Presentation on theme: "INTERNATIONAL YOUNG SCHOLARS WORKSHOP (IYSW) 3 AUGUST 2011 KYOTO UNIVERSITY, JAPAN Characteristics of FDI contribution to Vietnam economy and government’s."— Presentation transcript:
1 INTERNATIONAL YOUNG SCHOLARS WORKSHOP (IYSW) 3 AUGUST 2011 KYOTO UNIVERSITY, JAPAN Characteristics of FDI contribution to Vietnam economy and government’s policy to attract inward FDI selectively. Presenter: Mai Hai Sam Vietnam National University
2 Content 1. Outlook of inward FDI in Vietnam 1.1. FDI by investors1.2. FDI by geographic structure1.3. FDI in ownership2. Contribution of FDI to Vietnam economy2.1. Grossed fixed capital2.2. GDP growth2.3. Business structure2.4. International trade capacity3. Vietnam country’s factors to attract FDI3.1. Political Stability3.2. Rule of Law3.3. Competitive investment cost3.4 Corruption freedom4. Recommendation on government policies to attract FDI5. Conclusion
3 1.Outlook of inward FDI in Vietnam Figure 1 . Vietnam FDI in selected years ( Unit: Millions of USD)From , foreign investors were attracted by the potentiality of a transitional economyVietnam officially joined ASEAN (1995)Agreement of Cooperation and Development between Vietnam and EU (1995),A bilateral trade agreement (BTA) between Vietnam and the United States (2001).However, from 1997 to 1999, a sharp fall in FDI inflows to Vietnam, mainly as a result of the Asian financial crisis (1997) and the unattractiveness of Vietnam’s investment environment relative to other regional countries, especially ChinaSource: UNCTAD, World Investment Report 2011
4 Outlook of inward FDI in Vietnam Vietnam FDI in selected years ( Unit: Millions of USD)From , Vietnam has witnessed the strong comeback of FDIThe Law of Foreign investment in 1996 was also revised, taking out some favors to foreign investors since it generated unequal competitive environment between domestic and foreign investors.This upsurge in performance indicates a great interest from foreign investors, especially since Vietnam became the 150th member of the World Trade Organization (WTO) in 2007.The year 2008 was a particularly good year for Vietnam to attract FDI.Dip in 2009 and 2010 due to global crisis (2007) and other internal and external reasonsSource: UNCTAD, World Investment Report 2011However, it satisfied Vietnam authorities’ plan while Vietnam Ministry of Planning & Investment (MPI) set the FDI target of year 2009 to attract almost a half of actual in year 2008
5 1.1.FDI characteristics by investors Foreign investors in Vietnam ( )TerritoryShare of reg. cap. FromShare of reg. cap. FromReg. FDI of compared to (%)SEA40,1839,8193,9ASEAN23,2226,3213,5Tax haven*115,4812,8124,52Europe8,976,431,6USA, Canada, Australia11,579,8330,36Others0,584,9Source: Created from data of GSO VietnamSEA includes: Japan, Korea, HongKong, Taiwan and mainland China.*1. Tax havens are states or countries or territories where certain taxes are levied at a low rate or not at all while offering due process, good governance and a low corruption rate.In this research, taz havens are defined according to OECD including British Virgin Islands, Cayman Islands, Bermuda, Channel Islands, Cook Islands, Island of Man, Barbados, Belize, Bahamas, Samoa, Panama, Mauritius, Sain Kitts Nevis, British West Indies, Cyprus…European investors reacted weakest during recent 3 years after Vietnam’s full participation in ASEAN (1995)While USA, Canadian, Australian investors’ capital injected into Vietnam during took 3 times more than total registered capital in last 15 yearsIt’s noted that capital coming from tax haven territories has been originated from multinational corporations (MNEs) who set up their fund subsidiaries in these tax haven.
