More expectation placed on increased FDI effectiveness

Wednesday, 2017-07-26 15:42:15
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Manufacturing of wires used in automobile industry at Japanese invested SUMI Vietnam Co., Ltd in the northern province of Ha Nam. (Credit: NDO)
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NDO – Foreign direct investment (FDI) into Vietnam continues to be a bright spot, making important contributions to the development of industrial production and exports, as well as to the overall growth of the economy.

However, the effectiveness of this flow of capital in assisting domestic enterprises to rise up and seize opportunities to participate in the global value chain has not been as expected, requiring more determination from the Government, FDI enterprises and most importantly Vietnamese enterprises themselves.

Weak link

After reaching a record level of US$15.8 billion in FDI disbursement in 2016, the inflow of FDI continued to grow impressively in the first six months of 2017, with the total newly registered, increased and share capital reaching US$19.22 billion, up 54.8% over the same period last year; disbursement during the first half this year was estimated at US$7.7 billion, up 6.5% annually. After nearly 30 years of implementing FDI attraction policies, Vietnam has recorded over US$160 billion in FDI, bringing about enormous resources for economic development.

In addition, the FDI sector also accounts for approximately 50% of industrial production value, in which petroleum, electronics, electronic components, mobile equipment, animal feed and beverages account for the largest proportions. This sector also contributes more than 72% of the nation’s total export turnover, of which the key exports are processing and manufacturing products with high added value.

Prof., Dr. Nguyen Mai, Chairman of the Vietnam's Association of Foreign Invested Enterprises (VAFIE), said that the above figures reflect the continuously increasing flows of FDI into the country, along with higher quality and socio-economic efficiency. However, experts are still concerned about low FDI effectiveness, in which the core problem is the relatively weak link between FDI enterprises and the local business community, especially small and medium enterprises (SMEs).

Surveys conducted in the northern province of Vinh Phuc show that local industrial growth in recent years has witnessed great contributions from two FDI enterprises, Toyota Vietnam and Honda Vietnam, contributing about 80% of the provincial GDP. It is clear that they are large enterprises producing final finished products, whilst creating a good basis for supporting industry development.

However, the facts show that these two companies are still mainly using imported equipment and spare parts, while the localisation rate of most of their major products remains low, with very few domestic firms participating in the production chain of Toyota Vietnam and Honda Vietnam.

According to a survey by the management board of industrial zones (IZs) in Vinh Phuc, Honda Vietnam currently has around 500 suppliers of supporting industrial products, of which over 400 are FDI enterprises. Particularly, although the province has just 35 companies supplying supporting products in the field of automobiles and motorbikes, FDI projects account for 34 of them, with a total registered capital of approximately US$830 million, and only one domestic direct investment (DDI), Cosmos Co., Ltd, with registered capital of VND48 billion.

Deputy Director of Foreign Economic Relations Office (Department of Planning and Investment of Vinh Phuc province), Phan Tien Dung, said that the target of attracting high technologies, source technologies and technology transfer, through FDI attraction in Vinh Phuc, has not been as expected; the effectiveness and influence of the FDI sector on domestic enterprises still remains low. Many FDI enterprises when investing in Vinh Phuc have committed to increasing their localisation rate to 30-40% after ten years, but most of them have only reached 2-10% at present. Particularly, in the automotive industry, the localisation rate is less than 6%.

Dong Nai is also among one of the provinces with the largest number of FDI enterprises, with over 1,000 FDI projects in operation. Over the past few years, the influence from attracting foreign investment has created a great opportunity for SMEs, within and outside the province, to supply their products in the production chain for FDI enterprises.

However, in reality, very few businesses have made the most of this opportunity. Deputy Head of Dong Nai IZs management board, Mai Van Nhon, admitted that, compared with Dong Nai's requirements, chain links in production activities between domestic and FDI enterprises are not as expected. Very few domestic enterprises are involved in supply chain links with FDI enterprises operating in the locality. According to statistics, as the domestic supporting industry does not effectively meet the requirements of foreign investors, FDI enterprises in Dong Nai still have to import many raw materials, machinery and equipment (accounting for more than 70% of the total import value in the locality).

