FDI plays a crucial role in propelling industry and trade development

Three decades after the enactment of the Law on Foreign Investment in 1987, Vietnam has become one of the most attractive destinations of foreign direct investment (FDI) flows. As of now, FDI stands as the most dynamic development pillar with increasing contributions to national socioeconomic development. Currently, foreign-invested enterprises (FIEs) are responsible for 22-25 per cent of the total social investment capital, producing 55 per cent of the country’s total industrial production value, 70 per cent of the export value, 18 per cent of the total budget, 20 per cent of the GDP, and provides jobs to 3.7 million local workers.

Industrial development

FIEs have contributed to propelling the development of new industries and products, generating nearly 55 per cent of the country’s total industrial production value, helping to strengthen several major industries like petroleum, electronics, information technology, as well as cement and steel, and boost local production capacity by virtue of a more progressive economic structure.

In localities enjoying large FDI inflows like Bac Ninh and Thai Nguyen provinces in the north or Dong Nai and Binh Duong provinces in the south, FIEs have contributed 70-80 per cent of the total industrial production value per year. They have reported higher industrial production growth than the country’s average, growing at an average 18 per cent per year, with positive contributions to transforming the economic structure towards industrialisation and modernisation. The role of FDI in industrial development could be summarised as follows:

Positively restructuring the economy and the labour force, enhancing industrial production capacity

In the past three decades, FDI has played a role in formulating major industrial infrastructures, creating robust transformation in terms of occupational, economic, and labour structure, and enhancing the industrial production capacity of the recipient localities.

Parallel to domestic firms, FIEs help constitute new industries while bolstering the capacity of diverse industries like petroleum, information technology, chemicals, automobile, electrical and electronics, food and agricultural items processing, and garment and footwear.

It also plays a role in the establishment and development of an expansive system of 224 industrial and export processing zones and hi-tech parks across the country, helping to effectively utilise the land and other resources of localities.

A raft of major industrial production projects going into operation has led to enhanced investment efficiency. Many key projects seeking to lay the groundwork for development in later periods have been and are being deployed in locations throughout the country.

Directly and indirectly engaging in technology transfer and development, facilitating the industrialisation process

Aside from growing FDI volumes, state-of-the-art production technologies and management methods, cutting-edge equipment and production lines have been brought to Vietnam to serve industrial production projects and the building of industrial infrastructure. It is impossible to deny the positive role FIEs have played in equipping local human resources with the latest management skills, technical know-how, and technology processes through constantly upgrading and connecting with global management systems.

Thereby, currently, part of the local human resources have the capacity to effectively handle management positions formerly performed by foreign personnel at FIEs. New industries have appeared and carved out a spot on Vietnam’s industrial development map (eminent examples are Samsung, Intel, LG, and Panasonic, but the line is very long), creating a turning point in the development of spearhead local industries, accompanying Vietnam on its journey towards industrialisation.

Facilitating supporting industry development and inspiring domestic businesses to improve to withstand competition

FDI flows have had spillover effects at local businesses, helping them develop through joining joint ventures or direct alliances with FIEs or acting as accessories and parts producers and suppliers to foreign firms, thus appearing in the global value chains of multinational corporations (MNCs).

On the other hand, the presence of FIEs has inspired local businesses to improve to withstand market competition and match globalisation requirements.

High technologies should be transferred from FIEs to domestic partners

Trade development

Undergoing three decades of development, foreign investment has demonstrated its important role in Vietnam’s trade development as well as in facilitating the country’s economic integration.

With respect to export-import, from 2013 until present the share of FIEs in Vietnam’s total export and import value has often exceeded 60 and 55 per cent, respectively. FIEs also play a significant role in promoting Vietnam’s national image and bridge Vietnamese goods to the global market.

With respect to domestic trade, the strong presence of quality goods and modern distribution methods of FIEs has invigorated the domestic market, better meeting growing consumer demand, even contributing to positively changing consumers’ habits.

Facilitating international integration

FIEs act as an effective channel helping Vietnam to access and land cooperation deals with other nations, international organisations, and big economic, technical, and technology centres across the globe, from there accelerating the globalisation process, gradually enhancing the country’s image in the international arena.

