Improving quality of FDI inflows

Wednesday, 2018-07-11 18:22:36
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Toyota Boshoku Hanoi, an FDI firm in Vietnam
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NDO - Vietnam is preparing to review 30 years of attracting foreign direct investment (FDI) by the end of this year, with much attention given to assessing the spillover effect of FDI on domestic socio-economic development.

The pervasive influence of FDI is expected to be included in the report on summarising 30 years of FDI attraction by the Ministry of Planning and Investment. This content was also put on the agenda at the mid-term Vietnam Business Forum (VBF) in 2018 in order to propose solutions to enhance the quality of FDI inflows.

Over the past 30 years with many waves of investment, the FDI sector has become an important driving force for the Vietnamese economy with the presence of 26,000 valid projects, posting total registered capital of more than US$326 billion USD and total disbursement of more than US$180 billion.

The FDI sector has also made increasing contributions to the socio-economic development of Vietnam, equivalent to approximately 25% of the total of social investment capital and about 20% of GDP. In addition, FDI enterprises make up 72.6% of Vietnam's total export revenue.

However, the spillover effect of the FDI sector on other sectors of the domestic economy is not as productive as expected which is another difficult problem for policymakers.

In fact, almost all developing countries have created policies that encourage the transfer of technology from FDI firms to the domestic sector, thereby improving the technological capacity, competitiveness and labour productivity of domestic firms. However, Vietnam has yet to achieve this goal.

Samsung is a successful example of FDI attraction. After 10 years of investment in Vietnam, Samsung has established more than 200 first-tier suppliers which directly provide components to Samsung but there are only 29 Vietnamese suppliers.

A number of domestic companies have participated in the supply chain of FDI enterprises, but most of them are only able to supply packaging, cans, screws, and other such materials.
According to Dr. Vu Thanh Tu Anh, Dean of the Fulbright School of Public Policy and Management, the pervasive influence of FDI on domestic firms remains modest.

Foreign investment is important, but how it contributes to the domestic economy is even more important. Vietnam is integrating into the world but should not be reduced to a conduit for FDI enterprises to carry out their export activities, Anh noted.

While domestic firms say that foreign partners do not want to cooperate and help them to join the value chains of FDI firms, foreign firms blame the lack of linkages for the limited capacity of domestic firms. Foreign firms say that Vietnamese firms are too small in scale while lacking the knowledge and experience required for effective marketing of products and are not qualified enough to participate in the value chains, forcing FDI firms to use foreign suppliers.

In order to improve the quality of FDI inflows, one of the key issues is to enhance the linkage between domestic and foreign enterprises. FDI enterprises should actively create the conditions for Vietnamese enterprises to gradually participate in their value chains, through specific consultancy and cooperation programmes with Vietnamese enterprises.

Meanwhile, domestic enterprises should make every effort to be innovative in their management thinking, approach advanced technology, improve labour skills, increase production capacity, and enhance their product quality and competitiveness.

At present, the Vietnamese Government is trying to develop supporting industries and nurture small and medium-sized enterprises in the manufacturing sector. In the future, the government should develop more practical and effective measures to facilitate the links between domestic and foreign enterprises. At the same time, the government should adopt policies to direct large enterprises to forego real estate, to move to modern industries and develop into strong enterprises capable of joining in more complex business activities.