FDI down as investors chill

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Registered foreign direct investment (FDI) in the first six months of 2011 fell 48.1 per cent year-on-year to $5.6 billion, according to the Ministry of Planning and Investment’s Foreign Investment Agency (FIA).

Disbursed FDI from January 1 to June 22 also slightly dropped by 1.9 per cent year-on-year to $5.3 billion, ending the upward trend of the net FDI inflow over the previous two years.

In the year’s first half, foreign investors committed to invest into 455 new projects and raise investment capital at 132 projects, compared with 651 and 229 projects respectively in the same period last year.

Investment authorities blamed the declines in both net and committed FDI this year on the world’s slow economic recovery as weaknesses in developed countries meant many foreign investors were investing closer to home instead of expanding investment in Vietnam.

However, not all foreign investors share the same opinion.

Patrick Regis, chairman of British Business Group, said that while global sentiment was indeed weaker and many multinationals had shelved their investment and expansion plans until real growth was evident on the worldwide stage, this wasn’t the whole story.

“[The local macroeconomy] has deteriorated over the past 12 months and this will have a bearing on investor sentiment and business cases particularly those in the manufacturing sector,” said Regis.

Regis believed Vietnam would remain an attractive destination for FDI, but added that Vietnam could be losing its advantage as a preferred FDI destination because of an increasing loss of confidence.

Noriaki Shutoh, chairman of the Japan Business Association in Vietnam, said: “It is hard for me to verify how investors prioritise project in Vietnam in their global investment plan in this period.”

“One thing I can say is that it is not a good time for investors to make a decision now to invest in Vietnam given the current economic and social situation,” Shutoh added.

Vietnam’s inflation in June accelerated to 22.6 per cent year-on-year while the trade deficit had blown out $6.65 billion, or 15.7 per cent of total export turnover. In February, the Vietnamese government had to devaluate the dong for the third time in twelve months.

The dong devaluation, while boosting exports, has unintentionally eroded the profits of foreign investors operating in this country. Japanese manufacturing enterprises operating in this country, for example, rely on imports of their parts and components. The depreciation of the dong is inflating import prices.

“The amounts of profit become lower and lower every day,” said Shutoh.

But he said dong devaluation was not the only big difficulty facing foreign investors. The four others included rapid wage rises, power supply shortages, problems with local procurement of parts and components, and difficulties in employing workers.

According to Barclay Capital, Vietnam’s current electricity shortage is equal to 10 per cent of production capacity.

Nguyen Mai, chairman of Vietnam Association for Foreign Invested Enterprises, said Vietnam was now facing tough competition from neighbouring countries when it came to attracting FDI.

“When they [foreign investors] see Vietnam is not attractive than other destinations, they will leave,” he said.

Already some foreign investors are deciding against expansion of local investments, put off by local economic instability. Last year, both US-based automaker Ford and Japan’s Canon opted to build new factories in Thailand rather than Vietnam because of a lack of supporting industries and labour disputes. Similarly, Thailand’s tableware manufacturer Srithai Superware this year suspended plans for a $5 million expansion in Vietnam.

Regis said with such a small pool of investment available globally it was imperative that Vietnam bring a level of confidence to investment decisions being made increasingly over business case analyses.

Although many multinational corporations, including such big names as First Solar, HP, Formosa Plastics Group, Compal, Samsung and Nokia are still pushing ahead with investment projects in this country, Shutoh  believed these multinational companies are also facing difficulties.

“They check their business plans, calculate their losses in Vietnam then adjust their global portfolio,” he said.

Vietnam was still attractive as an investment destination, Shutoh said. But he warned rapid and appropriate policy implementation were critical.

“[Without that] Vietnam will drop out of the list of [preferable] investment destinations,” he said.