Is High-quality FDI Up to Expectations?

9:40:40 AM | 7/28/2022

Billions of dollars of FDI is invested in Vietnam every year, expected to bring with advanced industries and technologies from developed countries to enable Vietnam to take a shortcut to get ahead in technology. However, most FDI projects are now still labor-intensive.

Increasing FDI flows

The flow of foreign direct investment (FDI) into Vietnam has increased in a certain extent since May. Registered FDI fund was estimated at US$14.03 billion in the year to June 20, according to data released by the Vietnam Trade Promotion Agency (Vietrade) under the Ministry of Planning and Investment. In the first half of 2022, the country witnessed 487 projects add their investment value by US$6.82 billion, up 5.9% and 65.6% year on year, respectively.

Since the start of the year, Vietnam has licensed 752 new FDI projects with a total registered funds of over US$4.94 billion and seen 1,707 share purchase deals worth over US$2.27 billion, up 41.4% year on year.

While investment is being affected by the pandemic and geopolitical tensions are growing in the world, FDI growth in Vietnam shows investor confidence in the investment and business environment, solutions and policies for post-COVID-19 economic recovery.

In fact, since the COVID-19 wave broke out in China, large corporations, especially giant tech firms, have tended to move out of the country. Grasping that tendency, Vietnam has introduced many investment attraction policies, especially to draw high-quality FDI inflows.

Typically, the Foreign Investment Cooperation Strategy in the 2021-2030 period emphasizes important goals of raising the share of registered investment capital from developed countries and increasing 50% of multinational corporations in Fortune 500 list of largest corporations in the world by Fortune Magazine (USA) to have business presence and operations in Vietnam.

Seizing this opportunity, many large foreign firms have chosen Vietnam as a "manufacturing base", including Samsung, LG and Foxconn. Even, Intel, a U.S. chip manufacturer, is planning for a second phase investment after the US$1-billion first phase.

Earlier this year, Samsung alone invested an additional US$920 million in its electromechanical facility in Thai Nguyen province. Nestlé, after investing an additional US$132 million to double its processing capacity of premium coffee lines at Nestlé Tri An factory, Dong Nai province and bring its total investment value to nearly US$730 million, has constantly expanded production in Vietnam. Foxconn is making a similar move, especially after its biggest customer, Apple, said that Vietnam has an important position in its supply chain.

Insufficient funds for innovative research

In fact, billions of US dollars is invested in Vietnam every year, mainly in manufacturing plants, possibly high-tech facilities. However, there is a shortage of FDI capital for innovative research.

Vietnam always expects a new wave of high-quality investment funds from Europe, the United States, and developed countries but the deployment of solutions to unlock the path for this inflow is not as good as expected. High-tech projects from developed economies to Vietnam are quite small in number while investment in research and development (R&D) centers is still insignificant.

Typically, the US is still only the 11th largest investor in Vietnam with over 1,167 projects and US$10.87 billion. In 2021, Vietnam attracted US$31 billion of FDI funds.

Just 5% of projects are using modern technology and source technology from the US and Europe while 80% and 15% are using medium technology and outdated technology, respectively.

When entering Vietnam, Samsung was committed to establishing a research and development center but the South Korean group has so far completed the basic construction of this center or 70% of the workload. It remains unclear when this R&D center can be put into operation.

Subsequently, the lack of innovation research centers means the absence of "Made in Vietnam" copyrighted inventions. This means FDI factories are still labor-intensive, rather than technologically intensive.

The goal of attracting high-quality FDI capital is to help the Vietnamese industry to access new technologies for comprehensive development of industrialization and modernization.

However, the lack of R&D centers makes Vietnam's industry thrive only in a few fields that serve foreign firms such as manufacturing microchips and displays. In the meantime, Vietnam seriously lacks other fundamental industries.

Given FDI inflows and their allocation to industries, placed in comparison with domestic enterprises, there is a need for revision of investment policy to improve the quality of FDI inflows invested in high-tech and industrial projects.

While FDI projects are still labor-intensive, domestic enterprises are making due investments in supporting industries and R&D centers. According to the Ministry of Science and Technology, in 2021, they accounted for 64% of R&D investment funds.

Vingroup is now more well-known internationally as a high-tech researcher rather than a real estate developer. To sell electric vehicles (EVs) to the world, the group has made the methodical investment, from battery research to production line systems and supporting industries. In addition, other domestic tech corporations such as FPT, Viettel and Mobifone all have long-term investment strategies for R&D. 11 years ago, FPT decided to spend about 5% of its annual revenue on R&D. Viettel also established its own Viettel Research and Development Institute in 2010 like giant corporations in the world. The group has spent 10% of pre-tax profit, equivalent to VND2,500 billion, on the Science and Technology Development Fund since 2014.

Source:  Vietnam Business Forum