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Vietnam FDI Situation

Vietnam FDI Situation There is no dout that foreign direct investment (FDI) plays a very significant role in economic growth, according to experiences of new industrial countries in Asia. Over a decade of opening for FDI, we could realize that the more FDI inflows pour into our country the more we benefit. In fact, FDI has contributed a great proportion to fulfill targets on socio-economic development plan and has been one of the most important external sources of Vietnam on the process of industrializing and modernizing the country. Statistics shows that there was a sharp rise in FDI commitments in the period of 1998-1995. The number of investment projects go up at average 50 percent each year untill the end of 1995. In 1996, we suffered a slight setback compared with the previous year, just up 29 percent. Next, the trend in 1997 is for a decline in both the number and volume of FDI commitments and finally, it became a steady decrease in FDI inflows into Vietnam in recent years. What are the causes? This essay will examine the issue above with the purposes: 1. To have an overview on FDI in Vietnam in the period of 1988 to 1997. 2. To identify the causes of decline in FDI in recent years (since 1997 till now). 3. To deriving useful lessons from the past and put forward some measures to induce FDI in future: creating a better investment environment. In the scope of utilizing relevant literatures and various available statistical sources printed in the newspapers/magazines/web-pages to analyze the situation of FDI in Vietnam, fingures may differ a little bit from some other sources. A. OVERVIEW ON FOREIGN DIRECT INVESTMENT INFLOWS IN VIETNAM FROM 1988 TO 1996 In 1998, Vietnam government has officially issued the 1st Law on Foreign Investment, paved the way to absorb capital and modern technology from all over the world. In the late of 80s and the early of 90s (1988–1993), Vietnam still be hampered by United States’s embargo policy on its weak economy. Though, foreign investors were very eager to invest in Vietnamese market promising numerous business opportunities because Vietnam has many advantages such as being a new market with big population and cheap price of labor; having rich natural resources, particularly oils, favorable geographical location and huge agricultural potential. Statistics shows that FDI commitments coming to Vietnam increased notably from 1988 to 1996, hitted the top in 1996 with US$ 8633 million and decreased sharply since 1997. Most of these commitments were made during 1995-1996. Several large construction projects were approved during this period of time, and this pushed up average project size to US$ 20.5 million, compared to US$ 13.3 million during 1988-1994. We can also realize that proportion of disbursements in comparison with commitments is low in the early of 90s. B. THE CAUSES OF DECLINE IN FDI IN VIETNAM IN RECENT YEARS There are numerous factors causing the sharp decrease in FDI since 1997 up to now. In my opinion, there are 2 main kinds of causes: direct causes and indirect causes. The direct cause is the Asian financial crisis “booming” in July 1997. Yet, the critical cause we should consider strictly is indirect one that was hidden under annual increase in FDI in previous years. The Asian financial crisis has weakened the economy of many Asia countries, made a number of enterprises go to bankruptcy and millions of employees lose their jobs. Vietnam is in the influence circle of this crisis; therefore, bearing bad impacts on Vietnamese economy is inevitable. Clearly, FDI inflows into Vietnam went down strongly since then. Over past 8 years of attracting FDI (1988-1996), there was always increase in FDI commitments with growth rate never less than 25 percent per year. In 1997, FDI commitments were just equal to 50,9% of those in 1996 and continuously decreased in 1998, 1999. Some causes can be learned as followings: 1. Due to the difficulties in the business of Asian investors in their own countries, the situation made them unable to invest or pour their small amount of money remaining through the crisis into other countries. In other words, they were unable to expand their business; on the contrary, they had to tighten their belt, re-structured indigenous enterprises. In addition, other project owners had to pay debts when exchange rate went down. That is the obstacles from the side of foreign investors. 2. The crisis, which caused the devaluation of the currencies of many Asian countries and the appreciation of the Vietnamese dongs vis-à-vis other regional currencies, made the prices of Vietnamese exports higher than similar exports of neighbour countries such as Thailand and Indonesia by 20%-30%. At that time, investment projects focusing primarily on exporting goods became inefficient, thus resulting in decrease in FDI. 3. Investment environment is a decisive factor to deterred foreign investors. At that time, many shortcomings of Vietnam’s investment environment emerged more evidently than ever through a number of failing joint ventures. 4. Together with our weakness is the emergence of new attractive markets from neighbor countries, such as China, India and Indonesia. As compared with Vietnam, these 3 countries have a stronger appeal in many respects, with respect to industrialization, and investment polices. Therefore, a big, major share of FDI inflows pours into them. 5. Many investors realized that Vietnamese market now glutted with consumer goods, hotels, restaurant and office blocks, seemed to be saturated and no longer was a lucrative one to them.  