they will hand over the whole structure to VietnameseGovernment without collecting any sum

2.4.3Concentrated Industrial Park

It is industrial Park set up by the Government, with determinedborder, geography, specializing in industrial production, servicessupporting industrial production, without residents.

3.The Effects of Foreign Direct Investment

FDI involves the transfer of financial capital, technology and otherskills (managerial, marketing, accounting, and so on) as we have seen sofar This process gives rise to costs and benefits for the countries involved,the investing country (the source of the investment) and the host country(the recipient or the destination of the investment) It is not clear, however,what costs are borne and what benefits are enjoyed by the two countries, atleast not quantitatively.

3.1The Provision of Capital

The two gap model, which is often used in development economics,shows that developing countries typically encounter the problem ofincreasing their saving to match their investment needs, and that offinancing imports through export earnings The first problem arises fromthe saving gap (the difference between investment and saving), whereas thesecond problem arises from the foreign exchange gap (the differencebetween imports and exports)

3.2The Effect of FDI on Output and Growth

One of the most important aspects of FDI is its effect on output andtherefore growth in the host country This effect naturally is moreimportant for developing countries, where inward investment is viewed as ameans of boosting economic development.

3.3The Effect of FDI on Employment and Wages

There is a relationship between investment and employment Ingeneral, the employment effects of FDI may be summarized as follows:

* FDI is capable of increasing employment directly, by setting up newfacilities, or indirectly by stimulating employment in distribution.

*FDI can preserve employment by acquiring and restructuring ailingfirms.

*FDI can reduce employment through divestment and the closure ofproduction facilities.

3.4The Balance of Payments Effect

The balance of payments effect is more important for developingcountries than for developed countries This is because foreign exchange isregarded as a scarce resource affecting growth through the foreignexchange gap Hence, any effect of FDI may mitigate or worsen theconstraints imposed by the balance of payments on the attainment ofmacroeconomic objectives pertaining to growth and employment.

3.5The Effect of FDI on Trade Flows

The most critical issue about the relationship between FDI and Tradeis whether they are complements or substitutes In other words, to whatextent do production and sales by subsidiaries in a foreign market replaceor help to increase exports to the same market? One reason we shouldbelieve that FDI and trade are substitutes is that they are two alternativemodes of entry, as we have seen.

3.6The Effect of FDI on Productivity

Productivity is likely to rise and unit cost likely to decline if :

+ FDI is export- promoting and the products of the subsidiary aredestined for the large world markets.

+The underlying conditions and policies allow the installation ofplants designed to achieve full economies of scale.

3.7 FDI and Technology

Technology diffusion plays a central role in the process of economicdevelopment The interaction between FDI and technology is considered to

be of great and critical importance in the discussion of FDI Indeed, thetransfer of technology has perhaps become the predominant issue aroundwhich discussions of MNCs and their dealings with developing countriesevolve.

3.8FDI and Training

Foreign investors, much as they dislike to spend on the training oflocals, realize that such expenditure may be crucial for the success of theirinvestment Therefore, expenditure on training becomes part of the initialinvestment and another sunk cost.

3.9FDI and Inter – Industry Linkages

FDI can influence the economy of the host country via inter- industrylinkages To the extent that foreign subsidiaries establish links with localsuppliers for locally- produced material and parts, FDI can help to providelocal firms with increased opportunities that in turn affect theiremployment and income positions These are called backward linkages.Forward linkages can also be established for distribution purposes.

3.10The Effect of FDI on Market Structure

FDI is likely to affect the structure of the industries it is directedtowards It may be responsible for improving the competitive forces or forworsening the monopolistic elements in the host economy This is becauseFDI is thought of as a vehicle for disseminating the transfer of technology,including a higher level of technical efficiency.

3.11 FDI and The Environment

It is arguable that, because MNCs have significant financial, politicaland negotiating power, they can get away with causing a lot of damage tothe environment, particularly in developing countries that are trying toattract FDI Indeed, one of the reasons why MNCs choose to locateproduction facilities in developing countries is that these countries haveless stringent environmental damage requirements Indeed, the

governments of these countries may even inflict damage on theenvironment in an attempt to attract FDI.

A Final Remark

In this part we discussed the effects of FDI, a highly controversial andcontentious issue There is no doubt that FDI affects both home and hostcountries In theory, the effects on the host country can be highly positive,but the benefits are not realized automatically There are certain conditionsthat have to be satisfied for a positive effect to materialize, and theseconditions are more likely to be satisfied by a developed rather than by adeveloping host country The empirical evidence is so mixed that it cannotresolve the underlying issues.

So far we have dealt with the characteristics, determinants and effectsof FDI In the following four chapters we shall deal in more detail withsome aspects of FDI and the behaviour of MNCs that we have encountered.