6 1.1.FDI by investors (cont.) Taiwan is the biggest foreign investor (11,8%) with US$ 22,7 billion of registered capital, followed by Korea, Singapore, Japan. These top five economies have invested with total committed capital of US$ 87,6 billion (45,6 % of the total FDI capital).Top 20 foreign investors in Vietnam fromUS’s investment capital doubled their direct registed capital (MPI/ FIA and USAID/STAR, CIEM and FIA, 2007)Source: Vietnam partner data, 2011
7 1.2. FDI by geographic structure Foreign investments concentrated geographically in key economic areas in the South ( 65% of total investment projects and 57,7% of registered FDI capital) and North due to well- improved infrastructure, good sea ports, international airports, acceptable costs for employees, office and accommodationFDI in Vietnam provinces up to 2002City/provinceProject (%)Capital (%)Baria-VungTau2.364.73BinhDuong16.447.05DongNai10.5413.73HoChiMinh city34.1126.56LamDong1.602.20QuangNgai0.153.44ThanhHoa0.211.15HaiDuong1.121.30HaiPhong3.203.38HaNoi12.3020.42Others17.9816.05Total100Source: Vietnam Investment Review, No 563/July 29-August 4, 2002.
8 1.3. FDI in ownershipThe increasing FDI contribution seemed to motivate the increasing domestic investment as well with the stable share in about 22% average in foreign investment and higher rate from 24% to 36,4% among private sectors in and respectively
9 1.3. FDI in ownership (cont) Share of foreign invested enterprise (Unit: %)Year200020032005200720082009Small size60,8562,6664,2765,9466,52Medium size13,2511,369,859,99Large size25,926,6925,8925,0223,5FIEs/Total Es3,61%3,67%3,27%3,18%2,74%2,65%Parent TNCsTotal invested TNCsChina3.429Taiwan6063.034Vietnam4326Source: UNTCAD, 2008Foreign investors increasingly prefer the wholly owned form for their investment after learning the various difficulties occurring by operating a JV with Vietnamese counterpartsThese enterprises came to Vietnam not directly from their parent corporations, but from their affiliates or branches from the third countries into Vietnam.
10 2. Contribution of FDI to Vietnam economy 2.1. Grossed fixed capital sfsfFDI has been an important supplementary source of funds for gross fixed capital and improved the balance of payment for the past years.The event of Vietnam becoming member of WTO in 2007 made implemented FDI accounting highly again for over 30 percentSource: Created by author from data of CIEC, World Development indicators, World Bank (2009) and UNCTAD, World Investment Report 2011What’s your best guess?
11 2.2.Contribution of FDI to GDP growth Evidently, Vietnam economic growth during these recent 5 years has been based on foreign investment more than in the past.Vietnam was one of very few countries to reach plus growth in the context of global crisis leading to economic regression in many countries, only following China in region (IMF Article IV report)FDI stock situation in Vietnam (Unit: Millions of USD and %)Year19952000200820092010Inward FDI stocks Vietnam7.15020.59649.85457.45465.628Share of gross domestic product Vietnam34,55561,766,1Inward FDI stocks SEAShare of gross domestic product SEA22,444,150,751,5Source: UNCTAD, World Investment Report 2011What’s your best guess?
12 2.3. Contribution to business structure The sectors which attract higher inflows were light and heavy industry and services (30% each in 2007)However, FDI in agriculture, forestry and fishing is under-proportionate compared to the importance and huge potential of these industries in Vietnam.sfsfSource: Annual Statistical BooksIndustry: crude oil, light industry, heavy industry, foodstuff, constructionAgriculture: agri and forestry, aquaticService: transport and telecoms, hotel and tourism, finance and banking, culture, health and educ, new cities, offices and apartmentSource: Vietnam partnerWhat’s your best guess?