Low purchasing power of the market: In terms of population, the domestic market is quite big (80 million) but its purchasing power is not big. In fact, in 1996 and 1997, many domestically-produced good were not selling well and had to lie long in inventories. Typical of these weree cement, iron, and steel, garments. New FDI products in Vietnam such as motor cars, motorcycles were also very slow moving, causing substantial difficulties to these enterprises.  Competition between domestic and foreign invested enterprises: In 1996, Vietnam imported goods worth over US$ 11 billion, the majority of these being goods that Vietnam could not produce as yet. Therefore, it was the objective of many enterprises with foreign invested capital to produce goods that Vietnam still had to import, something which many Vietnamese had been endeavouring to do. As a result, fierce competition arose between them in the domestic market and over time the sales of good produced by these enterprises were slow, entailing a decrease in FDI.  High price index and dual price system: Vietnam’s cost of living, price of labors, prices of services are too high as compared to other countries in the region. According to statistics of Corporate Resources Group, price index of HCMC (97.8) and Hanoi (96.8) is higher than that of Seoul, Sydney, New Delhi, just lower than Singapore (109,4), London (111.6). In addition, the dual price system makes foreign investors pay higher price, thus this policy considerably topples Vietnam’s competitiveness.  Backward infrastructure: our infrastructure system not yet meets the requirements of foreign investors, especially as we compare with infrastructure of neighbor countries such as China, Thailand...  Bad services quality: some improvements have been recorded in the quality of investment services, but they are still far from meeting the requirements of investors. Besides, the fee to be paid for investment services is not uniform.  Poor qualification of Vietnamese management: In joint ventures, representative for Vietnamese side is primarily state-owned enterprises. Vietnamese officials are posted to management positions but most of them are not qualified for their jobs, and some only pay attention to their own interests. Obviously, it has partly resulted in the failure of the joint ventures and negatively affected investment environment.  Administrative procedures is too much and opaque  Difficulty in changing investment form: many failing joint ventures having prolonged losses or on the verge of bankruptcy are not allowed to shift to 100% foreign ownership. It ties investors in unique form of investment and makes them go to the decision of jumping out of Vietnam and investing in another environment more open.  Investors don’t have enough sense of initiative in their investment: Moreover, investors have to adopt some regulations in organizing their production and managing structure.  Tax obligations are high and unreasonable: some taxes are less than supportive to the foreign investors. For example, enterprises engaged in the production and assembly of cars in Vietnam must simultaneously pay two taxes for one or the same product: the special consumption tax and the VAT tax.  Procedures on foreign currency trading is too complicated and cumbersome: For example, if a foreign enterprises wants to demonstrate that it does not fall into the category of enterprises that must immediately sell its foreign currency following the export of goods, it must fill and submit some 10 different documents.  High price of leasing land and contribution by Land Use Right of Vietnamese party: Price of leasing land of Vietnam is expensive. Yet, Vietnamese party usually contributes to join ventures by Land Use Right. As the result, the foreign party considers it as one way of suffering inferiority. In short, the above are a number of inconveniences to foreign investors that we can withdraw from nearly a decade of attracting FDI in Vietnam. Here are some measures suggested to attract more FDI in future:  Rapidly improve a set of laws, and legal documents bearing on FDI in Vietnam; amend policies which are still inadequate and to further clarify the existing laws and regulations on FDI.  Perfect and issue regulations ensuring equal opportunities for all enterprises, regardless of domestic ones or foreign invested ones. Together, provide foreign invested enterprises with the same competitive opportunities (prices of public services, market access, ect) as are available to domestic ones.  Improve the machinery in charge of managing the activities of foreign investors from the central down to the local level, with definite division of tasks and lines of power between the central and local authorities, between various ministries and branches.  Implement and provide guidance on the implementation of provisions relating to “retroactive application” in the law on Foreign Investment, which should be in accordance with international practice.  Rapidly improve the general plans of various branches and provinces and, on that basis, provide concrete orientation to foreign investors.  