Encouraging Exports Via Inward Foreign Direct Investment: Policy Implications for Vietnam

Encouraging Exports Via Inward Foreign Direct Investment: Policy Implications for Vietnam

Abstract

Following the process of trade liberalization, exports have contributed significantly to the impressive economic growth in Vietnam. One of the most important factors behind this success has been the inward foreign direct investments (FDI). This paper firstly shows the positive relation between FDI and exports in Vietnam during 1996-2003. It then compares the competitiveness of Vietnam with China and Thailand in attracting FDI by using the recent surveys by international organizations such as the Japan Bank for International Cooperation Institute (JBIC Institute), the World Economic Forum (WEF) and the Investment Climate Department of the World Bank. Lastly, the paper makes policy proposals in order to attain the goals of FDI attraction, and thus encouraging more exports for industrialization.

1. Relation between Inward FDI and Exports in Vietnam during 1996-2003: an overview

State investment accounts for a large amount of total investment in Vietnam. State investment has always been more than 50 percent of total investment over the last decade. In 2003, state investment accounted for approximately 55 percent of total investment, while FDI accounted for only 1/4 of the total investment in the period from 1991-2000 and was less than 1/5 of total investment in 2003. FDI tends to decrease recently.

Currently, Vietnam's industry accounts for about 40 percent of GDP, increased from roughly 30 percent of GDP in 1995.

In the period 1996-2003, the annual growth rate of industrial output value was more than double the Vietnam's annual GDP growth rate. Before 2000, the annual growth rate of FDI's industrial output value was higher than the average rate of country. However, since 2000, this rate has been slowed down due to (i) the growth rate of private sector's industrial output value is high (about 19percent) and (ii) the decrease of oil output value.

FDI contributes to export growth more than other investments. It is clear since its export growth is higher than country's average export growth[1] and its share in total exports is larger than its share in total investment

Even though the export growth of FDI sector is higher than that of economy, Kokko (1997) shown that only 1/4 of FDI in industry was for export. However, Hai (2003) has calculated that FDI in industry is contributing 94 percent FDI's revenue and 91 percent of FDI's export value. In fact, the FDI's implemented capital of construction and industry sector is 68 percent in the period 1988-2003. Hence, the ratio of exports of FDI's industry to total FDI's exports (91 percent) is higher than the ratio of implemented capital of industry sector to total FDI's implemented capital (68 percent).

MPI and JICA (2003) have calculated that FDI accounts for 100 percent production of oil, automobile, washing machines, air conditioners, office equipments, etc. Production of FDI accounts for 60 percent of steel mill, 28 percent of cement, 33 percent of electrical and electronic products, and 76 percent of medical equipments. FDI accounts for a large share of Vietnam's main exports such as 42 percent of leather footwear exports, 25 percent of textiles and garment exports, and 84 percent of electronics, computers and their parts.

Industrial Parks (IPs) have been built in Vietnam since 1991. Over the last decade, the number of IPs increased substantially. Currently, there are more than 90 IPs in Vietnam allocating mainly in Hanoi, Ho Chi Minh city, Binh Duong, Dong Nai. Only 30 percent of land has been rented. Only 37 percent of IPs has rented more than 50 percent of their land to investors. Enterprises in IPs are mainly FDI.[1][2]

Export growth and export share of FDI enterprises in IPs are always higher than the average export growth and export share of FDI sector, especially before 2000 (see Figure 5 and Figure 6 again). Export share of FDI enterprises in IPs increased from less than 20 percent in 1996 to 70 percent in the last five years. What is the role of FDI in the growth of Vietnam's manufactured exports? Matin, Rajapatirana and Athokorala (2003) argued that Vietnam was at the first stage of export with low-tech and labor intensive products. Export-oriented investors prefer IPs for their choice of location. Vietnam's electronics industry is different from that of other East Asian countries, i.e. small scale investors (not TNCs) dominate the industry. Export share of FDI sector in country overall export increased from 6 percent in the period 1991-1995 to 34 percent in 2000. At the same time, manufactured export share of FDI sector in overall export increased from 19 percent to 50 percent.

