First-quarter foreign direct investment under microscope

 When the Foreign Investment Agency announced that total newly-committed FDI into Vietnam amounted to just $2.046 billion (61.4 per cent of the same period last year) and supplemental capital for existing projects tallied at $1.287 billion, a dramatic 39.3 per cent fall against the same period in 2013, there were concerns that this year could be characterised by a more gloomy FDI picture.

This method of comparison is commonly used in economic analyses, but sometimes statistics don’t reflect reality. FDI is a long-haul investment whereas newly-committed and supplemental capital amounts in a specific quarter may depend on the actual situation at any given point and not necessarily reflect an overall development trend over the course of years. Therefore we should not produce assessments in haste.

Samsung’s $2 billion investment project in the first quarter of last year was tantamount to the total committed capital in this year’s first quarter, or the Nghi Son refinery and petrochemical complex project’s capital addition of $2.8 billion early last year was tantamount to 2.3-fold the supplemental capital of the existing FDI projects in this year’s first quarter.

These bald figures alone do not explain the overall attractiveness of Vietnam’s investment environment. However it would be wrong to ignore other significant factors in what is driving inward investment.

International economic integration does not rely on foreign capital alone. The Vietnamese government, therefore, needs to work out an array of more effective measures to rescue foreign invested firms in difficulties, while encouraging domestic firms to prioritise investment in new technologies and human resources in order to boost competitiveness.

International integration also targets attracting and effectively using foreign capital flows like official development assistance (ODA) or FDI to supplement and inspire more effective usage of domestic capital sources.

Combining internal and external forces has been the government’s watchword for two decades. Reality shows that in the more than 25 years of attracting and tapping FDI sources, foreign invested businesses have contributed a great deal to pushing economic growth, accelerating restructuring, boosting foreign trade turnover and technology transfers, creating more jobs and helping train the local workforce. In trade, industry and services, from 1991 when FDI started to impact Vietnam’s social-economic development, many FDI firms were reported to have established ties with local businesses via bilateral co-operative deals or through product associations on the principle of mutual benefits.

Is it good news or a cause for concern when several localities with double-digit growth for many consecutive years, which were regarded as playing important role in national economic development, such as Dong Nai and Binh Duong are now facing growing labour migration threats due to lack of available workers, meanwhile each year Vietnam needs to create about 1.2 million new jobs, and unemployment is commonplace in the major economic hubs of Hanoi and Ho Chi Minh City?

Was it a good news or a cause for concern when Vietnam started to score a trade surplus from 2012 after a long-term trade deficit, and in this year’s first quarter FDI businesses accounted for nearly $4 billion of trade surplus, helping to offset the trade deficit incurred by local firms, generating the country a $1 billion trade surplus?

Is it good news or a cause for concern when Vietnam is growing into a global handset manufacturing hub and thousands of young engineers are working at modern research and development centres, not only enjoying fairly high incomes but more importantly having a chance to access leading global technologies?

From the point of view of investment experts, what has bothered us in respect to FDI during this year’s first quarter are the following factors.

The scope of most FDI projects remains minuscule. Of a total 252 newly committed projects, only five reported registered investment capital of nearly $1 billion each; the remaining 247 projects were worth a total $1 billion, averaging around $4 million per project. Now is the time to look at project quality rather than quantity to comply with the new direction we have adopted in attracting FDI? It needs further guidance from investment authorities such as the MPI in properly appraising FDI attraction in cities and provinces.

The knock-on effects from foreign invested enterprises are still limited due to a suite of factors, including investment models. In the 1990s, joint ventures (JV) accounted for about 70 per cent of FDI projects, so the knock-on effects were apparent as the foreign investors brought capital, technology and management expertise to existing projects and it quickly generated changes in terms of the business performance of the projects.

However, from the turn of the millennium until present, wholly foreign owned businesses accounted for more than 80 per cent of the total. For instance, of a total $3.3 billion in newly committed and supplemental capital in the first quarter this year, only $214 million involved JV operations, which was tantamount to 6 per cent of that total. Therefore, it is important to consider introducing foreign ownership limits to specific fields and areas.

The trend of attracting FDI in some specific areas still continues, causing great waste such as in cement, steel, and industrial or economic zone investments.

The MPI chief once said he was perplexed when as many as 10 provinces asked to open casinos in their areas, yet no serious studies about the actual performance of existing casinos, their contributions to state budget and possible social effects was even available and before the Vietnamese government had worked out suitable policies on attracting FDI into casinos that matched the country’s socio-economic situation.

Despite falling newly committed and supplemental FDI amounts in this year’s first quarter, Vietnam still has enormous potential for luring FDI into technology, hi-tech services and supporting industry development.

The following factors provide some reasons for optimism. Vietnam prevails over some neighbouring countries like Thailand or Malaysia in terms of political stability, security, economic growth potential and low-cost workforce (in 2012, the average minimum salary of Vietnam was $75 per month against $265 in Thailand).

In terms of the international market Malaysia has adopted a new approach in FDI attraction and prioritises the development of local businesses whereas Thailand is plagued by political unrest, rising labour costs and serious flooding in some areas, including the capital Bangkok, thereby many foreign investors want to relocate factories to other countries.

There were positive movements for Vietnam in receiving investment from leading transnational companies. One typical case is with Korea’s Samsung group. In 2007, Samsung opened its handset manufacturing facility in the northern province of Bac Ninh with $650 million in initial investment capital. Last year, the group ramped up its Vietnam’s investment with a $2 billion manufacturing complex in Thai Nguyen and a research and development centre in Hanoi where 800 researchers are currently working. The group generated about 15 per cent of Vietnam’s total export value last year, making handsets the leading item in terms of export revenue. The Samsung project did not originate from Korea but was relocated from a neighbouring country to Vietnam.

Generally, to enforce the Government Resolution 103 issued on August 29, 2013 on improving quality and efficiency in attraction, usage and state management of FDI, it is vital to effectively tap new opportunities to lure FDI from leading global companies into hi-tech, modern services, small and medium- sized enterprises and supporting industry development.