4.Role of Foreign Direct Investment in Vietnam

FDI emerged as an important economic phenomenon in the course ofeconomic development worldwide in 1950s- 1960s However, all economicphenomena have its head and tail.

4.1 For Investors4.1.1Positive Effects

Most investing countries are developed industrial ones, with strongeconomic capabilities, or some new industrial countries with rather highstandard of development, so factors developing production extensively lossgradually, as a result, fund is abundant in the country and they find way tobring the fund overseas to invest.

FDI is the most important element helping the investor countries overcome aging situation of products This is one of best solutions to help domestic industries at their sunset Through FDI, the investors can transfer

machines, technologies that are now not advanced in their countries to the invested countries in order to expand the product’s life span, while

continuing to develop dawn industries with high tech products in their countries This is a phenomenon complying the objective rule in international fund transfer process.

Besides, FDI also help the invested country build up stable materialsupply market with low price by exploiting plentiful materials frominvested countries, helping the invested country to expand its economicpower and raise prestige in international area.

The increasing trend of integration makes FDI becomes the mosteffective measures to penetrate and occupy market Through building ofproduction plant and consuming overseas, the fund exporter countries willexpand consumption market and avoid the protective tariff.

4.1.2Negative Effects

FDI does not only produce positive effects but also adverse ones onemployment and income of home employees It reduces domestic savingsflows and employment, making the domestic goods less competitiveness.

4.2 For Invested Country4.2.1Positive Effects

FDI solve the problem of lacking fund to implement industrialization,modernization of Vietnam Due to insufficient capital, internalaccumulation is low, which limits investment scale and technicalrenovation, causes imbalance import- export Payment of foreign debts canalso be taken from proceeds from FDI enterprises.

FDI promotes economic growth, taking advantage of capital andtechnologies overseas to develop the economy is the turning point helpingVietnam get out of the muddled cycle of poverty Practice and experiencesof many countries show that any nation implementing the economic

strategy of an open economy to the outsiders, taking advantage of andpromoting influence of external factors to turn it into internal ones, shouldcreate higher economic development speed than the others do.

Receipt of management are experience and technology transfer Wheninvesting into a given country, the investor does not only transfer to thatcountry funds but also capital in objects such as machines, equipment,invisible capital, technical experts, management secret and capability ofmarket approaching.

FDI is the significant additional part to State Budget’s income throughtaxation on FDI enterprises.

FDI helps local enterprises to approach global market through venture with foreign parties and their broad network of consumption.

joint-FDI positively affects education, training and psychology of laborforce, while encouraging investment within invested country.

4.2.2Negative Effects

FDI widens the rich- poor gap between industries, regions nationwide.Although FDI is carried out in host country, but actually, this fundingsource is directly managed and used by the investors for their specificpurposes in the legal framework of the host country Final objective of theinvestors is profit maximization, so they only invest in high profitabilityindustries, favorable regions As the result, the development gap betweendifferent regions increase, leading to widen rich- poor gap.

FDI enterprises often have advantages regarding capital, technology,and management experiences compared to domestic ones Therefore, homeenterprises are often less competitive, consequently, they are likely to gobankrupt or operate perfunctorily In long- term view, decrease savings rateand domestic investment will make the invested country become more andmore depend on the investing countries.

When FDI projects come into operation, deficit of payment balancewill increase because foreign currency amounts is transferred overseas inthe form of returning profit, loan interest, material cost, etc Which aremuch larger than FDI capital transferred by the investors to investedcountry.

Technology transfer through FDI is still limited Many investors donot follow regulations of the host countries, leading to minor technologytransfer, backward technologies, environment polluting technologies andtechnology’s price is often higher than common international price.

In brief, FDI always has its duplicity, benefits bought in by FDI to twosides are great, especially to developing countries as Vietnam, FDI is thepush for Vietnam to take advantage of favorable objective conditionscreated by the investors to develop economically and socially It is why thecountries encourage FDI activities.

Contribution of FDI for Vietnam’s Economy

*FDI companies contributed 13.3% to the GDP, 35% to the industrialoutput, 23% to export, 25% to total State Budget revenues in 2004 butprovided only 0.7% of overall employment.

*Vietnam an impressive performance considering the share of FDIpledges to every US$ 600.

*On other hand the FDI attracted into Vietnam is by regionalstandards quite modest (FDI in Vietnam is about 4% of FDI in China).

*In year 2004 alone, Vietnam earned US$8.6 billion from exports andimported US$10.97 billion worth of products.

*Turnover of US$18 billion, the sector remitted US$ 800 million tothe State Budget and employed 759,000 workers.

