INTERNATIONAL INVESTMENT REPORT FDI TRENDS AND ECONOMIC IMPACTS – THE CASE OF VIETNAM

FOREIGN TRADE UNIVERSITY HO CHI MINH CITY CAMPUS INTERNATIONAL INVESTMENT REPORT FDI TRENDS AND ECONOMIC IMPACTS – THE CASE OF VIETNAM Lecturer: Ph.D Phạm Thị Mai Khanh Class: K57CLC4 Student: Nguyễn Thị Sáng 1801015753 Đặng Thái Sơn 1801015754 Hồ Minh Tâm 1801015767 Bùi Thanh Tầm 1801015773 Quách Minh Tân 1801015776 Nguyễn Chánh Thắng 1801015778 Lê Phương Thảo 1801015809 Ho Chi Minh City, December 27, 2020 Table of Contents INTRODUCTION 1 IMPORTANCE OF FDI .2 1.1 FDI Inward Performance Index .2 1.2 Transnationality Index FDI TRENDS 2.1 2.1.1 Volume of investment 2.1.2 Distribution 12 2.2 Period from 2000 – pre COVID-19 From Covid-19 onward 18 2.2.1 The world situation: .18 2.2.2 Vietnam situation 21 ECONOMIC IMPACTS OF FDI IN VIETNAM 22 3.1 Positive impact 22 3.1.1 Contribution to GDP growth and state budget revenue 22 3.1.2 Increase the proportion of exports 23 3.1.3 Contribution to labor productivity growth 25 3.2 Negative impacts 26 3.2.1 Tax avoidance and abusive transfer pricing by TNCs 26 3.2.2 Crowding out local firms and discouraging domestic entrepreneurial development 28 3.2.3 Transfer of polluting activities or technologies 29 CONCLUSION 30 REFERENCE .31 Figures Figure 1.1.1 FDI Inward Performance Index Figure 1.2.1 Transnationality Index Figure 2.1.1 Number of projects and implementation capital Figure 3.1.1 GDP Distribution of Different Types of Businesses (2016-2018) 23 Tables Table 2.1.1 Vietnam’s primary FDI Stream 1988-2019 10 Table 2.1.2 Types of Investments 1988-2001 in Vietnam (Source: EIU 2002) 13 Table 2.1.1 Top-ten Vietnamese Provinces with Registered FDI in 2009 14 Table 2.1.4 Foreign Direct Investment in key economic zones accumulated up to 2018 15 Table 2.1.5: Sectoral Composition of Registered FDI in 2009 16 Table 2.1.6 Sectoral Composition of Registered FDI (1988-2016) 17 Table 3.1.1 Export share (%) by economic sector of Vietnam from 2010 - 2019 (source: GSO) 24 Table 3.2.1 Calculating ICOR coefficient of Economic Sectors for the period 20052013 27 Table 3.2.2 Tax Stability and Tax Buoyancy of Economic Sectors for the period 2005-2013 27 Table 3.2.3 Market stealing effects of FDI in Vietnam (2001-2010) 28 Table 3.2.4 Results of pairwise granger causality test 29 INTRODUCTION Foreign Direct Investment (FDI) plays an increasingly pivotal part in developing nations due to its well-recognized role as a growth-enhancing element in these countries Works on economic growth indicated that there are certain channels through which FDI has a persistent impact on economic growth FDI can exert its impact on output and income by increasing the stock of capital, labor force by generating job opportunities, and boosting human growth by means of technology and knowledge transfers via organizational structures, vocational training, skill acquisition and novel management techniques What is Foreign Direct Investment (FDI)? Based on WTO’s definition, foreign investment occurs when an investor based in one country (the home country) acquires an asset in a different country (the host country) with a view to managing that asset According to the IMF and OECD’s definitions, FDI indicates the ultimate goal of obtaining a long-term interest by the resident entity in one economy (―direct investor‖) in an entity resident in an economy other than that of the investor (―direct investment enterprise‖) Thus, both entities - including the host country and the home country are referred to in these definitions Since the advent of market-oriented economic reforms in 1986, there emerged the need to foster the existence and role of multi-ownership structure in Vietnam via two sectors: the private sector and FDI Also, the transition of Vietnam into trade liberalization was the result of two critical policies - market orientation and local economy Acknowledged this, the Vietnamese authorities partook in the seek for FDI with other regional and global markets This was achieved by restructuring the domestic economy and expanding the economy for external trade and investment Economic growth and FDI in Vietnam witnessed a dramatic increase There was a fourfold increase in GDP from 1986 to 2006 The total registered capital in Vietnam during the period from 2001 to 2005 was 13 times that of the 1988-2000 period In addition, 2006 saw the highest (US$12.0 billion) - which accounted for one sixth of the total capital registered These achievements can be ascribed to Vietnam’s market-oriented policies and