Ohno (2004) calculated Vietnam's manufactured exports[1][3]. The share of manufactured exports in the total exports increased from 20 percent in 1992 to 40 percent in 1996 and over 50 percent in 2002. However, the growth of Vietnam's manufactured exports has been unstable. It declined in the period 1997-2000, and then rose in the period 2000-2002.

There is no accurate statistical data on the contribution of FDI sector to the growth of Vietnam's manufactured exports. However, we can explain preliminarily FDI's role in Vietnam's manufactured exports by looking at the following information: (i) FDI accounts for a small share (1/5) in total investment, (ii) industry accounted for 68 percent of implemented FDI capital in the period 1998-2003, (iii) industry exports share was 91 percent of FDI sector's exports in this period, (iv) share of FDI sector's exports increased from 20 percent in 1998 to 30 percent in 2003, and (v) growth of manufactured exports was high in the period 1992-1996, declined in the period 1997-2000, and then raised in the period 2000-2002. One explanation is that FDI has been playing an important role in export growth in general and growth of manufactured exports in particular. Even though FDI accounts for a small share in total investment, its implemented capital in industry together with its big share in industry's exports have contributed positively to Vietnam's export growth. FDI's manufactured exports negatively responded to the Asian financial crisis, and therefore resulted in reduction of their share in Vietnam exports in the period 1997-2000. Its share increased in the period 2000-2002, resulted from increase of FDI's implemented capital in manufacturing industry.

2. The Competitiveness of Vietnam Compared with Thailand and China in Attracting FDI:

Comments from Recent Surveys' Data

In 2003, JBIC Institute implemented a survey on business activities of the Japanese companies. There were 571 out of 932 enterprises provided feedbacks to the survey. According to this survey, Vietnam had the same level of investment attraction as Thailand and it was considered as a country for diversifying investment risks in China. However, the questions related to the strategy and possibility of expanding their investments, and factors attracting them gave particularly different replies (Table 1).

Table 1. Rate of Answering Questions

Source: JBIC Institute (2003)

There were three important characteristics that made Vietnam less competitive to Thailand and China, i.e. poor physical infrastructure, loosen legal frameworks (represented by easily changing policies), and unprofessional business human resource. These comments were also appropriate to what was in the WEF survey (Table 2).

Table 2. Competitiveness Ranking, 2001-2002

Note: Nominator is ranking position; Denominator is number of countries surveyed.

Source: WEF, various years

In addition to these factors, there are also some other microeconomic factors that make business environment in Vietnam less attractive to Thailand and China to some extent. The following are the results from "Doing Business in 2004" survey, done by the Investment Climate Department of the World Bank (Table 3).

Table 3. Costs of Doing Business: A Brief Comparison

Source: the World Bank (2004)

3. Policy Implications for FDI Attraction Policies to Encourage Exports

It is clear that the inward FDI in Vietnam tends to decline recently and the absorption is still very small. Every year, if Vietnam is able to attract FDI capital 10 times bigger than its current amount, it will create critical mass to accelerate export growth, manufactured exports and more importantly encourage the development of all industries. In case Vietnam successfully attracts critical mass of FDI capital, the next question is how to mobilize this capital to satisfy both investors (profit-led and other strategic goals) and Vietnamese government (industrialization goals).

The decision of how much to export and how much to sell in the domestic market is the decision of investors. Government needs to maintain a competitive policy to encourage exports. However, the policy must not violate international commitments which government has already committed. Hence, to encourage investors to export, government should not only implement direct policies/tools but also understand investors' choice of location. This understanding should be expressed in a proper manner, so-called "post-investment services" which include long-term commitments of policy's stability, transparency and fairness. Government needs to understand the business models of investors and the decision making process of Marketing, operation, etc of foreign invested enterprises.