1.1Vietnam- Next Destination For Japanese FDI

How is Japan undergoing a “business renaissance”? Yet much of thereason why Japan is having such a good run is not only its willingness toembrace entrepreneurs like never before, but also its willingness to investin its fast growing Asian neighbors This Newsweek article tells howJapanese investors are starting to like Vietnam more than China – costs areroughly the same, and there isn’t as much potential for political backlash.In fact, China’s fast growing cities may in fact be pricing themselves out ofthe market, given how much comparatively cheap labor resides on that sideof the Pacific.

Many people forget Vietnam is an economic and demographicpowerhouse Vietnam has tons of coastline, making it an easy location forocean shippers to operate from It’s population of 83 million ranks 15th inthe world, and its economy is growing at a nearly 8% clip Though itremains nominally communist, it is rapidly changing and should achievesome sort of democratic reform as the population becomes more affluent.That means a more stable future for investors willing to jump in early now.In the US, Vietnam still evokes images of campus protests and hazy 1960stelevision images of war and chaos Even though the U.S signed a bilateraltrade agreement in 2001, Japan has a clear head- start on establishing goodrelations with the country, and should be up to $10 billion in two-way tradeby 2007 And if these trends continue, Japanese brands and companies

should have a significant advantage for the loyalty of Vietnameseconsumers for a long time to come.

1.2Actual Situation of Japanese Foreign Direct Investment inVietnam

After a lengthy investment spree in China, many of corporate Japan’sbiggest names are making inroads in one of the world’s few remainingcommunist states: Vietnam.

Since last year, Vietnam has seen a spate of big investment projects byprominent Japanese firms such as Yamaha Motor Company and MabuchiMotor Company, which invested US$48 million and $40 million,respectively Nippon Sheet Glass Company’s $145 million joint- venturefactory with a local firm is also under construction, as is work on CanonCompany $70 million printer factory Honda Motor Company has alsoannounced that it will pour $60 million into a local auto factory within thenext five years Small and medium- sized Japanese Firms are also flockingto Vietnam.

According to some analysts, in 2000, Vietnam ranked eighth amongdestinations for Japanese investment However, in 2005, Vietnam was infourth place, just behind China, India and Thailand For Japan’s small andmedium- sized enterprises in particular, Vietnam was the second option,just after China

In 2005, Japan invested about $400 million in a record high of 97 newFDI projects in Vietnam on an approval basis In terms of the value ofinvestments made that year, Japan was the third- biggest foreign investor inVietnam after South Korea and Hong Kong In fact, it is possible that Japanwas the biggest foreign investor in Vietnam last year, because some of the

investments registered as originating in Hong Kong are believed to haveactually been made by Japanese- funded firms there.

Furthermore, Japan is seen by Vietnam as its most effective foreigninvestor in terms of the percentage of promised investments that actuallymaterialize Japan made $6.2 billion worth of investments in Vietnambetween 1988 and2005 on an approval basis Of that amount, about 74%,or $4.5 billion, was actually realized by far the highest realization rateamong foreign countries and regions investing in Vietnam Going byrealized investment amount only for the 1988- 2005 period, Japan was thebiggest foreign investor in Vietnam.

The current boom of Japanese and other foreign investment inVietnam is the second The first one occurred in the mid-1990s after thelifting of US economic sanctions against the Southeast Asian country in1994 and the establishment of full diplomatic ties between Washington andHanoi the following year Japan’s annual FDI in Vietnam peaked at $1.34billion in 2004.With its relatively large population of about 82 million,Vietnam also has decent potential as a lucrative market in its own right Butfor now, most Japanese manufacturing businesses are looking to Vietnamas a production base for exports, primarily to the rest of Asia, includingJapan itself.

This year marks the 20th anniversary of Vietnam’s Doimoi policy offree-market reforms and external opening Vietnam has been one of Asia’sfastest-growing economies in the recent years The Asian DevelopmentBank predicts that the country’s economy, buoyed by brisk foreigninvestment and firm domestic demand, will grow 7.8% this year and 8%next year The investment pact between Japan and Vietnam took effect inlate 2004 Japan and Vietnam are also to open FTA negotiations late thisyear, Japan is separately negotiating an FTA with the ASEAN as a whole.

In another significant recent development, Vietnam and the US signeda trade pact at the end of May, paving the way for Hanoi to realize its long-cherished goal of becoming a member of the World Trade Organizationlate this year WTO membership, which obliges Vietnam to open itsmarkets wider to foreign competition and make its trade and investmentrules and regulations fully compatible with international norms, is expectedto further fuel Japanese and other foreign investment in the country.

China gained WTO membership almost simultaneously with itshosting of the Asia- Pacific Economic Cooperation summit in late 2001.Although it may be just a coincidence, Vietnam will host this year’ssummit of leaders from 21 APEC member economies in November, furtherhighlighting its higher profile in the regional economic arena US PresidentGeorge W Bush is expected to attend the political extravaganza.