integration into the global economy through large foreign capital inflows In Vietnam, one of the most critical milestones which marked the transformation from a centralized management economy to a free market economy is the implementation of the Law on Foreign Investment in 1987 This was also the emerging period of the flows of foreign flows into Vietnam and global integration in many disciplines Despite the slow growth of capital flow, the arduous efforts of Vietnam thereafter by imposing many policies to attract FDI, including flexible financial and monetary policies, tax policy reform, tight control over monetary aspects, deep and wide integration had succeeded in drawing more foreign direct investment This culminates in the rapid development in both the quality and quantity of FDI flows The purpose of this article is to shed light on the impact of FDI growth on economic development in Vietnam IMPORTANCE OF FDI 1.1 FDI Inward Performance Index As we can see in Figure 1.1.1, except in 2000 and 2006, in the remaining years of Vietnam from 2000 to 2019, Vietnam’s inward performance index values are all more than one, indicating that, compared to the size of our economy, Vietnam’s FDI performance seems to be very attractive to the foreign investors The main reasons are coming from some advantages in our strategic location in Asia, and government policy that attracts FDI inflow in the 2000s with a great deal of FTAs Figure 1.1.1 FDI Inward Performance Index In general, the fluctuation of the FDI Performance Index was unstable From 2000 to 2005, the index was all below 2, tended to go up at the first half of the period but go down at the second half and reach the lowest point ever in 2006 (0.85) due to the impact of the Asian financial and monetary crisis in 1997 The next period from 2006 to 2009 could be considered as a magical breakthrough growth, in which the index rose from 0.85 (2006) to 3.0 (2009) the highest point ever in the history of Vietnam’s economy The main reason for this significant growth is that in 2007, Vietnam has become an official member of the World Trade Organization (WTO) has facilitated the expansion of export markets and service business to the world Secondly, along with the stable political situation, the rapidly growing economy, especially activities within the framework of the APEC Summit which took place during 2006 in Vietnam have increased the interest of foreign investors to Vietnam, especially groups and potential enterprises of 21 APEC economies In 2009, the whole world witnessed a serious financial crisis that profoundly affected all aspects of the economy and Vietnam is not an exception This event resulted in a significant fall in the FDI Performance Index since 2009 and the following years The decline in FDI is due to the impact of the global economic recession, investors have decreased confidence, in addition to increased inflation and input costs, site clearance of many projects has faced many difficulties Until 2012, a slight increase in FDI inflows led to the rise again of the performance index but in general, this increased amount is insignificant and did not improve in 2016 as well In 2016, with a series of Free Trade Agreements (FTAs) taking effect, FDI capital began to increase, leading to an increase in FDI Performance Index as well Generally, the total registered capital of new projects, additional capital, and investment in the form of capital contribution and share purchase in 2016 reached more than 24.3 billion USD Despite the fact that there was a slight decrease in FDI inflow value, but disbursed capital increased by 9% compared to 2015, reaching the highest disbursement ever This also can explain the number 2.33 of the FDI Performance Index in 2017 In 2018, the FDI Performance Index reached the highest peak ever in our history, breaking the record of 2009 In order to explain this, there was the main reason that after years come into effect, FTAs established in 2017 now can fully fulfil their potential to flourish in the Vietnam economy In addition, this is the third consecutive year that disbursed FDI has continuously increased, from $ 15.8 billion in 2016 to $ 17.5 billion in 2017 and reaching $ 19.1 billion, up 9.1% over the same period, which can reflect that out capacity in FDI project management is more and more effective As a result, that made Vietnam an extremely attractive host country for foreign investment Figure 1.2.1 Transnationality Index 1.2 Transnationality Index As we can see, the graph illustrates above-mentioned