Vietnam's FDI Attraction Lacks Long-term Planning

Vietnam's FDI Attraction Lacks Long-term Planning

Since 1987 with the enforcement of the foreign investment law, FDI has played an important role in the socio-economic development of Vietnam. In FDI, Asian partners make up 62 per cent of the total registered capital leading by Singapore, Taiwan, Japan, ROK and Hong Kong. Though the capital includes investments from European and American companies, Japan is the only country among G7 making significant investment in Vietnam. Why do trans-national companies hesitate to invest in Vietnam?

Small-scale investment

Though the average size of investment continues to increase, it remains below US$10 million per project. The small size of investment also means the absence of integrated investment and diversified production, low added value and poor economic efficiency. The question must be considered across various fields: economy, technology and market. As small projects involve only contractual jobs, assembly and the final stages of the production line, while semi-products and materials are imported, the added value in Vietnam is low. Such is the case of the assembly of automobiles and motorbikes, footwear, garments and electronics. Vietnam does not have many projects producing most of the product parts known as a localisation programme trying to obtain advanced technology, higher added value and exploitation of natural and human resources. The current production mode can create only minimum added value or artificial profit by high tariff rates.

In contractual production of garment and footwear, for examples, Vietnamese companies get only small profit from the cheap labour of Vietnamese workers. The key issue is the production of materials. It ensures both profit and economic safety, maintaining the production and employment. The localisation programme encourages intensive investment in Vietnam. Progress has been already made in joint ventures of automobiles and motorbikes.

FDI has increased in recent years but remains unstable. It is no longer a problem of policy but the absence of scientific and long-term planning for sustainable development.

Hurdles remain

In the past two years, especially 2004, FDI raised the hope of good development as was the case in 1988-2000. There are, however, certain hurdles to be removed concerning protectionism, project evaluation, infrastructure and investment policy. As FDI plays an ever-increasing role in the economy, export and revenue, related legal framework must be improved and made more attractive. In 2004, 723 new projects were licensed with registered capital of over US$2.2 billion and 460 projects with additional investment worth over US$1.94 billion. With long-term planning, sectors and corporations should be allowed to call for investment in their related industries.

The government is merging foreign investment law and domestic investment law. It must be in line with international practice, bilateral and multilateral commitments of Vietnam. There must be also decrees on preferential treatments to foreign and local investors. They are not the same but must be equal.

Vietnam must accelerate its economic development in the next 5 and 10 years. No doubt, integration into the world economy remains difficult. While posing no problem to FDI projects, it is most critical for other sectors, especially small and medium enterprises and loss-making SOEs. Integration also means competition in prices, quality and services, in other words, competition in knowledge and cultural assets.

For the past 17 years, Vietnam has had to import production materials such as steel, chemicals, plastic, textiles, leather, petroleum and spare parts that are vital to related industries. Imported steel is important to ship-building, railways and automobiles. The Hyundai group alone needs 1.4 million tonnes of steel a year to build ships and automobiles. Vietnam must also produce materials for these industries. It requires careful consideration as these industries require big investments, contain many risks and are slow in profit.

Real economic reform

In spite of an optimistic forecast for 2005, Vietnam cannot achieve its goal of sustainable development without the participation of big economic groups bringing in big investments, technologies and markets instead of the current small and scattered investment.

It is correct to let localities decide on investment projects within their range, but it must be in the framework of long-term planning. Presently, there are too many industrial zones and export processing zones. Vietnamese companies can build the infrastructure but cannot attract foreign investors. It is better to allow foreign investors to build industrial zones and be responsible for calling investment, such as the case of Singapore IZ in Binh Duong.

The land law has been approved, but its decree and guidance must be completed. Constraints remain in land clearance and administrative formalities make it difficult for investors, in some previous cases, it took five to seven years and investors lost patience.

However, the investment environment has also shown some optimistic developments. Many projects have expanded their re-investment such as Nghi Son and Chinfon cement projects. Projects of hotels, apartment buildings, golf courses and major industries continue to develop indicating a stable and attractive investment environment in Vietnam. The additional advantages are the employment and supply of building materials. Although big projects are slow in profit, they are long-term commitments in Vietnam and should be encouraged.

• Dr. Mai Thanh Hai
  Chairman of Foreign-invested Enterprises Association of Vietnam