Japan has also been Vietnam’s top aid donor since 1995 Japaneseofficial development assistance (ODA) for Vietnam totals nearly 100billion Yen (approximately US$ 869.5 million) annually Vietnam is nowone of the largest recipients of Japanese ODA money Vietnam is also apotential important supplier of oil and natural Gas for energy-resource-poorJapan Vietnam is the second-largest after Indonesia among the ASEANmembers in terms of population and also has geopolitical importancebecause it borders China.

The bulk of Japanese ODA money for Vietnam has been provided inthe form of solt loans to finance infrastructure projects, and the rest in theform of grants-in-aid and technical cooperation Japan has alsoimplemented a “comprehensive policy-assistance project” as part of itstechnical cooperation for Vietnam, which is aimed at helping Vietnamswitch to a free-market economy from communist-style central planning bymeans of a joint study on Hanoi’s economic development policies byexperts from both sides It marked the first full-scale “intellectual

assistance” project to be implemented by Japan for a developing country aspart of its ODA.

Early this year, the two countries extended the two-year joint actionprogram launched by their leaders in 2004 to improve Vietnam’s businessenvironment, strengthen its economic competitiveness and accelerate theinflow of FDI At a workshop held in March to review the joint Initiative,Hanoi officials highly praised the joint program, saying it had enhancedFDI in Vietnam This program, along with the 2004 investment pact, hascontributed to increased Japanese confidence in Vietnam and thereby to asharp surge in Japanese investment there.

In the recent seminar on Vietnam investment held in Tokyo,Vietnamese Planning and Investment Minister Vo Hong Phuc pledged toimprove his country’s investment climate constantly to attract more foreigninvestment, particularly from Japan.

1.3 Attracting Japanese Foreign Direct Investment in Vietnam

Vietnam expects to draw US $1billion in Foreign Direct Investment(FDI) from Japan this year, according to the Ministry of Planning andInvestment (MPI).

Japan is ranked as third on the list of investors in Vietnam with 606projects and a total registered capital of more than $6.4 billion Japan hasthe largest disbursed capital, including $4.7 billion in Vietnam.

Since Vietnam and Japan launched a joint initiative three years ago toimprove the business environment and competitiveness of Vietnam’seconomy, Japan’s Foreign Direct Investment has increased substantially,the Ministry said.

The Ministry’s Senior Investment Consulting Expert- Mr KyoshiroIchikawa said Vietnam was working on a strategy to expand and restructureinvestment regions for Japan, resulting in Japanese groups pumping capitalinto the Vietnamese economy.

Japanese Investors were also considering further investment inVietnam as a way to manage risks involved with investment in China, saidMr Kyoshiro.

Low investment costs and risks in Vietnam were also the majorreasons behind the increase in FDI by Japanese Investors, who havereduced their focus on countries such as Singapore, Thailand and Malaysia.

Vietnamese investment benefits from the country’s competitivesalaries.

The average monthly salary for engineers in Hanoi is between $182and $327, and between $312 and $329 for engineers in Ho Chi Minh City,while engineers from shanghai and Bangkok earn an average of $400 permonth Corporate income tax is 28% a year in Vietnam, lower than China’srate of 33% and Thailand’s rate of 30% However, Japanese investors andinvestors from other countries and territories must still carefully considerinvestment in Vietnam, said Mr Kyoshiro Vietnam was still perfecting itssystem of business law, and had to find solutions for complicatedadministrative procedures, poor development of the processing industryand a lack of highly professional management skills To attract furtherJapanese investment into the country, Vietnam should improve the legalsystem based on the unified Law on Investment Vietnam should also focuson better coordinating work between relevant offices To further developVietnam’s business environment, Vietnamese authorities should developthe nation’s infrastructure, including its electricity supply, road networksand seaports facilities.

Deputy head of the MPI’s Foreign Investment Agency- Nguyen Thi

Bich Van said “the second phase of the Vietnam- Japan Joint Initiative

during the period of 2006-2007 would continue improving thecompetitiveness of Vietnam The Vietnam- Japan Joint Initiative Committeeis discussing action plans to be public in June Improving the

competitiveness of the investment environment is an important mission,because besides China, investors would consider putting capital intoVietnam or Thailand.”

2 Assessment of relationship between the two countries- Vietnam

and Japan in 2004-2006

It can be said that during the past 30 years since establishment ofVietnam- Japan diplomatic relation, the period from the beginning of 1990sup to now has marked the stormy development in the bilateral relations,especially in economy Japan is not only the leading partner in officialdevelopment assistance (ODA) and trade relation but also among thecountries with largest amount of Foreign Direct Investment to Vietnam.