factors: FDI inflows per Gross fixed capital formation & FDI inward per GDP Overall, the Vietnam Transnationality Index (average of factors) is relatively high, which demonstrated the very important role of FDI in Vietnam's economic activities In the period of 2000 to 2006, the Index is always under 40% and intends to go down, the cause of the above situation is due to the impact of the Asian financial and monetary crisis in 1997 Besides, Vietnam's investment environment has been slowly improved, while facing strong competition from other countries like China But in 2007, the role of FDI became more and more important, demonstrating through the significant leap of Index in 2007 and reaching the highest peak (36.06%) 2008 In these years, Vietnam has officially become one of WTO members which attract a great deal of FDI inflows into Vietnam’s economy As a result, the proportion of FDI contributed to total national investment was larger and larger, confirming the importance of FDI in Vietnam's economy In 2009, as mentioned above, the global financial crisis has seriously damaged the biggest economies as the USA, Japan, etc and FDI inflows in Vietnam, which cause the slight decrease in Vietnam Transnationality Index This number also maintains through 2009 to 2014 due to the post-effect of the financial crisis and there are also no significant steps of government to attract FDI because we are more cautious in this sensitive period After 2015, following a great deal of Free Trade Agreement (FTAs) have been established and come into effect, the contribution of FDI in our economy rises again and keeps going up in the following years 2016 and 2017 But since the year of 2018, the Transnationality Index slowed down and fell (41,47%) because we now realize some disadvantages of larger volume of FDI and have implemented some method the filter the FDI with high quality and improve the capacity in carrying on FDI projects FDI TRENDS 2.1 Period from 2000 – pre COVID-19 2.1.1 Volume of investment Figure 2.1.1 Number of projects and implementation capital In Figure 2.1.1, from 2000 to 2003, FDI influx to Vietnam was quite somewhat idle Total registered capital varied between USD2.8 billion – USD 3.2 billion In spite of the fall in registered capital, new FDI projects increased significantly, from 391 to 791 Consequently, the average capital scale of FDI projects shrinked In the meantime, nevertheless, the capital of FDI projects in Vietnam grew marginally from over USD 2.4 billion to over USD 2.6 billion 24 Calculation (%) Economic area FDI 2010 2011 2012 2013 2014 2015 2016 2017 2018 Preliminary 2019 54,2 56,9 63,1 66,8 67,4 70,6 71,5 72,0 71,4 67,8 Domestic 45,8 43,1 36,9 33,2 32,6 29,4 28,5 28,0 28,6 32,2 sector (%) economic sector (%) Total 100,0 100,0 100,0 100,0 100,0 100,0 100,0 100,0 100,0 100,0 Table 3.1.1 Export share (%) by economic sector of Vietnam from 2010 - 2019 (source: GSO) According to the data table of the General Statistics Office, we can see that the FDI sector is playing an increasingly important role in Vietnam's export activities The proportion of exports contributed from this sector increased sharply from 54.2% in 2010 to more than 71% in 2018, at that time, Vietnam's export value in 2010 was nearly USD 7.5 billion and in 2018 it was USD 243.48 billion, 32 times more than 2010 As of mid-March 2020, the total export value of FDI enterprises reached USD 33.87 billion, an increase of 3.4%, respectively, USD 1.11 billion over the same period in 2019 and accounting for 67.3% The total value of Vietnam's merchandise exports and the balance of payment of the FDI sector reached a surplus of more than USD 5.97 billion Currently, FDI enterprises are present in most of Vietnam's key import and export sectors In July 2020, many export commodity groups of FDI enterprises have 25 turnover of billions of USD, especially in the fields related to high technology Phones and accessories are the largest with USD 24.2 billion, accounting for over 92% of the total export turnover of this commodity group of the country Meanwhile, computers, electronic products and components also reached USD 19.8 billion, accounting for over 84% of total export turnover of the country In addition, other major export commodity groups with a large contribution from FDI enterprises such as: textiles and garments reached nearly USD 9.3 billion; machinery, equipment, tools and spare parts reached 8.6 billion; However, Vietnam's over-reliance on exports and FDI is seen as a potentially risky problem for the