Hopes Pinned on FDI Flow

Closing the eyes to existing hot issues like tax evasion and transfer pricing, FDI plays an important role in trade balance. From a country with inherent trade deficit, Vietnam has gained a trade surplus. The country had a trade surplus of more than US$4 billion in 2012, US$6.48 billion in 2013, and over US$2 billion in the first nine months of 2014. Trade surplus has enabled Vietnam to increase its exchange reserves and stabilise its exchange rates.

 

Such surplus values are attributed to Vietnam’s increased exports. Its export value was just US$1.088 billion in 1988 but the figure climbed to US$132.135 billion in 2013. The FDI sector contributed about 10 percent to the country’s export in 1989 but the proportion soared to 61.42 percent in 2013. The FDI sector’s export growth averages some 30 percent annually. The performance of this sector played the key role in generating trade surplus for Vietnam.

 

The economy has bottomed out the crisis and recovery signals are not really clear and solid. The domestic sector remains weak on waning purchasing power. More companies has gone bankrupt, got dissolved or moderated operations. Conversely, the FDI sector has created impetuses for the economy.

 

Vietnam has a right and clear development strategy when it focuses on cheap production and labour costs. Labour costs in Vietnam equal a half in China and 40 percent in Thailand and the Philippines. The population structure is in the golden stage when the labour force is abundant. Other pluses include financial incentives and income tax incentives for some foreign-invested enterprises in Vietnam. Income tax has been reduced to 22 percent and expected to be brought to 20 percent in 2016.

 

Political stability, incentive policies and labour advantages have exerted a very strong pull on foreign corporations. In the latest three years, more and more big manufacturers have relocated their production bases from China to Vietnam to reduce costs and seek more profits. Gigantic production projects are being invested by world-leading firms like Samsung, LG, Nokia, Intel and Canon. South Korea’s Samsung Electronics built two big production factories in Bac Ninh province and Thai Nguyen province and hugely contributed to export growth of Vietnam. Samsung investment has envisaged the clear direction of investment process in Vietnam. At first, Samsung started with an assembly point for mobile phones. With its great success in phone export, Samsung planned the third plant in the Saigon Hi-tech Park in Ho Chi Minh City.

 

As FDI is considered an important assessment indicator, many localities have rolled out their red carpet and introduce appealing policies to attract investors. But, this is the time Vietnam must be clever enough to direct investment flows into weak sectors like supporting industries and agriculture. It must also weigh up FDI benefits in relation to technology transfer, ripple effects and economic impacts. How to effectively draw FDI capital is an extremely difficult issue and the Government has yet introduced FDI capital using plans and orientations.

 

In fact, foreign-invested companies in Vietnam are the average of their industry on the global scale. In the future, Vietnam must calculate and open up its door to A-class investors, or investors of higher quality and bigger scale. Vietnam must understand their financial capacity and investment plans before granting investment licences. Priority fields must be of Vietnam’s comparative advantages and have high competitiveness on the global market.

 

At first, outsourcing for FDI firms is necessary. But, Vietnam must upgrade its capabilities, from an outsourcer to a manufacturer. It means that Vietnam must receive technologies, not provide a market for foreign companies or help generate short-term employment.