FDI and Local Businesses Need to Set Up Reciprocal Relationships

11:40:56 AM | 4/8/2020

The weak connectivity of business sectors has hindered sustainable development of businesses, including foreign-invested ones. Accelerated development of sustainable value chains is considered a decisive factor to recover business sector and spur economic growth.

Many opportunities are lost on weak connectivity

Minister of Planning and Investment Nguyen Chi Dung said, Vietnam has recently achieved remarkable results in foreign direct investment (FDI) attraction and domestic private business development. However, there are still some shortcomings: The connectivity of Vietnamese businesses is still loose and uncoordinated, especially between small companies and larger ones, and between Vietnamese companies and FDI firms. In addition, their connection and interaction with other economic areas are not tight; spillover effects on productivity and technology are not high; and localization rate is still low.

FDI firms and large corporations often have their own ecosystems, ready supply chains or self-developed closed chains, he explained. Therefore, the opportunity for other Vietnamese companies to join value chains led by such businesses is very difficult. Moreover, a vast majority of Vietnamese businesses are SMEs which have a very low management level, limited human resources and low technology to meet increasingly stringent requirements imposed by major domestic and international customers.

In fact, many economists have long warned of two independent economic sectors that are unlikely to help each other. The chicken or the egg causality dilemma in the past years has caused Vietnamese companies to lose a lot of opportunities and hurt their operations and troubled FDI enterprises as well, Minister Dung said. And, we cannot continue to let FDI firms go on a different way from Vietnamese firms.

“This is a puzzle that the Government always wants to solve to draw and harness FDI funds and to strengthen the linkage between the FDI sector and the domestic private business sector, further supporting Vietnamese SMEs to grow to join global value chains; the country can’t have two separate business sectors,” he emphasized.

Close coordination of stakeholders needed

In order to truly develop a sustainable value chain and help economic growth, foreign and Vietnamese enterprises need interconnectivity, mutual support and joint development. And, to do so, there is a need for the close coordination of stakeholders like governmental agencies, businesses and associations.

The Government has encouraged FDI firms to link with Vietnamese partners in the value chain. The Politburo's Resolution 50-NQ/TW is aimed to enhance the quality and effectiveness of foreign investment cooperation, create ripple effects of cooperation with Vietnamese enterprises and connect global production and supply chains. The Law on SME Support features support for small and medium-sized enterprises (SMEs) to enter deeply into domestic and international networks and value chains - one of three key contents of the law.

In addition, right in working tasks of a newly established special working group on foreign investment cooperation, this element is also placed on the negotiating table when it contacts big enterprises. The working group asked these enterprises to figure out their plans to transfer technology to Vietnam and engage Vietnamese businesses in their value chains. For their part, FDI firms will get higher preferences.

Besides the support of the Government and stakeholders, efforts of businesses themselves are the main solution to this problem. According to experts, private enterprises, especially SMEs, should further increase their creativity and flexibility to adapt to new circumstances, quickly capture market opportunities, dare to take risks; upgrade investment to meet requirements of partner businesses and more deeply enter domestic and international value chains.

Large corporations need to strengthen internal resources, make more innovations, promote the leading roles, and help domestic SMEs to join production networks and value chains. There is a need to build greater strategies and visions to establish a new position of Vietnamese brands in domestic and foreign markets.

In addition, FDI firms must be considered an inseparable component of Vietnam's economy. The Government has introduced policies on investment attraction but also required FDI investors to build reciprocal relationships with domestic partners to spur growth and development; strengthen connectivity with domestic companies, transfer knowledge and technology to domestic companies to create an effective and sustainable business ecosystem.

By Ha Linh, Vietnam Business Forum