country 3.1.3 Contribution to labor productivity growth Theoretically, FDI inflows are interrelated with the labor productivity of the host country, but it should be noted that it will have a positive impact when the domestic enterprises are capable of learning new technology, or sufficient capacity to provide inputs for FDI enterprises Many previous theoretical and empirical studies have shown that FDI has an important role in the growth of labor productivity of the host country and vice versa For example, a research of Hidekatsu Asada (2020) about the effects of Foreign Direct Investment and trade on labor productivity growth in Vietnam in the long run and short run The study using data from 1990 to 2017 and employed the autoregressive distributed lag (ARDL) model of analysis The results confirm the theoretical framework augmenting the positive relationship that exists among FDI and trade and labor productivity growth The ARDL model analysis also revealed that in the long run FDI, and export contributed to the labor productivity growth, whereas the impact in the short run is still vague According to 26 the General Statistics Office, in 2010, the labor productivity of the FDI economic sector reached 186.23 million VND/labour, 1.4 times more than the state economic sector and 8.6 times more than the non-state sector In 2018, the labor productivity of the FDI economic sector reached 225.12 million VND/labour, about 1.3 times higher than the state-owned economic sector and 6.9 times more than the non-state sector However, the labor productivity of the FDI sector increased and decreased unstable and continuously decreased since 2016 Another study by Le Van Hung (2017) shows that FDI plays an important role in directly contributing to the growth rate of labor productivity in Vietnam However, the FDI sector's contribution to labor productivity growth is largely due to the movement of labor from the low productivity sector to the FDI sector with higher labor productivity (accounting for 64%) Meanwhile, the contribution to real labor productivity growth from the FDI sector (minus the contribution due to labor mobility) accounts for a much smaller proportion (36%) This means that Vietnam has received a positive impact from FDI However, in general, the level of positive impacts is still low, mainly due to the weak competitiveness, learning, especially production linkages and participation in the supply chain of domestic enterprises 3.2 Negative impacts 3.2.1 Tax avoidance and abusive transfer pricing by TNCs It can be said that the "fight" between anti-price transfer and price behavior of foreign direct investment (FDI) enterprises is a contradiction without end For FDI firms in Vietnam, in order to carry out price transfer, they use a variety of tactics that are diverse, sophisticated, and even as costly as hiring a specialized professional company on price transfer for advice on transfer pricing For the tax 27 authorities of the host country, tax authorities must seek effective measures to control transfer pricing including investing in modern management systems, databases, interdisciplinary collaboration, and inspection Table 3.2.1 Calculating ICOR coefficient of Economic Sectors for the period 20052013 (Vietnam General Statistics Office, 2014 (Doan, 2015)) Table 3.2.1 shows the ICOR calculated for the whole economy, the State sector, the non-state sector and FDI sector of Vietnam between 2005 and 2013.The ICOR results show that investment of the private sector has the highest efficiency while the FDI sector investment has the lowest efficiency State sector, always considered as a sector invested with less efficiency in Vietnam, is also better than the FDI sector This inefficiency is related to the controlling problems of transfer pricing for FDI businesses in Vietnam during the period Table 3.2.2 Tax Stability and Tax Buoyancy of Economic Sectors for the period 2005-2013 (Vietnam General Statistics Office, 2014 (Doan, 2015) 28 Particularly in table 3.2.2, the state economic sector contributed 4.8% of budget increase, the non-state sector contributed 6.1% and FDI sector contributed 5, 4%, higher than the state sector, but lower than the private sector This analysis showed that the phenomenon of tax evasion of FDI businesses through transfer pricing violations is real and is happening 3.2.2 Crowding out local firms and discouraging domestic entrepreneurial development The report will use the following model (Bao et al, 2016) for illustration purposes: y = b + b FDI _firm + b FDI _ industry + b (FDI _ firm * FDI _ industry) Table 3.2.3 Market stealing effects of FDI in Vietnam (2001-2010) 29 As can be seen from Table 3.2.3, all estimated coefficients on lagged log of real turnover are significant Besides, we can see the evidence of crowding-out effect at firm-level through positively significant coefficients of FDI_firm in OLS and GMM estimations We evaluate the total effect of crowding-out/crowding-in effect at mean of FDI intensity at industry level As such, the crowding-out/crowding-in effect would be: Δreal turnover/ΔFDI_firm = b1+ b FDI _ industry >0 Overall, there is evidence of the crowding-out effect of FDI presence on firms in Vietnam in the period of study from 2001-2010 3.2.3 Transfer of polluting activities or technologies The report will use the following model (Phuong et al, 2018) for illustration purposes to to test whether there is a two-way relationship between CO2 emissions, FDI and economic growth in Vietnam: FDI = a a CO + a GDP + u t 0+ 2t t t CO = b + b FDI +b GDP + b GDP + u 2t t t t t Table 3.2.4 Results of pairwise granger causality test 30 The results of Granger causality test in Table 3.2.4 show that there are one-way relationships between CO2 and FDI; two-way relationships between CO2 and GDP; one-way relationships between GDP and FDI It is explained as follows: The pollution level is dependent on not only itself but also changes in FDI attraction and economic growth FDI attraction is dependent on not only itself but also rate of economic growth CONCLUSION The objective of this paper is to examine the correlation between FDI and economic growth in Vietnam during the period from 1987 to 2019 Drawing from the findings of the article, some policies are proposed as follows First, it is essential that Vietnam modify its strategy from attracting FDI based on natural resources and cheap labor to high-tech FDI projects to be the driving force for economic enhancement in the following period through tax policies, land, infrastructure development, high quality labor Second, it is also advisable to partake in international organizations and be committed to enacting signed commitments on trade and investment agreements to expand the export market, thus boosting economic growth Third, Vietnam should actively impose transformation to further improve the investment index and financial liberalization to expand production, which amounts to economic growth Fourth, due to the adverse effect of inflation on economic growth, it is recommended that Vietnam impose stringent methods to control annual inflation index and become the springboard for economic growth 31 REFERENCE Foreign research 1) Anwar, S 2013 Is Foreign Direct 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[online] Financial Times Available at [Accessed 28 December 2020] 25) Thuy Chung 2020 USD 173 billion of import-export turnover in the hands of FDI enterprises [online] Vinanet.vn Available at [Accessed 28 December 2020] 26) Tranh, D 2015 Negative Impacts of Transfer Pricing Violations of FDI in Vietnam Available at [Accessed 28 December 2020] 37 27) Van Xuan 2018 FDI contributes nearly 20% of GDP [online] Journal of Finance Available at [Accessed 28 December 2020] 28) Vu Thi Yen Anh, 2019 Thu Hút FDI Vào Việt Nam: Lượng Tăng, Chất Chậm Đổi [online] TapChiTaiChinh Available at: [Accessed 28 December 2020] 38 No Name Responsibility Nguyễn Thị Sáng - Leader 1801015753 - Positive impact of FDI in Vietnam - Design powerpoint Đặng Thái Sơn 1801015754 - Importance of FDI - Presenter Hồ Minh Tâm 1801015767 - FDI trends from Covid-19 onward - Formating report paper Bùi Thanh Tầm 1801015773 - Introduction and Conclusion - Presenter Quách Minh Tân 1801015776 - FDI trends (volume of investment) - Presenter Nguyễn Chánh Thắng 1801015778 - Negative impact of FDI in Vietnam - Summarize report for presentation Lê Phương Thảo 1801015809 - FDI trends (distribution) - Summarize report for presentation ... the rapid development in both the quality and quantity of FDI flows The purpose of this article is to shed light on the impact of FDI growth on economic development in Vietnam IMPORTANCE OF FDI. .. economic reforms in 1986, there emerged the need to foster the existence and role of multi-ownership structure in Vietnam via two sectors: the private sector and FDI Also, the transition of Vietnam. .. reduce the economic impact of the pandemic Geopolitical and financial threats and continued trade tensions contribute to the uncertainty The pandemic is a supply, demand and policy shock for FDI