Breakthrough reforms for next-generation FDI attraction

The report outlines eight recommendations on Vietnam next-generation FDI strategy

The Recommendations on Vietnam’s Next-Generation FDI Strategy and Vision for 2020-2030, launched by the Ministry of Planning and Investment (MPI) and the International Finance Corporation (IFC), a member of the World Bank Group today provides findings and recommendations to serve as key inputs for the government to develop Vietnam’s new national FDI approach.

While the open-door investment and trade policies have led to increases in FDI inflows, employment opportunities, and diversification of exports, especially in the last decade with annual FDI inflows skyrocketing by almost ten times to outperform most regional competitors, this new report responds to a growing realisation that Vietnam requires breakthrough reforms to compete for higher quality streams of FDI.

“The challenge we face is unique, as record FDI inflows contrast with still limited spillover effects and value-added benefits. We believe the recommendations outlined today will underpin a new national approach to FDI and contribute to the achievement of national development goals,” said MPI’s Vice Minister Vu Dai Thang.

The strategy in particular responds to recent findings that FDI in Vietnam is substantively driven by low labour costs and generous incentives. In fact, investors have identified a lack of skilled labour as an impediment to growth, while the absence of integrated local supply chains has further blunted the competitiveness of firms as has the lack of qualified domestic suppliers and effective policies to assist local players.

“By addressing these issues, the government is likely to unlock more opportunities for Vietnam,” said Kyle Kelhofer, IFC country manager for Vietnam, Cambodia, and Lao PDR. “The core analysis involved an intensive review of potential priority sectors. It aimed to identify which sectors and under what circumstances represent the most competitive opportunities for Vietnam to attract investment (FDI and domestic), create both more and better jobs, and increase sourcing from local firms.”

The report recommends eight proposed breakthrough reforms. An immediate priority is adoption of concrete policies that increase FDI linkages and spillover effects with a focus on introducing policies to increase FDI linkages and targeted supplier development programmes.

In line with meeting the challenges and opportunities of Industry 4.0, Vietnam should aspire to create a business environment commensurate with business needs in the digital age. Instead of “playing catch-up,” this reset should offer a superior investment climate and operating experiences with digital/online solutions compared to regional competitors.

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 polices.

Above all, a strong FDI focal point agency with the proper profile, influence, organisational structure, and budget is key to ensuring the effective implementation of all these recommendations.