FDI Attraction: Many Gaps to Fill

The Foreign Investment Agency under the Ministry of Planning and Investment said foreign investors registered to invest US$2,046 million in the year to March 20, down 38.6 percent year on year, and they applied for adding US$1,278 million to their existing projects, down 60.7 percent year on year. The sharp decline in foreign direct investment (FDI) raises worries about their pessimistic trend for Vietnam’s economy 2014.

 

But, according to many economists, the slump in FDI value in the first months of 2014 is not enough to portray the economic picture in the year because FDI is a long-term source of capital. The value of fresh and additional FDI capital in a quarter depends on specific situations and it does not reflect the trend in one or a few years. For that reason, the result does not necessarily indicate what is really going on.

 

One year earlier, Samsung’s project in Thai Nguyen had a registered investment capital of US$2 billion, equal to the entire FDI capital in the first quarter of 2014 or Nghi Son Refinery and Petrochemical Company added US$2.8 billion to its project in Thanh Hoa province, as many as 2.3 times the value of the additional FDI capital in the first quarter of 2014.

 

Previously, FDI capital was seen as a key factor to spur economic growth, even at double-digit rates for years, in some provinces like Dong Nai and Binh Duong. These localities had to recruit guest workers from other provinces because of insufficient manpower supply. Amid economic slowdown, most companies have to scale down production and lay off workers.

 

FDI flows have given a strong boost to Vietnam’s economy. Currently, Vietnam is considered one of the largest mobile phone producers in the world. This sector has generated hundreds of thousands of jobs and thousands of engineers and built many modern research & development centres.

 

However, most FDI projects in Vietnam have small scale. Among 252 newly licensed projects, only five projects have a registered investment capital of nearly US$1 billion while remaining 247 projects are much below the US$1 billion mark, averaging nearly US$4 million per project.

 

Although Vietnam is seeing certain difficulties in attracting FDI, it is high time Vietnam paid attention to the quality of FDI projects, according to experts. Tiny projects or unsuitable projects should be turned down.

In previous decades, the joint venture form, where foreign investors usually kept up to 70 percent of interests, generated very good ripple effects because foreign investors only needed to put capital, technology, governance into an existing project to have immediate effects. But, since the start of the 21^st century, wholly foreign-invested companies accounted for over 80 percent. In the first quarter of this year, with US$3.334 billion of fresh and additional FDI capital, joint ventures contributed merely US$214 million, or just 6 percent.

 

Calling and attracting FDI into the country is necessary and very important. It is about time Vietnam oriented its drawing of this capital source. This capital should be channelled into industries and fields Vietnam lacks and is weak at rather than be disoriented as now. Minister Bui Quang Vinh of Planning and Investment said it is very hard to consider a licence for casino opening when up to 10 localities apply for to call investment capital while no official in-depth studies on casino in the country have been made.

 

According to economic experts, Vietnam has many advantages to draw FDI capital for technology, service and supporting industries.

 

Though Vietnam has shortcomings in magnetising foreign investment capital like incomplete legal framework and cumbersome mechanisms and policies which lead to time-consuming project preparation, it still has certain advantages in comparison with other countries in the region like Thailand and Malaysia, particularly political stability, security, safety and low cost labour.

 

The movement of FDI flows since 2010 indicated that Vietnam is very much interested by foreign investors, specially world-leading transnational corporations. Typically, Samsung started its mobile phone production in Bac Ninh province with a US$650 million project in 2007 and increased its investment capital here to US$2.5 billion in 2013, let alone a US$2 billion project in Thai Nguyen and a R&D centre in Hanoi staffed by 800 researchers. Samsung accounted for 15 percent of Vietnam’s total export turnover in 2013 and made mobile phone the biggest forex earner. Samsung's projects did not come from South Korea but were relocated from neighbouring countries.