Overcoming limitations of FDI inflows

Tuesday, 2018-07-10 17:00:05
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NDO - Foreign direct investment (FDI) continued to be the highlight of the economy in the first six months of the year, with growth in registered capital and disbursed capital. However, the inherent limitations of this capital inflow have not been clearly overcome. How to attract and more effectively use this flow of capital without becoming dependent on it, seems to be a thorny problem.

In the first five months of the year, FDI registered in Vietnam decreased continuously. The total of newly registered capital, increased capital, capital contribution, and share purchase was estimated at just US$9.9 billion, down 18.4% over the same period in 2017. However, experts seemed untroubled about the decline. According to Nguyen Van Toan, Vice Chairman of the Vietnam's Association of Foreign Invested Enterprises, long-term data should be looked at when assessing FDI. In the first months of the year, there were not any big FDI projects so the overall FDI attraction was lower than in 2017, and only several US$ billion projects could boost FDI inflows.

The reality proved what Toan said. In June, there were a series of large projects such as smart city projects in Hai Boi and Vinh Ngoc communes (Dong Anh district, Hanoi) by Japanese investors with a total registered capital of US$ 4.138 billion, and a project on polypropylene manufacturing and liquefied petroleum gas storage in Vietnam invested by the Hyosung Group from the Republic of Korea in the southern province of Ba Ria - Vung Tau with a total registered capital of US$1.201 billion. Total FDI to Vietnam in the first half of 2018 was estimated at US$20.33 billion, up 5.7% year-on-year, according to the Foreign Investment Agency (FIA). During the same period, the amount disbursed also rose by 8.4% to US$8.37 billion. This figure shows that the investment and business environment has been improved and that the FDI flowing into business will contribute to economic growth overall.

In addition, Vietnam's prospects for FDI attraction, at least in the short term, also show positive signs, especially from the free trade agreements that have been signed. According to a recent survey on the EU-Vietnam Free Trade Agreement (EVFTA) conducted by the European Chamber of Commerce in Vietnam (EuroCham), more than 70% of companies said they would consider increasing their investment in Vietnam over the next one to three years and even up to five years. Moreover, the Comprehensive and Progressive Agreement for Trans Pacific Partnership CPTPP will open up many other good opportunities for Vietnam to attract more investment capital, especially as Thailand is also "in the mood" to join the agreement while there is a possibility of the US returning to the fold.

It can be seen that FDI capital has become a major driver of Vietnam’s economic development and international integration, creating large numbers of jobs, diversifying exports, improving technology and facilitating economic restructuring. However, FDI in Vietnam is substantially driven by low labour costs and generous incentives including tax holidays, concessionary rates and import duty exemptions. Attracting and using FDI in Vietnam has some limitations. FDI capital has not created much of a breakthrough when compared to other sources of capital, in terms of both quantity and quality. There are still many small projects. In the first six months of 2018, there were 1,366 newly licensed FDI projects with a total registered capital of US$11.8 billion, compared to 1,183 projects with the total registered capital of US$11.83 billion in the same period last year.

Economists said that FDI inflows to Vietnam have not had a great influence on the economy and have not boosted the domestic business sector as expected, due to the lack of a strong links between the two sectors. For that reason, strengthening the link between the two important components of the economy is essential to ensure the sustainable development of the whole economy. In addition, strengthening the links will not only motivate domestic enterprises to develop and seize their opportunity to participate in the global value chain, but it will also bring about benefits for FDI enterprises themselves.

FDI enterprises need to actively cooperate with their domestic counterparts by creating opportunities for them to find out about the products and components needed in the production process, while proactively transferring technologies for the private sector to reach the value chain. Domestic enterprises need to boldly invest in machinery, technology change, human resource training and market research to create products that meet the needs of FDI enterprises, therefore having the opportunity to become a link in the global value chain.

Other recommendations include creating and implementing an integrated national skills development plan to accelerate Vietnam’s transition from low to skilled labour, modernising investment promotion, moving from reactive to proactive promotion in priority sectors, overhauling current incentive frameworks, opening up important sectors that underpin competitiveness and growth and introducing strategic outward FDI promotion policies.