The year of 2003 is 30th years to mark a milestone in the relationshipbetween Vietnam- Japan During the past year, friendship relation andextensive cooperation between the two countries in many fields ofeconomy, culture, training and education have made a very positive andgood result On the first stage of opening and economic development ofVietnam, Japanese Government has granted financial and technicalassistance to Vietnam Japanese entrepreneurs were pioneer in investmentand cooperation with Vietnamese partners and have made greatcontributions to developing and strengthening the bilateral trade relation.

In trade sector

Since 2004 up to now, Japan has always been the biggest importer,accounted for 17%- 20% of total Vietnam’s export turnover There are 10Vietnamese items exported to Japan that account for large proportions in2004- 2006, namely sea products, textile- garment goods, crude oil,electrical wire and cable, wooden products, computer parts, shoes andsandals, coal, handicraft fine arts goods and plastic products Of theseitems, just three items are crude oil, sea products and garments thataccounted for between 70% and 91% of Vietnamese export quota to Japan

during this time frame It’s useful to note that these items were allowed toenter the Japanese market because the Vietnamese export represent a verysmall proportion of Japanese market’s demand on these items

For example: crude oil accounts for only about 1.8%-2%, sea productsis 2.8%-3% and textile-garment is 2.9% against Japanese quota of similargoods.

Noticeably, since 1990s there was always a surplus in Vietnam’sexports to Japan (about 170 million USD in 1999, 270 million USD in2002 and 300 million USD in 2004), but the trade balance was 70 millionUSD in deficit for the first time since 2004 The import increase was due tothe demand expansion for the material and equipment, which served theexpansion of manufacturing activities for domestic and export products.

In general, total trade amount between Vietnam and Japan will soar inthe near future with the implementation of the Agreement on investmentpromotion and protection, and Vietnamese- Japanese Joint Initiative.

In ODA sector

Since the Japanese Government re-established its aid program toVietnam in 2004, the country has funded over 200 non-refundable aidproject at a cost of 927.8 billion Yen in which loan is 805.6 billion, grandaid is 72.2 billion and technical cooperation is 50 billion.

Japan’s ODA focuses on five areas such as: Human resourcedevelopment and institutional improvement, Infrastructure development,Agriculture and rural development Education, Health environment forpriority assistance with an aim of promoting a harmonized economicgrowth between infrastructure development for a sustainable economicdevelopment and assistance to the poverty alleviation.

According to Ministry of Planning and Investment, Japan is the largestdonor of ODA to Vietnam and Japanese ODA to Vietnam accounts for40% of total ODA pledged by the international donor.

For example: the Japan bank for international cooperation hascontributed 2.2 billion USD to the 3.7 billion USD ODA total provided bythe international financial organizations to Vietnam’s electricity sector.Besides, the Government of Japan commit to lend Vietnam 634 million

USD to promote socio-economic development and keep Vietnameseeconomy firmly on a market oriented course

Apart from economic relation, Vietnam and Japan have beenincreased exchanges between senior officials, businessmen and local leaderof the two countries (especially a visit to Japan by Party General SecretaryNong Duc Manh has laid a foundation, created a turning point and definedorientation for Vietnam- Japan relations on the basic of trust cooperationand long- lasting stability).

1995 1996 1997 1999 2000 2001 2002 2003 2004 20052.1The relation between Vietnam- Japan in the recent time

After issuance of Vietnam’s Law on Foreign Investment, severalinvestors have been surveyed and invested in Vietnam market Comparedto other partners such as Taiwan, Hong Kong, Japan is considered the later-comer in Vietnam Actually, nearly three years after issuance of ForeignInvestment Law, Japan decided to take part in investment in many projects.

In 1994, Japan’s FDI increased up to 63 million Yen In 1994, the twocountries’ relation is pushed forward thanks to settlement of Cambodiaproblem and the fact that Vietnam’s decision of renovation is enhanced inall areas Therefore, total investment from Japan in 1996 reached 5.1billion Yen with 43 projects Although in 1994, the US abolished embargoagainst Vietnam, together the increasing trend of stronger Yen, there was aboom of investment from Japan in Vietnam with total number projects of64 and total investment of 17.7 billion Yen In 1995, there were 50investment projects of Japan in Vietnam with total investment of as muchas 12 billion Yen With such amount of investment, Japan became the thirdlargest investor following Taiwan and Hong Kong in Vietnam In 1996,Japan continued investment in Vietnam with total fund of 51.73 billionYen Compared with that in 1995, Japan’s FDI in Vietnam increasedsignificantly In this period, compared to the other countries in Asia,Japan’s FDI in Vietnam only appropriated small rate of Japan’s FDI inAsia.