LESSONS FROM FDI ATTRACTION AND DEVELOPMENT IN THE INDUSTRY AND TRADE SECTOR

Though FDI’s contributions to industry and trade in the past three decades have been quite impressive, it is necessary to have a look at current limitations in using and attracting FDI inflows.

Accordingly, many foreign-invested projects are still using backward technologies, hampering the country’s sustainable development goals. Tax evasion and transfer pricing at several FIEs have dented state coffers and undermined the local investment environment. Similarly, labour disputes in FIEs have badly affected local labourers’ interests.

So what lessons have been drawn after 30 years of FDI attraction and development? From the angle of the whole economy and the industry-trade sector in particular, the following lessons could be cited.

Macro-level

Properly defining the country’s comparative advantages

After 30 years, Vietnam’s current comparative advantages are not its abundant and low-cost workforce, but political stability, secure economic institutional mechanism, social order and security, sizeable market, young population, high economic growth, and the people’s constantly rising incomes.

Adequately defining the country’s comparative advantages in each development period will help outline a well-conceived strategy on FDI attraction and usage, from there addressing the shortcomings and utilising the comparative advantages. On this basis we could develop the strategy in FDI attraction and usage at each locality and economic sector more effectively, as well as select foreign-invested projects which have the capacity to spread effects to other economic sectors, leveraging the actual development levels and advantages of each sector and locality.

Introduction of suitable policies

As the world is undergoing radical changes and under the implications of Industry 4.0 and current booming domestic investment, the regulatory system over FDI must not run after simple figures, but strive to optimise efficiency, or in other words, improve the usage efficiency of capital flows.

FDI attraction and usage must ensure economic and social effects, taking into account the benefits of the nation, domestic businesses, and the labourers, and factors like green growth and sustainable development.

In addition, as Vietnam has more deeply and broadly engaged in international integration, the need to “upgrade” FDI policies to ensure the execution of international undertakings and protect the legitimate rights of foreign investors has become imperative.

Frequent policy changes, badly affecting investors’ rights and disrupting the local investment environment, is a deterrent to FDI flows that must be avoided.

The industry-trade sector

Boosting linkages between foreign-invested and domestic businesses

In the past years, FIEs’ impacts on technology, skills, management level, and productivity at domestic businesses are noteworthy, but some limitations do exist. That is because local businesses still report limited scale and capacity, not yet taking initiative to connect with FIEs, so that the spillover effects remain limited and local businesses can hardly grow into satellite units of FIEs to avail themselves of the latter’s global value chains.

That is one of the reasons why the local supporting industries have yet to reach the set target. To break the impasse, it is important to bolster cooperation between foreign-invested and local businesses, striving to optimise the spillover effects for the development of the local supporting industries that are closely linked to regional and global value chains.

To achieve this goal, it requires concerted efforts from domestic businesses themselves and regulatory support from state management agencies, in which the industry and trade sector holds a significant role in outlining and ensuring the effective implementation of policies on supporting industry development.

Properly setting the orientation of FDI attraction and management in the trade and services sector

Through 30 years of FDI attraction, the government’s policies on FDI attraction and management towards conventional investment activities (investment in industrial and agricultural production or infrastructure) and investment into trade and services have been almost the same. This approach had certain impacts on the efficiency of FDI management in trade and services, especially after Vietnam became a member of the World Trade Organization (WTO) in 2007.

In fact, FDI in trade and services shows big differences compared to other fields. Particularly, foreign-invested projects in trade and services are modest in capital, have low capacity in job creation, bring the risk of seizing the market share of minuscule local service providers, are not feasible in terms of transferring technology and modern management methods, while at the same time facing high levels of transfer pricing with low contribution to the state budget.

Therefore, based on Vietnam’s international commitments on trade and services, during the policy making process there must be a clear division between policies of FDI attraction and management in traditional investment fields and those in the trade and services field. It is imperative that the regulatory system be suitable, ensuring the efficiency of state management in all arenas.

