FDI capital inflow into Vietnam must be screened

No significant benefits from FDI

Undeniably, the screening efforts of the Government and localities in refusing poor quality FDI projects has brought about a significant improvement in the quality of FDI projects in recent years. But in all honesty, optimizing the benefits from Foreign Direct Investments are still unobtainable for Vietnam.

In particular, in the context of the ongoing trade war between China and the US, attracting FDI capital appears to be more worrisome because of the shift of projects from China to Vietnam for avoiding US taxes, and also taking advantage of preferential policies in attracting FDI capital into Vietnam. Looking at the structure of the FDI capital inflow into Vietnam currently, it can be seen that the quality is not as per expectations.

No clarity on FDI capital inflow

Among the 76 countries and territories cleared for investment projects in Vietnam, South Korea is the largest investor with USD 2,913 mn, accounting for 19.8% of the total registered capital. This is followed by China with USD 2,281 mn, accounting for 15.5% of capital; Singapore with USD 1,951 mn, accounting for 13.3%; Hong Kong Special Administrative Region (China) with USD 1,928 mn, accounting for 13.1%; Japan with USD 1,656 mn, accounting for 11.3%; Taiwan with USD 726.6 mn, accounting for 4.9%; and Thailand with USD 557.5 mn, accounting for 3.8% of capital.

FDI capital increased by 26% in a number of projects, but decreased by 14.6% in newly registered capital. Decreased capital and reduced project size, is sufficient to doubt the project quality and investment methods of foreign enterprises in Vietnam. In addition, additional FDI also decreased by 16.4% over the same period, implemented capital increased by only 7.4%, while foreign direct investment increased sharply to 70.5%.

The question is, who are these foreign investors in Vietnam? What do they buy and where? How will the projects progress? Besides the extraordinary scale and structure, the quality of FDI projects is of utmost concern. Remarkably, investors from Europe and the United States are hardly seen, while it seems that Chinese investment capital direct and indirect accounted for nearly 50%. Will this trend be reversed after the Political Bureau's recent Resolution No. 50, which requires screening of all FDI capital inflow into Vietnam?

Caution required in FDI from China

Since Vietnam opened its doors to international economic integration to attract FDI, China has not been listed among the top 10 countries investing in Vietnam. But since 2011, Chinese FDI into Vietnam has changed significantly, rising in ranking, increasing in size, changing in form, field, and expanding over localities.

Research on the economic structure of Vietnam and China shows that although the two countries have relatively similar economic structures, in terms of extent of spread from final demand to output and added value, China is much higher than Vietnam, while import demand is lower than Vietnam. This means that the level of self-production of auxiliary products is much higher than Vietnam.

In other words, China and Vietnam are both manufacturing, but China is at a higher level, and has more products in the global value chain than Vietnam. This shows that 1 currency unit from Chinese exports to Vietnam converts into China's income with 0.79 currency unit, while 1 currency unit of Vietnamese exports to China only converts into Vietnam's income with 0.47 currency unit.

Thus, it can be seen that in the trade relationship between Vietnam and China, the Vietnamese side has not benefited as much. The fact that Chinese FDI enterprises import equipment and technology from China not only increases the trade deficit between Vietnam and China, but also increases pollution and emissions (CO2) as most of the industries in China emit more CO2 than those in Vietnam. Therefore, although FDI from China is rushing into Vietnam in all areas and is an opportunity for Vietnam to add more capital for economic development, it is necessary to be very careful of the reputation of investors. This investment is often not appreciated.

Dr. Bui Trinh, Vietnam Economic Institute

Korean investment unsustainable

South Korea is currently leading the list of investment capital into Vietnam. However, I think that Korean investments are not sustainable. At present, if you look at the Korean investments, they focus heavily on services such as real estate and commerce, banking, and processing such as manufacturing of phones, shoes, and apparel. In addition, Korean businesses also participate in the field of mergers and acquisitions (M&A) in Vietnam. In terms of capital contribution and share purchase, China and South Korea are the two countries with the largest capital contributions and shares of Vietnamese enterprises in 2019, about 1,973 and 1,267 capital contribution and shares, respectively.