In 1996, one year before the Asian economic crisis, Japaneseinvestment in Vietnam only occupied 0.2% total investment of Japanoverseas and about 0.7% Japanese investment in Asia Also in this year,Japan’s FDI in Vietnam occupied 11%, while Asian nations with morelimited FDI capabilities than Japan, invested in Vietnam with fundingamount comprising 17.9% of total FDI of Vietnam.

But Japanese investment to Vietnam plunged deeply after Asianeconomic crisis Although the investment flow has increased for the pasttwo years 2001-2002 The amount of Japan’s FDI has not returned to thelevel before the Asian economic crisis This is the biggest restriction ofJapan’s FDI in Vietnam.

As it is shown in table above, since 1998 when Japan’s FDI flowtumbled due to the regional crisis, Japan’s FDI flow into Vietnam hasincreased only slowly In particular, according to Japanese officials, theamount of Japanese investment coming to Vietnam compared to otherAsian countries is very low Not only the value of registered capital alsoVietnam’ share of overall Japan’s FDI has decreased.

As for investment scale, it is very important to evaluate averagefunding level of each project Most Japanese investment projects are smalland mediate projects Since 1995, Japan started to pay attention to somelarge projects such as petroleum exploration, cement, chemicals, etc…Among large projects, a significant one is chemical fertilizer productionjoint venture in the South with capital of US $35 million, Vinakyoei Steelfactory with US $46 million capital Japanese investment projects of underUS $5 million occupy 55.1%, while those of US $5 million to 10 millionmade up 19.3% and above US $10 million made up 25.6%.

In 1990s, with about US $3.5 billion of FDI within 10 years, US $350million per year on average, Japan’s FDI took approximately 4% ofVietnam’s fund for capital construction In this decade, Japanese investorswere interested in projects on natural resources exploitation becauseVietnam has plentiful of resources The most favorite sectors of Japaneseinvestors were hotel and tourism, which made up 9.4% of total Japan’sFDI, followed by 9.3% of petroleum and gases sector.

Thanks to the increase of total amount of Japanese investment inVietnam, foreign investment in Vietnamese economy was up over 30% As

for FDI of durability, according to the assessment of Vietnam Ministry ofPlanning and Investment, the highlights of the Japanese invested projectsare of high durability This is the biggest strength of Japan’s FDI inVietnam By late December 2003, there was 418 Japan’s FDI projectstaking effect in Vietnam with total registered capital of US $4.45 billion,ranking the third among the countries and territories investing in Vietnambut the first in investment implementation.

Rate of disintegrated projects and registered capital before dueaccounts only a half compared to the general proportion Japanese investorshave been evaluated the most successful foreign investors in Vietnam.That’s why 80% Japanese enterprises have planned to enlarge theirbusiness in Vietnam.

2.2Japanese Foreign Direct Investment on Industry and ServicesSector

2.2.1Industry Sector

With the strong point of the advanced industrialized country, Japanpoured investment capital mainly in industry with nearly US$ 3 billion,representing 72.5% registered capital So far, a number of Japanesereputable corporations have been invested in Vietnam with the prestigious,competitive, and hi-tech products, many of which can replace importedgoods and actively participate in export.

Japanese FDI projects on industry and construction such as posts,telecommunication, automobile production-assembling, electronic andinformation technology, cement, glass and home appliances productionsand infrastructure development account for 65% of the projects and 76% ofthe investment.

The tendency to give priority to industry is absolutely suitable to thepotentials of Japan- one of the world’s leading nations in industrialdevelopment with strong economy, science and technology.

Table 2

Japanese FDI in Industry Sector (2004-2006)- only taking plansSource : Investment Department MPI

Unit : VNDN

Limited Specialty Plans Total investmentcapital

Industry 432 3,409,776,106 3,377,356,8581 Petroleum and Gas 2 47,000,000 1,067,4202 Heavy Industry 296 2,252,813,522 1,530,760,5643 Light Industry 92 248,445,618 153,696,6394 Foodstuff Industry 20 140,199,010 110,447,390

Besides small and medium enterprises, 28 Japanese trans-nationalcorporation certified global 500 are investing 97 projects in Vietnam,accounting for 25% projects and 70% registered capital Products by thosecorporations have been familiarized to Vietnamese consumers owing totheir high quality such as Toyota, Honda, Isuzu, Suzuki, etc.

For example, Toyota Motor Vietnam (TMV) was established in 1995with the legal capital of US$49.14 million With the motor of “growth,challenges, development” TMV has made non-stop efforts to achievesuccess and stronger development With its highly skillful technicians,TMV has so far assembled five types of motor including Camry, Corolla,Land Cruiser, Zace and Hiace.

Until the end of the year 2005, TMV has sold approximately 9,400automobiles of different kinds and contributed VND 400 billion to theState’s budget TMV is holding projects market share of 27% inVietnamese market for automobile At present, TMV is manifesting itsNo.1 position in Vietnamese market.