Export Decisions of FDI's enterprises

Vietnamese government expresses its desire that companies export high value-added commodities. However, this desire is not supported by business community all the time When investors make their choice of investment, they will follow different goals: (i) raw materials seeking; (ii) market access (national or regional) seeking; (iii) efficiency seeking; and (iv) strategic element seeking. In Vietnam, foreign investors look for domestic access market, materials, cheap labor, high skilled labor, ideal transportation location. Export decisions of FDI enterprises in Vietnam, in many cases, do not depend on the management in Vietnam.

Fujikura Fiber Optics Company: Take advantage of ideal geographic location and highly-skilled labor to export 100percent

This is one of the three big manufacturers of fiber optics in the world. However, most of Vietnamese do not know about their name. Fujikura imports 100percent materials, assembles in Vietnam and export 100percent of its products. The company meets no difficulty in dealing with import and export procedures. Fujikura takes advantage of Vietnam's ideal location to make quick response to their Japanese customers' orders. In compared to Chiang Mai factory in Thailand, Vietnam factory at the Vietnam-Singapore Industrial Park makes quicker response to customers. Engineers and workers of Vietnam's factory are very skillful. After short in-house training, quality of Vietnamese engineers are the same or even better than quality of Japanese engineers. To reach the same final result, R&D expenditure in Vietnam is just only 1/10 that of Japan. Vietnamese engineers manage very well complicated machines and processes, hence Fujikura can save investment cost. International Marketing decisions are made in Japan.

Quadrille Vietnam Co., Ltd: Take advantage of Vietnam's cheap labor cost to export 90percent

Quadrille Vietnam is a wholly Japanese owned company. Its production range is foundation garments, lingerie and swimming wear. Quadrille recruits 550 employees of which there are only two Japanese. Quadrille moved from Ho Chi Minh city to Amata industrial park in Bien Hoa in 1997 to take advantage of location preferences. It imports almost 100percent materials and exports 90percent its finished products to Japan and EU. The company's domestic brand is VERA. This is a highly competitive brand in the industry. Vietnamese employees satisfy with their job. The rate of job quitting is low. Quadrille meets no difficulty in export and import procedures. After the signing of US-Vietnam Bilateral Trade Agreement, the company has received some inquiries from US market. However, management board of company would like to focus mainly on the Japanese market. International marketing decision is made from Japan.

American Standard Vietnam: Satisfy domestic market by foreign brands and do not plan to export

American Standard is the largest manufacturer of sanitary wares in the world. It built Vietnam's factory at Binh Duong in 1997. American Standard Vietnam sells 100percent in domestic market. Since 2002, the competition in the sanitary wares market has been fiercely with the presence of Japanese manufacturers (Toto, Inax), Taiwanese manufacturer (Caesar), and Vietnamese manufacturers Viglacera, Thien Thanh). Domestics supply exceeds domestic demand. While Vietnamese and Japanese manufacturers are exporting to Japan, China, Eastern Europe and Middle East, American Standard must concentrate on domestic market. American Standard Corporation in America does not allow Vietnam's factory to export to other markets.

Automobile industry and motorbike industry: Difficult to export

Recently, there are comments that (i) some manufacturers are complaining too much but they are very profitable; (ii) manufacturer's better find new export markets rather than complaining that government's policy is not good for selling in domestic market; and (iii) manufacturers are importing too much and do not collaborate with government to develop supporting industries.

So far, policy makers and businesses have agreed that it is difficult to develop supporting industries for automobile industry and motorbike industry. In addition, manufacturers have argued that it is very difficult to export these products because (i) in the automobile industry, the high production cost results in high price of cars assembled/manufactured in Vietnam which does not allow automobile industry to compete internationally; (ii) in the motorbike industry, the preference/taste of end-users in different countries is very different so that motorbikes produced in Vietnam are hard to sell in other markets.

• Mai The Cuong, MBA*
  Giang Thanh Long, MPP*