Three-sided determination

According to a recent review from the International Finance Corporation, only 21% of Vietnamese firms participate in the global supply chain. Meanwhile, results from a survey by the Vietnam Chamber of Commerce and Industry show that the proportion of products purchased from domestic processors only accounts for approximately 27% of the total FDI input value.

Accordingly, just 36% of Vietnamese enterprises are involved in the export network of FDI sector, which is very low compared to 60% in Malaysia or Thailand. This proves that Vietnamese enterprises have witnessed very little benefit from the effectiveness of FDI inflows through technology transfer, knowledge transfer and productivity enhancement.

Regarding the reasons for those issues, Deputy Director Dung said that many foreign companies, prior to making investment decisions in Vietnam, had previous economic contracts and place their trust in their traditional partners, therefore the opportunities for Vietnamese enterprises are very limited, often focusing on simple and low-processed products, as a form of coping with the requirements to fulfil their investment commitments in Vietnam.

On the other hand, the majority of domestic enterprises, with low capital, backward production technologies, low labour quality and limited management capacity, often stand on the margins of the "playground" in providing products for larger projects.

From another point of view, Deputy Head Nhon said that not all FDI enterprises pay attention to using domestic SMEs’ supporting products. In contrast, they are in great need of local supply as importing supporting products is much more complex, as they are subjected to import duties, transportation costs, etc., which will in turn increase production costs. However, domestic SMEs are generally running on a small scale production, weak financial capacity and backward technologies so their products barely meet requirements.

Sharing the same opinion, Nguyen Van Thang, Director of Nguyen Toan Phat Co., Ltd in Bien Hoa city (Dong Nai), said that the demand for supporting products of FDI enterprises in Dong Nai is huge. For example, footwear and plastic companies need a lot of steel molds for their production, but domestic enterprises have still not grasped the opportunity. At present, Nguyen Toan Phat stops at the production of steel billets to make molds, while making molds requires huge investment in production machines.

Vice chairman of Dong Nai Young Entrepreneurs' Association, Pham The Linh, said that due to financial constraints, it is difficult for domestic enterprises to innovate their production technologies. Meanwhile, machines to make high-quality products, that meet the requirements of FDI enterprises, are rarely domestically produced but are imported from abroad, resulting in high costs and remain almost out of reach for domestic companies.

In addition, development policies for supporting industries and investment resources from the Government remains limited, therefore, it is necessary for the relevant agencies to deploy more open policies for SMEs to access capital and high quality human resources in the support industry.

Economists said that FDI inflows in Vietnam have not created a great influence on the economy and have not boosted the domestic business sector as expected, due to the lack of a strong links between the two sectors. For that reason, strengthening the link between the two important components of the economy is essential to ensure the sustainable development of the whole economy. In addition, strengthening the links will not only motivate domestic enterprises to develop and seize their opportunity to participate in the global value chain, but also bring about benefits to FDI enterprises themselves.

To strengthen this links, the Government, FDI firms and also domestic enterprises must have a coordinating responsibility, in which the Government plays the supporting role for link activities, through improving policies and laws; introducing incentive mechanisms for FDI companies that have strategies to expand the trading of spare parts and supporting products from domestic enterprises; opening mediatory channels to support product trading between the two sectors; and focusing on supporting domestic enterprises in terms of capital, technologies and high quality human resources to meet the requirements of FDI companies.

FDI enterprises need to actively cooperate with their domestic counterparts by creating opportunities for them to find out about the products and components needed in the production process, while proactively transferring technologies for the private sector to reach the value chain.

Domestic enterprises need to boldly invest in machinery, technology change, human resource training and market research to create products that meet the needs of FDI enterprises, therefore having the opportunity to be a link in the global value chain.

“Domestic enterprises are hardly involved in the linkage chain with FDI enterprises. There is a problem related to unmet requirements in supply-demand relation. Domestic enterprises want to have exclusive contracts with FDI enterprises, with assurances that investment will be made in production technologies, while FDI enterprises have their own supply networks and often expect domestic enterprises to actively offer and demonstrate their supply capacity. Meanwhile, the intermediate role of regulators to introduce and connect domestic suppliers with FDI enterprises is very faint.”

Dr. Dinh Trong Thang, head of Investment Policy Department, the Central Institute for Economic Management