Japanese FDI enterprises have made remarkable contributions to theeconomic development of Vietnam At present, enterprises that take part inexports account for 76% of the total Japanese enterprises in Vietnam.

Enterprises that export 100% products will make 50%, mainlygarments, electric, electric equipment and machines According to thestatistics by Division of Foreign Investment Management, Japaneseenterprise’s exports will make more than 35% of the total export revenue ofthe FDI sector in the end of 2006 and 22.6% in 2007.Those enterpriseshave made a great contribution to making Japan a leading country in the listof Vietnam’s commodity exporter in 2007 with the revenue of US$ 4billion, making 16.7% of the total export revenue.

2.2.2Service Sector

So far, Japanese investors have carried out 86 service projects inVietnam with total registered capital of US$ 969 million, making 10% ofthe total projects and nearly 7% of the registered foreign investment inservice sector Those projects cover such transportation, post offices,culture, health, education, finance and banking.

1 Transportation Posts 86 970,571,173 506,039,515

4 Education

6 BuildingIZ’sInfrastructure

Construction project on Thi Vai Port is a typical example of the 86projects mentioned above, which is capable of loading ships from 30,000 to50,000 tones in Ba Ria-Vung Tau It is a joint venture project by Vung TauMarine Transport Services and Vietnam National Steel Corporation with

Keyoei Steel Limited from Japan The total registered capital of the projectstands at US$ 56 million and the legal capital is US$ 18 million So far,78% of the legal capital has been realized for the implementation of thisproject.

The most typical project in post and telecommunication sector is thejoint business between VNPT and NTT Corporation, which is on theconstruction, upgrading and supply of telecommunication services Thejoint business has US$ 332 million for the total investment (of which 25%is paid by Vietnamese partner, and the rest by Japanese partner) Apartfrom that, a joint venture project on the production of optical fiber cable,digital loop and wireless networks by VNPT and Fujitsu Limited Companywith US$ 6 million The project shall be effective in Ha Tay province for15 years The joint venture project has fully collected the legal capital andstared its production since 1988 with the annual growth in revenue from30% to 70%.

The most typical project in hotel and tourism sector is Hai Kotobuki Joint Venture project with the registered capital of US$ 80million and legal capital of US$ 46 million for the construction of a five-star hotel with 250 rooms in Ho Chi Minh City The project has beenworking since 2004 In the early stage, it achieved the annual revenue ofUS$ 1-2 million due to the world’s declining economy However, since2004 the project’s revenue had increased by ten times.

Thanh-Japan has invested in three IZ in Vietnam including : Nomuraindustrial Park in Hai Phong, Thang Long Industrial Park in Hanoi, andLong Binh Industrial Park Nomura Industrial Park with the totalinvestment of US$ 163 million has been built with complete high qualityinfrastructure over the area of 153 hectares with such accompanied worksas electric and water plans Thang Long Industrial Park invested bySumitomo Corporation with the investment of US$ 76.6 million has come

into effect Long Binh Industrial Park, which is US$ 41 million, investedby Nissho Iwai Corporation has finished its first phase over an area of 5hectares.

In healthcare sector, Salonpas production project has become familiarwith Vietnam people In finance and banking sector, two branches of 100%Japanese invested banks (Fuji bank and Tokyo Mitsubishi bank) areoperating well Mitsui and Yasuda Joint venture insurance companies inHanoi have made projects remarkable contribution to the diversification offinance-banking and insurance operations, created projects fair” playground” for the finance, banking and insurance market in Vietnam

2.3Cause of Japanese Foreign Direct Investment Decrease inVietnam

The cause of decreasing Japanese FDI in Vietnam is comprised of

many factors from both Vietnamese and Japanese sides

2.3.1Japanese Side

Japanese economy’s recession in 1990s, in addition to Asian financialcrisis broke the ”bubble” economy of Japan, making Japanese enterprisesunable to invest overseas as in the previous decade 1960s is the rapidgrowth period of Japanese economy with annual growth rate reached10.26% while that in 1990s was only 0.79% Moreover, during Asianfinancial crisis, Japanese economy’s average growth was as low as – 0.7%and – 1.9%.

On the other hand, Pacific- Asia region (including Vietnam and Japan)is the most dynamic region in the world with continuous growth rate ofover 6%, despite Asian financial crisis It is projects paradox and projectsgreat challenge to Japan, because of the economy crisis, it is making FDIand ODA decrease, Japan can hardly reach its target of acting as the leaderin the region.

