Imbalance in South Korean Investment Structure

With advantages in capital, technology and governance, South Korean FDI companies operating in Vietnam have made great contributions to Vietnam’s socio-economic development. However, apart from that positive effect, South Korean foreign direct investment (FDI) still has issues with imbalanced investment structure from sector to sector, from region to region, and from investment form to investment form.

 

According to data released by the Foreign Investment Agency (FIA), South Korea is now leading 92 countries and territories investing in Vietnam. The East Asian nation has invested US$23.4 billion in 2,832 projects in Vietnam, an increase of more than 260 times from its US$90 million in 1992.

 

South Korea’s FDI structure in Vietnam is changing, gradually shifting from light industries like textile and footwear production to capitalise on low-paid labour and low-valued investment to its advantageous heavy industries like steel, energy, chemical, electronics and petrochemical which require less manpower but more investment. According to statistics, South Korean investors have injected US$12.88 billion in 2,049 industrial and construction projects, which account for 74 percent of South Korea’s total projects and 57.5 percent of total investment value in Vietnam. These fields were followed by the services sector with 646 projects and US$9.4 billion (accounting for 23 percent of total projects and 42.42 percent of investment value); and agro-forestry and fishery sectors with 44 projects (less than 1 percent of investment capital.)

 

Dr Ngo Thi Tuyet Mai, a lecturer at National Economics University, said the South Korean investment restructure relatively matches the economic restructuring of Vietnam in the process of national industrialisation and modernisation. Besides, the negligible amount of its investment going to agriculture, forestry and fisheries is giving rise to imbalances in industry-specific investment structure.

 

A series of hugely invested projects have been deployed in Vietnam, including the US$1 billion Landmark Tower office and hotel complex invested by Keangnam Group, or US$500 million Hanoi Plaza twin towers invested by Charmvit Group, or US$1.126 billion steel mill invested by Posco Group. Many leading South Korean conglomerates like Samsung, Lotte and Kimho Asiana have also established their presence in Vietnam. A lot of world-acclaimed South Korean brand names like Hyundai, Daewoo, LG, Samsung and GS are also present and familiar to Vietnamese consumers. South Korean corporations’ investments have offered an opportunity for Vietnam to gradually acquire advanced technologies and contribute to economic restructuring. Nonetheless, a lot of South Korean investors use backward, energy-prohibitive and environment-polluting technologies, causing negative impacts on people's lives and poverty reduction in Vietnam.

 

According to many economists, labour shortage, especially managerial and qualified personnel, is one of the major factors hampering South Korean FDI flows into Vietnam. The rate of trained labour in Vietnam remains as low as 40 percent of the national workforce. Workforce productivity is equal to just 42.2 percent of Thailand and 17 percent of Malaysia. The scarcity of technical workers and engineers is increasingly clear, not only in newly established economic zones but also in industrial centres like Hanoi, Ho Chi Minh City, Dong Nai and Binh Duong. If Vietnam wants to attract Korean money into high-tech, high-value industries, it needs to make breakthroughs in human resources, especially high-quality personnel, said Ms Mai. To do so, the State must be determined to make fundamental and comprehensive reform of the national education system on the basis of ensuring the quality of teachers, educational conditions and market-oriented education. The country should also apply policies to encourage businesses to apply and renovate technologies, especially new know-how, source technology and clean technology, to restructure the economy, enhance workforce productivity and protect the environment.

 

Although Vietnam's infrastructure has received investment over the years, it is still in poor condition and this factor also inhibits South Korean investors. A survey conducted by the German Development Institute (GDI) shows that most foreign investors interviewed said transportation costs in Vietnam were much higher than the regional average rate. According to the United Nations Development Programme (UNDP), density of ground traffic/km is equal to 1 percent of the world average and the average speed of communication transmission in Vietnam is 30 times slower than the world rate. Besides, the shortage of “clean” ground for investors is another major obstacle because site clearance is more difficult as a consequence of rising land prices. Therefore, Ms Mai said, enhancing infrastructure investment quality is very important to reduce costs for enterprises to attract more new foreign-invested projects and keep existing ones. In addition, Vietnam needs to have proper supporting policies to accelerate site clearance for investors.

 

Underdeveloped supporting industries have put a brake on operations of South Korean companies. In many fields, South Korean companies have to import up to 70 -80 percent of materials from other nations in order to maintain production and exportation. This not only leads to higher input costs, but also weakens positive FDI impacts on domestic companies. Therefore, according to some economists, Vietnam should have incentive policies to draw projects to establish value chain networks for domestic companies. At the same time, it needs to review and pull the plug on projects concentrating on natural resource exploitation, using backward, energy-prohibitive and environment-polluting technologies.

 

In recent years, Vietnam has achieved remarkable results in building the legal system. Nevertheless, many legal documents are inconsistent, contradictory and overlapping, particularly those Vietnam signed with international partners. This not only results in confusion in implementation, but also creates loopholes for organisations and individuals to exploit (transfer pricing, showing operating loss or low profit to transfer profits back to home countries or reduce contributions to the State Budget of Vietnam.) Thus, according to many economists, the nation is required to review, amend and supplement regulations on foreign investment management decentralisation, and ensure local dynamism and accountability. Besides, it also improves supervision of central authorities over FDI projects.

 

Remarkably, spiralling inflation and soaring lending interest rates (19-20 percent per annum) have spiked input costs, making it difficult for companies to sustain production and business activities. In addition, cumbersome administrative procedures, insufficient information and the language barrier are three other major factors discouraging South Korean firms in Vietnam.

 

All these setbacks should be soon resolved to create a more stable and attractive investment environment and build the confidence of foreign investors in Vietnam, including South Korean investors.