13 2.4. Contribution to International trade capacity With foreign investors increasingly attracted to export-oriented industries, FDI has played an important role in export growth, especially after the crisis in 1997Beside motivating export from domestic companies, FDI certainly has impacts on domestic firms’ effectiveness in export, making the market become more competitive.Contribution of FDI to Export (bil USD)Source: Vietnam Ministry of TradeYearTotal ExportExport by FIEsContribution to export(%)20005,451,4727%20017,262,1630%20029,193,2135%20039,363,2234%200411,544,6841%200514,486,8147%200615,036,845%200716,717,87200820,1510,1650%200926,514,4955%
14 2.4. Contribution to International trade capacity FDI accelerate export more quickly than import, leading to unbalance in trade balance as well.Vietnam Balance of Payment,In billions of USD20072008200920102011Current account balanceProjectedTrade balance-10,3-12,8-8,3-7,1-7,6Export, F.O.B48,662,757,172,289,4Import, F.O.B58,975,565,479,397Investment income-2,2-4,4-3-4,6-4,7Receipts1,11,40,80,50,6Payments3,35,83,85,15,3Source: IMF 2011 Articale iV report, p24
15 3. Vietnam country’s factors to attract FDI Empirical researches using an institutional theoretical approach have emphasized the study of institutional quality, political risk, bilateral investment treaties, foreign investment and trade regulations, and capital markets liberalization to explain flow of FDI (Busse et al., 1996; Habib & Zurawicki, 2002).The flow of FDI into Vietnam is related to these simultaneous satisfied institutional quality conditions:(1) The Political Stability(2) Rule of Law(3) Competitive investment cost(4) Corruption FreedomStill, there are other variables such as bilateral investment treaties, foreign investment and trade regulation, and capital markets liberalization to attract FDI, which should be further evaluated in future research.
16 Vietnam country’s factors to attract FDI 3.1. Political Stability A big concern of developing countries to express themselves as a stable government and as a security state to ensure investment (Agarwal & Feils, 2007; Brada et al., 2003; Trevino & Mixon, 2004; Zitta & Power, 2003);Political and social stability is strength of Vietnam. There are in Vietnam less problems related religions, languages or ethnic disputes, and the safety of foreign direct investments is guaranteed
17 Vietnam country’s factors to attract FDI 3.2. Rule of Law Comparison of Vietnam’s foreign ownership commitment among regional and global countriesSegmentNew investmentM&AVietnamRegionGlobeFuel5075,792Coal100Oil and gasAgriculture- forestry82,995,9Light industry7586,896,6Telecommunication49-5164,988Electricity71,475,887,6Electricity transferBanking306576,191Insuarance80,991,2Transportation49-10069,463,778,5Media (Journal & Television)36,168Construction, Tourism and service91,698,1Pharmacy and clean water management51-10075,584,196Source: Investing Across Borders 2010, World Bank and Vietnam Foreign Investment LawVietnam government has endeavored to undertake market reforms for more attractive to FDI open better investment climate and get closer to regional commitment.The amended Law of Foreign Investment was to improve its investment climate, and thus to compete with other regional economies
18 Vietnam country’s factors to attract FDI 3 Vietnam country’s factors to attract FDI 3.3 Competitive investment costComparison of investment-related cost among ASIA (10/2011- Unit: USD)According to a survey conducted by the Asian Business Council, Vietnam ranked third for investment attraction among Asian nations in the period, after China and India (VIR, 2007)Due to lower costs for labor, land rent, telecommunications, power and water supplies, Việt Nam is in better position than regional countries (JETRO, 2010).Source: Japan External Trade Organization (JETRO), 2011, p66-71
19 Vietnam country’s factors to attract FDI 3. 3 Vietnam country’s factors to attract FDI Competitive investment costComparison of investment-related cost among ASIA (10/2011- Unit: USD)Investment-related costDanangHCMCHanoiJakartaManilaBangkokBeijingShanghaiKuala LHKSeoulSingNon-manufacturing staff's salary/actual annual3.2055.6385.9545.3335.7379.80611.27012.15414.46028.94930.73930.835Engineer's salary/actual annual2.7244.5745.1946.0826.8419.7786.69410.49414.82731.75030.60937.266Worker's salary/actual annual1.8161.8911.7333.2473.8975.1256.1075.6095.61521.87824.60122.206Office rent/month/sp.m1738452018221144024945267Electricity rate for general use/kWh0,070,090,230,080,110,140,20Housing rent for resident agent/month1.0252.5503.0132.9501.5321.9354.6292.2771.5542.4141.7954.969Regular gasoline price/liter0,840,51,111,311,091,080,621,981,791,51Mobile phone basic charge/month2,5541337,686,9281180,8Corporate income tax rate (%)253016,516Source: Japan External Trade Organization (JETRO), 2011, p66-71Country ranking by inward FDI performance index and inward FDI potential index,EconomyInward FDI performanceInward FDI Potential Index200820092010Vietnam20227773Source: UNCTAD, World Investment Report 2011Note: Ranking is that of the latest year available. Covering 141 economies. The potential index is based on 12 economic and policy variables.