In general, Korea's FDI capital can hardly be considered accompanied with high technology or creating strong motivation for enterprise reform or economic transformation.

Adjustments needed in favor of businesses in 2020

2020 is forecast to be a much more difficult year for the business community. There will be many newly established businesses, though 60% of current running businesses are in a state of no profit, and incurring no business income tax. In the last three years, revenue from businesses and production activities towards the state budget has not even reached target, even though the plan was adjusted down. Regarding exports, most markets dropped or increased only slightly, only increasing in the US market which is doused with worries. 30% of GDP still comes from working households, a sector still very loosely strung and disorganized. The index for improved business environment according to the ranking given by the World Bank has been downgraded, making the journey to reach the goal for top ASEAN 4 even more inaccessible.

In 2016, we simultaneously reformed and reduced 1,000 business conditions. In 2018, we continued to reduce and simplify 50% of business conditions and specialized inspections. At the end of 2019, VCCI proposed twenty points for overlapping business investment laws. This is a major obstacle in bringing projects for investment and if we focus on solving the legal bottlenecks related to business investment, we will create an important breakthrough for a healthy business investment environment. Besides, there should be measures to promote and upgrade growth in businesses, and then the economic picture in 2020 will become much brighter.

Dr. Vu Tien Loc, Chairman and President, Vietnam Chamber of Commerce and Industry (VCCI)

Increased risks in 2020

The current ongoing US and China trade war, mainly caused by a will to retain world supremacy, was brought about ever since President Donald Trump came to power. This is essentially competing to retain No. 1 position in the world, so it will be a long time before there will be clear signs of tensions easing. Neither side wants to entirely destroy the other, but wants to keep the other in check, more so in the case of USA. This trade war is primarily a battle to remain the world’s greatest economic power or to become one. The measure being used to do so is in the form of tariffs, a strategy that has hit hard at the core of China’s economy. We need to have an indepth understanding of this to be able to begin responding appropriately and promptly.

In Vietnam's relations with the region, I find the Asia-Pacific region to be good, and although the trend of protectionism and trade war has accelerated, the region remains integrated and receptive to trade. However, in the current uncertain and unpredictable times, ASEAN countries are waiting and watching, so when we become ASEAN Chairman, we will have to face all these challenges.

Regarding relations between Vietnam and the US, in the past 25 years both sides have taken relations to new heights, but it is unclear what future direction it will take. For example, Vietnam is on US priority list, but also has most marked reversals in trade deficit. Vietnam's strategic position is very good but if there continue to be issues such as high taxation, the balance in Vietnam's favor can soon fall or weaken. We also need to pay attention that 2020 is the year for presidential elections in the United States. From there, we can make tentative calculations of changes in Vietnam's geo-strategic position in relation to the region, the world and the big super powers. In 2020, the world situation is expected to be complicated, and hence a higher level of vigilance is required.

Growth requires huge capital

In 2019, FDI inflow into Vietnam was estimated at USD 17 bn. This reduced pressure for capital helped exchange rates and interest rates and stabilized inflation, which all helped build a stable macro-economic foundation. What was most impressive in 2019 was the breakthrough made by private enterprises, and the strengthening of the domestic economic sector, which created a trade surplus of nearly USD 10 bn. From these results, it is forecast that in 2020 there will be huge revenue sources for foreign exchange reserves and overall balance.

In fact, since 2015, Vietnam has continuously seen a surplus of capital. This is one of the important conditions for the economy to switch from a growth model based on cheap labor to cheap capital. Only when we move to a cheap capital-based growth model, can we have indepth growth, because indepth growth requires huge capital that requires long-term investment. I think 2020 will bring in cheaper capital. In 2020, it is also expected there will be more free flow of public investment, though not by much, but there will be a breakthrough. This will then trigger a trend for more active capital flow of private investment.