OPPORTUNITIES AND PROSPECTS IN ATTRACTING FDI IN INDUSTRY AND TRADE

On March 22, 2018, the Politburo enacted Resolution No.23/NQ-TW presenting the orientation on the national industrial development policy until 2030 with vision towards 2045. Accordingly, the country is set to reach the target of basically growing into a modern-oriented industrialised nation listed among the top 3 in the ASEAN with several industries having the capacity to compete on the global scale, and by 2045 turning into a modern industrialised nation.

Under the resolution, Vietnam has set several priority industries until 2030, including the information and telecommunications industry, electronics, clean energy, renewable energy, smart energy, processing and manufacturing industry serving agriculture, defence industry, security, and mechanical engineering. By 2045, priority will be given to the development of a new-generation information and telecommunications industry, and popularising digital technology, automation, high-tech equipment, new materials, and biotechnology.

Resolution 23 came into being as Vietnam has signed 12 bilateral and multilateral free trade agreements (FTAs) and is negotiating FTAs with four nations with commitments on opening the market more widely. This will lay the foundations for foreign investors to get deeply involved in the Vietnamese economy.

Industry

Export-oriented industries in which FIEs held a large proportion and witnessed sharp growth rates in the past years, such as textiles and garment, footwear, and electronics, will continue luring FDI flows. The direction of investment, however, will shift to mainstream areas in the value chain due to more stringent requirements on product origin within the FTA framework, particularly regarding fibre and input material production in the garment and footwear industries.

In fact, FDI flows into these fields have jumped swiftly in recent years as foreign investors have been scampering to avail themselves of the benefits of signed FTAs. In 2017 alone, FDI flows into mainstream garment projects surpassed $3 billion.

Industries serving the domestic market are growing fast (over 10 per cent), while local businesses still could not develop sufficient capacity, especially in the steel and power industries. These industries, therefore, will continue charming foreign investors who are capital and technology-intensive.

High-tech industries and new industries, such as electronics and new, renewable, and smart energy are being prioritised for investment by the government to reach the industrialisation targets. These industries are also capital and technology-intensive and require quality human resources that are still within the domain of foreign investors.

Trade and services

In developing a socialist-oriented market economy that is integrated into the international economy, opening the market according to international commitments and gradually removing trade barriers and tariffs are an irreversible trend. Participation in 12 FTAs, including the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), marks a huge leap in Vietnam’s market openness, including the door to the trade and services market.

The CPTTP is expected to facilitate cross-border mergers and acquisitions (M&A), particularly deals in trade and services because this is one of the most effective ways of market penetration, helping foreign investors to avail themselves of the service networks local businesses have developed.

Retail and distribution will especially grab foreign investors’ attention as (i) regarding internal factors, Vietnam is one of the largest, most populous nations in Southeast Asia, boasting a young population with constantly improving incomes, whereas leading foreign retailers still have modest presence in the country; and (ii) as for policy, five years after the CPTPP comes into force, the need to assess the economic needs test (ENT) applied to retail and distribution projects by foreign retailers will be gone and retail and distribution services will entirely be opened to foreign investors coming from CPTPP member countries.

The freedom in doing trade and investment globally brings multiple opportunities for Vietnam to attract FDI flows, but in the meantime it also poses challenges about how to use and manage FDI flows effectively. Raising FIEs’ operation efficiency is the desire and responsibility of the Party, the government, and the people.

The Party resolution has pointed out how to achieve the target: “Enhancing the efficiency of FDI attraction, focusing on the transfer of technology and management expertise, and output market development; taking initiative in choosing and applying incentive policies towards foreign-invested projects featuring modern technology and management skills which have place in the global value chain, and connections with local businesses. It is also important to foster cooperation between foreign-invested and local businesses for the development of supporting industries and key industries, linking to regional and global value chains.”

This orientation aims to tackle the root of the problem: improving the competitiveness of Vietnamese goods and domestic businesses, consolidating internal strength to compete on equal footing with foreign players, and striving to ensure the long-term and sustainable development of the Vietnamese economy.

By Tran Tuan Anh, Minister of Industry and Trade