IZs and EZs lauded as key to national growth

The proliferation of inustrial zones and economic zones has revolutionised the processing and manufacturing sectors

Source: The Department for Economic Zones Management

Currently, 299 industrial zones (IZs) have been established across the country, covering the total area of 85,000 hectares of land, 56,000ha of which can be rentable. In addition, 16 economic zones (EZs) have been established in the nation’s coastal provinces with the total ground and water surface area of 814,792ha. The nation’s IZs and EZs have made important and practical contributions to the socio-economic development of their local areas, as well as of the country as a whole.

Within the first nine months of 2015, enterprises located IZs and EZs reported $90 billion in the total revenue, $58.6 billion in the export value (about 52 per cent of the country’s total). They contributed VND65.3 billion ($3 billion) to the state coffers, and provided employment to 2.57 million local workers.

However, despite such encouraging statistics, the performance of these zones is still below its potential due to a number of factors, such as a lack of cohesion between enterprises in the manufacturing and processing industry, and a scant number of production and processing bases in these zones.

Therefore, it is necessary to promote the development of key processing and manufacturing projects in IZs and EZs nationwide and cultivate strong links in production among businesses to bolster the operational efficiency of this model.

Attracting foreign investment into processing and manufacturing in IZs and EZs – a growing tendency

There have been noteworthy improvements in attracting foreign direct investment (FDI) in the processing and manufacturing sectors to the zones, both in terms of investment capital and the number of projects in recent years.

During the 2010-2014 period, FDI in the processing and manufacturing sectors accounted for approximately $7.7 billion per year on average, about four times higher than that in 2006. During this period, FDI increased year-on-year. However, in 2014 the figure levelled off at $11 billion. Economists attributed this to the economic slowdown in Europe and China.

During the 2010-2014 period, the number of FDI projects attracted annually numbered 494 on average, about 62 per cent higher than the total in 2006.

Major achievements

First, attracting a growing number of technology and capital-intensive projects in the processing and manufacturing sectors in IZs and EZs over recent years was the primary accomplishment. This proved the attractiveness of Vietnam’s investment environment – in particular, its IZs and EZs.

Second, there has been growth in the size and the number of FDI projects in the processing and manufacturing sectors, which account for about 70-80 per cent of all foreign investment projects in the zones. The capital scale per project averages $10 million. Specifically, it jumped to about $17 million in 2013, before slightly retreating to $15 million in 2014.

Review of strengths, challenges, and solutions to promote IZs and EZs as key areas for processing and manufacturing after 2015

Strengths

The Vietnamese government regards IZs and EZs as key components of the nation’s long-term development strategy. The Party and the State are committed to their success and further development. The prime ministerial Decision No.1716/QD-TTg dated November 13, 2012 announced the establishment of a steering committee for IZ and EZ development to remove any policies or mechanisms impeding the zones’ development. Over recent years, the government has devoted considerable resources to investing and improving the technical infrastructure in the nation’s IZs and EZs.

Processing and manufacturing businesses operating in these zones are entitled to numerous tax incentives as per existing regulations, such as EZ investors receive a four-year exemption on corporate income tax (CIT), a 50 per cent rate off CIT for the following nine years, and a 10 per cent CIT rate for 15 years (these are the highest investment incentives offered in Vietnam).

Market opportunities have been steadily increasing in recent years, with Vietnam’s deeper integration into the global economy through multilateral and bilateral free trade agreements and international trade institutions. Recently, trade ministers of 12 member countries agreed to a draft of the landmark Trans-Pacific Partnership deal (TTP). Through the implementation of such agreements, enterprises in Vietnam have had many opportunities to expand their market to foreign countries.

This has already created new investment opportunities in Vietnam for foreign companies. The fact that many countries among the 12 TPP members have highly developed processing and manufacturing sectors and source technologies (such as the US, Japan, and Australia) means that there are even stronger incentives to promote investment capital flows from these countries into the processing and manufacturing sector in Vietnam.

Challenges

First, to meet the requirements of large-scale processing and manufacturing production, the technical infrastructure of the country’s IZs and EZs must be continually improved. Unfortunately, the state funds are limited, and due to the long payback period of the technical infrastructure capital it has been difficult to mobilise private investments.

Second, to develop strong local processing and manufacturing sectors, it is necessary to rely on the investment resources of large international industrial corporations. However, differences in culture and business philosophy continue to act as barriers, and the competition among developing countries to attract such investments is intense.

Third, the development of the processing and manufacturing sectors requires the existence of supporting industries to supply necessary spare parts and materials. However, Vietnam’s existing supporting industries are not yet of a high quality standard. This is one of the main difficulties that Vietnam must overcome if it wants to develop strong and comprehensive processing and manufacturing sectors.

Fourth, industrial development creates environmental protection challenges, such as waste treatment, natural resource exploitation limitations, and sourcing sustainable raw materials for production. Environmental protection requires investments in technology and capital. Therefore, for the sustainable development of the processing and manufacturing sectors, it is necessary for Vietnam to invest in waste treatment technologies.

Finally, the processing and manufacturing sectors require skilled and responsible workers. However, according to a 2012 assessment by the World Bank, the quality index of human resources in Vietnam is only 3.79 on a 10-point scale, ranking 11th among 12 participating Asia countries. Therefore, the improvement of human resources is a necessary condition for Vietnam to develop its processing and manufacturing sectors.

Solutions

First, it is a must to continue to attract FDI with a focus on large industrial corporations with advanced technology in processing and manufacturing. For investment projects with large spillover effects, it is necessary to apply strategies that enhance investment incentives, such as those adopted by Malaysia and Singapore.

Second, there needs perfect investment incentives to develop supporting industries. Also, promote co-operation between enterprises in the domestic supporting industries and foreign-invested processing and manufacturing companies to better participate in global value chains.

Third, there should be an increase in state budget allocations and mobilising other funds to complete the technical infrastructure of the coastal EZs, which will facilitate investment projects in the processing and manufacturing sectors. The country’s coastal EZs are of special strategic importance, as they are being invested in with large-scale and dynamic projects.

Fourth, focus on developing workers’ technical skills as well as advanced skills by strengthening links between educational institutions and enterprises. This will transform the current competitive advantage of low-skilled/low-cost labour into an advantage based on highly-skilled, tech-savvy workers at an appropriate cost.