Screening FDI

Monday, 2018-11-05 16:21:00
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The production of electronic equipment at Tamagawa Electronics Vietnam at the Thang Long 2 Industrial Zone in Hung Yen province (Photo: Dao Ban)
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NDO - The foreign direct investment (FDI) sector has created increasingly significant influence on the domestic economy, becoming an important part of the national economy and a driving force to renew thinking and perfect the socialist-oriented market economy. However, it requires a comprehensive and objective assessment on FDI inflows to effectively attract FDI capital.

Three big problems

Besides the majority opinion that FDI plays a major role in the country's socio-economic development, there are different opinions on the attraction and use of FDI, focusing on three big problems. The first viewpoint states that the domestic economic sector has been growing and could replace the FDI sector in many areas. Thus, it is necessary to consider the position and role of FDI in the future. The second opinion proposes to lower the proportion of FDI in the total social investment to less than 20%, while stipulating the areas without FDI to support domestic production and control the rate of foreign investors based on their nationality in certain regions of Vietnam to ensure national security. The other point of view voices concern over the relation between FDI and national security amid the fact that foreign organisations go under the cover of FDI firms to invest in Vietnam.

The reverse side of FDI has gradually been revealed. Many FDI projects only concentrate in several stages of labour-intensive industries to carry out outwork and assembly, while investment from multinational corporations in the field of high technology remains limited. Some projects fail to ensure their sustainability while consuming energy and natural resources and polluting the environment.

In particular, several FDI enterprises have carried out transfer pricing methods to evade taxes, causing losses to the State budget and failing to ensure the legitimate interests of the labourers. The linkage between FDI and the domestic sector has not been as expected with a low localisation rate in some industries and low value added per unit of product. In addition, various Vietnamese localities have not paid due attention to ensuring national defence and security in strategic areas and in sensitive sectors.

Notably, the strong growth of FDI inflows into Vietnam has raised concern about the increasing dependence of the economy on this sector as the FDI sector contributes approximately 20% to the GDP and 70% to Vietnam's total export revenue.
The results of the Vietnam Economic Census 2017 conducted by the General Statistics Office (GSO) on Vietnam's outworks for foreign countries showed that 1,740 Vietnamese enterprises did outwork for foreign countries, but the total value they gained was only US$8.6 billion.
The results also showed that FDI firms earned 78.9% of the total value of the finished goods. Most of the finished products after processing are exported and only 3.9% of the processed goods are sold in Vietnam. "These figures express the weak linkages between domestic and foreign enterprises and Vietnamese enterprises mainly do outworks for foreign countries," said GSO General Director Nguyen Bich Lam.

Moving towards new-generation FDI

Experience from around the world, as well as the lessons from Vietnam's 30-year attraction of FDI, are creating new opportunities and challenges for Vietnam in attracting and using FDI, requiring a long-term strategy in this area.

According to Deputy Prime Minister Vuong Dinh Hue, the consistent view of the Vietnamese Government is that both domestic and FDI sectors must grow stronger and connect with each other despite the unequal development between the two sectors. Therefore, Vietnam should be more selective in attracting FDI in areas aligned with its economic restructuring such as rural and agricultural development, high technology, and environmentally friendly technology.

In addition, the capacity of Vietnamese enterprises must be enhanced to be capable of participating in the regional and global value chains so that FDI enterprises are ready to connect with Vietnamese enterprises. "FDI is part of Vietnam's economy and any part of the business sector has its shortcomings. The important aspect is how to utilise the positive side and overcome the negative aspects of each business sector, "Deputy PM Vuong Dinh Hue emphasised.

The Prime Minister has assigned the Ministry of Planning and Investment to finalise the report on Vietnam's 30 years of attracting FDI to submit to the Government and the Politburo to promulgate a new resolution on improving the efficiency of FDI by 2030.

Minister of Planning and Investment, Nguyen Chi Dung, said that Vietnam will develop new policies, orientations and "filters" in FDI attraction, which will shift from passive to active FDI attraction and attach importance to the pervasive influence of FDI on the domestic economy, technology transfer and linkages between domestic and foreign enterprises. Notably, the Foreign Investment Agency will develop a tool for FDI management based on a set of indicators to make a comprehensive assessment of investment promotion, investment incentives and efficiency of FDI, making it easier for localities to make their choices.