In terms of policies, we should focus on the following: 1. Review and amend policies on taxes, land rents, exports and imports. 2. Formulate and promulgate at early date policies giving preferential treatment to investment projects in the highlands, in islands, and in Central Vietnam. 3. Study and announce policies on compensation and site clearance. 4. Study and devise policies on allowing foreigners to buy shares in Vietnamese joint stock companies and to study measures designed to increase the share of the Vietnamese partners in the prescribed capital of joint-venture enterprises. 5. Further concretize policies designed to develop export-processing zone, which are regarded as important centers for attracting FDI.  Allow new forms of investment with contract pattern similar to BOT, BT....  Allow foreign investors to shift their investment forms reasonably.  The Vietnamese government or its organs should make commitments on loans, on the mobilization of capital, on the exchange of Vietnamese currency into foreign currency, on remittance of profits abroad, on stabilizing prices, on allowing foreigners to conduct business independently within the framework of law, to reinvest their profits, to expand their projects, etc. Such commitments should be clearly formulated in contracts concluded between foreign investors and authoritative government organs of Vietnam.  Revise the tax policies with a view to making them more reasonable and long lasting, encourage foreign invested enterprises to use local raw materials and save them from paying higher taxes for imported raw materials than when importing finished products.  Apply a regime of appointment or selective examination, first and foremost with respect to important projects. Officials (irrespective of their branches or provinces) who have successfully passed the examination are entitled to be enrolled in enterprises which need such personnel. In case of necessity, the provincial people’s committees can replace the land users in order to have partners which are able to co-operate with foreign investors, or at least to secure the participation of units which, while not holding any land, have the required knowledge and expertise for running joint-ventures.  It’s necessary to work out regulations for the management and control of officials who are now working in enterprises with foreign invested capital.  Various ministries and local people’s committees should take a hard look at the contingent of officals involved in foreign investment, and particularly officials who are working in joint-ventures, in order to make the necessary readjustments, including the replacement of persons, who are poor in ethics and professional qualifications. 4. Upgrading the existing infrastructure  Infrastructure projects, invested through BOT, should be selected in such a way as would permit the investors involve to recoup their capital and acquire profits which are not lower than order forms of investment. After a certain period of time, the whole project would be transferred to the Vietnamese government in normal working conditions.  We may link infrastructual development with estate business, thus using profits accuring form the latter to feed the former. That is so because the upgrading or building of new roads, the construction of plants and export processing zones, the construction or expansion of ports and airports would, on the one hand, entail the emergence of service and residential areas associtated with the main project and, on the other hand, would increase the value of the surrouding land plots. Therefore, allowing, on the basis of the general plan of the project area, the foreign investors to enjoy reasonable profits in estate business in the same area would make it posible to attract foreign capital investment for infrastructual development.  We may formulate and make public coherent policies and mechanism on estate business, such as specific regulations on construction investment, on renting urban infrastructual projects, on regulations and criteria relating to environmental protection adn the protection of cultural monuments, etc.  We may diversify estate business in terms of forms and contents. Besides, marketing investment opportunities is very necessery, we should:  Launch marketing campaigns aiming at European and North American investors and making them a counterbalance to investment from Chinese-speaking countries.  Join the Internet and open a web-site introducing investment opportunities in Vietnam.  The MPI can co-operate with Misnistries of Trade and of Foreign Affairs to organize international workshops and publish guide books and other documents to present investment opportunities in Vietnam.  Organize meetings and workshops to promote foreign investment in Vietnam in co-operation with foreign business associations. “Storms in a tea cup” is the image that a Singaporean investors used to portray Vietnam’s investment environment. Storms of opaque policies, bureaucrat, inconvenience, complicated procedures have continuously beat foreign investors down so that they have to leave Vietnam market to a better one. Therefore, changing Vietnam’s investment environment from something shoddy to something fine is the most important thing that the government has to perform now. The challenge is great; success depends only on the strength of our will. Bibliography:

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