20 Vietnam country’s factors to attract FDI 3.4 Corruption Freedom In Vietnam, law enforcement is not consistent and uniform in the country, the law interpretation and enforcement depend too much on local agencies or lower ranking state officials (JETRO, 2010).Corruption is a disturbing barrier existing in the institution to increase business cost. If the rule of Law is not strong enough, it would let corruption surrounding institutional administration.Therefore, bureaucracy and low transparency are the big weaknesses of the business environment in Vietnam.
21 4. Recommendation on government policies to attract FDI What are government’s effective ways to attract FDI?How to keep foreign investors make more long-term investment rather than short-term?Up-grading infrastructureImproved foreign investment regulationsTransparency, accountability and predictabilityLegal systemEnhanced labor force by training / retrainingWhat’s your “to” Statement?
22 4. Recommendation on government policies to attract FDI (cont.) First priority is to adjust the legal system according to the international.Legal regulations in Vietnam in foreign investors’ assessment are generally fast changing, less predictable and less consistent, especially in tax, foreign exchange, labor regulation, land and jurisdiction.Business information has to be provided;Transparency, accountability and predictability of the public administration must be improved rapidly commitments.Post-licensing procedures especially on land clearing, foreign exchange, tax and customs must be simplified tangibly.Secondly, up-grading of infrastructure, especially in power and clean water supply, Internet connection is one of the top priorities.Vietnam maintain a competitive investment cost advantage but the quality of some public goods and services is low.Higher charges and fees for public goods and services like international dial, Internet, seaport fees and others than in regional level.Low stability, fluctuating tension, sudden black outs in power supply create significant additional costs for users and prevent investors to move high-tech investment into Vietnam.In future policy to attract inward FDI flow, Vietnam should allocate national funds to up-grade its roads, ports and various areas of infrastructure as well as improve foreign investment regulations in these sectors.
23 4. Recommendation on government policies to attract FDI (cont.) Thirdly, training and re-training Vietnamese labor forceYoung, fast learning relatively well-educated labor forces, competitive labor cost are advantages for Vietnam in regionGeographic location, natural resources (oil, gas) are other factors foreign investors will take in consideration to choose a place for investment.Therefore, the quality of Vietnam's labor forces must be enhanced in different ways like vocational training, foreign languages, health and industrial discipline to keep up these competitive advantages.Fourth, enhance capability of government organization, agent to evaluate inward FDI and select new efficient foreign investmentFDI has represented an extremely important source of growth for the Vietnamese economy. However, its impacts on employment and technology transfer have been limited than its potentiality. Even the imposed local content requirements have not yielded the desired results.The authorities need to clearly communicate their views of the inward FDI effectiveness in economic situation and provide economic agents with timely and comprehensive data, withdraw licenses in ineffective FDI projects to provide opportunity for more potential and capable investors, controlling the project’s land transaction. Projects which may cause pollution to environment, whose investment-scope is small but use much land and spend a lot of energy will be considered to be controlled.
24 5. ConclusionFDI contributes capitals help accelerate the government’s development goal and has been recognized as a major indicator to promote economic growth.Inward FDI flows contribute in the form of capital (to enrich their foreign exchange reserves)Accelerate export capacity and contribute to change the economic sector .FDI sector accounts for an increasing share in GDP.Vietnam’s restored macroeconomic stability and efforts to reduce corruption are significant factors for potential foreign investors, while incentive policies in the government’s investment law do not register as attractive enough for foreign investors rather than more transparent legal system, improved infrastructure, enhanced labor force and local agent capability
25 5. Conclusion (cont.)Vietnam still remains an attractive destination for investment due to favorable economic growth prospects and the implementation of pragmatic economic policies.FDI outlook for is projected to grow to USD 7.7 billion and USD 8.5 billion, respectively due to returning interest and confidence by investors who are investing and doing business in the country (IMF, 2011).