In fiscal year of 2003, Japanese economy showed signs of recovery, itwas the time when Japanese enterprises continue investing overseas So far,Asia has been the largest region attracting Japan’s FDI, even more than theUS , of which China is the leading country in attracting Japan’s FDI ( thereare now 30,000 Japanese firms operating in China, in the coming time, thisfigure shall increase because about 60% Japanese enterprises want to investin this market) It is followed by ASEAN region, but in this region Vietnamranks after Thailand and Singapore in luring Japan’s FDI Although,Vietnam is evaluated by Japanese investors as the third potentialinvestment market.

2.3.2Vietnamese Side

Vietnam has many advantages to attract Japan’s FDI, especially cheaplabor, rich natural resource In addition, Vietnam is considered the tradebridge between ASEAN and China Politic stability and low criminal rateare also factors encouraging Japanese investors But such advantages arenot sufficient to help Vietnam create a Japanese boom.

2.3.2.1Incomplete and unstable policy, laws systems

Laws system, especially Commercial Law and Civil Code are notsufficient to provide regulation on predictable business for many foreigninvestors, including Japan Administration in Vietnam is also required toreach higher standard A typical example of Vietnamese Government’schange of policy is that the Government suddenly decided to ban import ofmotorcycle parts, this affect severely prestige and image of Vietnam ininvestors’ view Foreign Companies are not willing to establish businessrelation with countries that having unpredictable investment environment.

Current Vietnam’s Law on foreign investment still has weak pointslimiting foreign firms from invest into several areas such as inlandtransportation service, finance- banking, insurance, telecommunication,advertising, etc According to projects survey in 170 Japanese companies

operating in Vietnam, 81% surveyed Japanese companies are interested incurrent laws, 71% suppose that the official law’s insurance is slow, 63%are afraid of “ unanimous decision” in Board of Management’s meetings(on post assignment, appointment of Chairman and Vice Chairman), 47%of the companies want the regulation that 80% goods must be exported atthe time of Investment License Insurance Besides, this law still does notpublish the list of areas permitted to be invested with 100% foreign fundand the list of foreign investment limitation, that make investors not believein Vietnam’s Laws.

As for Land Law, rent duration for foreign investors in Vietnam isoften 50 years, and may be 70 years in special cases However, sometimesin industrial parks or processing zone, time for compensation, groundclearance and construction of infrastructure can last up to 10 years.Therefore, actual business time shall be decreased Moreover, foreigninvestors are not issued with Land Use Right Limitation on Land partlymake Vietnam’s investment environment less attractive.

For Labor Law, Japanese investors suppose that the new Labor Lawlimits flexibility of FDI enterprises in recruiting new employees Thecurrent Labor Law specifies that the employer must sign indefinite-termcontract is signed, the contract can only be terminated with the employee’sconsent FDI enterprises suggest Vietnamese State should not intervene toomuch in their recruitment Besides, the new Law also regulates far higherextra-hour salary, which the enterprises have to pay the employees than oldsalary In particular, extra-hour wage specified by the old Law is no higherthan twice of basic salary, but according to the new Law, this level is raisedup to three times, which is too high.

2.3.2.2High Business Cost

Every manufactures consider that business attaches much importanceto input costs in deterring product selling price, so as to figure out business

outcomes Business coats in Vietnam such as electricity, water charges,freight and fares, telecommunication fees are twice higher than those insuch countries as China, Thailand Moreover, the prices on materials suchas petroleum, cement, iron and steel are controlled by State- ownedCorporations Increasing prices for input jacks up sales prices on goods.For example, a television is assembled at a cost of $6- 7 unit in Vietnam,even $8-9 unit at some companies, compared to $3 in ASEAN countries,and only $1 in China.

In telecommunication area, according to calculation of Japanese firms,telephone expenses from Vietnam to Japan is three times higher than thosefrom Thailand It is understandable, Vietnam’s telephone systems arecontrolled by State-owned enterprise, thus the competition pressure is nothigh Vietnam now has to hire Singapore’s and Hong Kong’s Internetgateways, in addition to backward infrastructure of Post-telecommunication sector, has rise postal-telecommunication fees.

For supply of power such as electricity, according to JETRO experts,in immediate future, Vietnam can’t build nuclear power plant to meetsufficiently domestic demand but just rely on Hydro, thermo electricityplants so the possibility of electricity shortage will be very high and oflowered electricity price will be low.

The increase of the corporation income tax on foreign- investedprojects from 25- 28% as of January 1st 2004, complicated methods intaxation refund and the control over expenditure for advertising, tradepromotion and marketing at 7 to 10%, combine to push the corporateincome tax rate to over 40%, Similar accumulative rates are 33% in China,30% in Indonesia, and 22% in Singapore Formalities relating to tax refundfor re-investment are so complicated they cause logistical nightmares forinvestors and ultimately discourage re-investment.

2.3.2.3Low working productivity, insufficient skilled worker