The Foreign Investment Agency, under the Ministry of Planning and Investment, reported that as of 20 August, the new registered capital along with purchased shares by foreign investors totaled VND 19.54 bn, a huge decline from the same period last year. Capital contribution by foreign investors showed a continuous decrease with the total invested capital plummeting in the last eight months. This decline in FDI capital, along with adjustment of policies to attract FDI by other countries in the region such as India, Indonesia and Thailand have raised many questions for Vietnam to change its policies as well to attract much needed FDI capital.
Countries vying for FDI
In the last five years, a rapid decline of FDI has been a worldwide trend, and not just in Vietnam alone. Worldwide capital investment fell by USD 2,034 bn in 2015 down to USD 1,297 bn in 2018, as observed at the United Nations Conference on Trade and Development (UNCTAD). The main reason is the shift by American multinationals to avoid rising labor costs in world factories such as China and India. By the end of 2019, capital flow recovered only by a modest amount to reach between USD 1,370 bn to about USD 1,500 bn, equivalent to an increase of just 5% to 15%.
In recent years, Vietnam had been a highly successful country in attracting FDI and had become something of a phenomena in the southeast region. In the last seven years, from 2013 until 2019, Vietnam was leading in attracting FDI compared with other ASEAN countries and also India. Vietnam had a 7.8% GDP with USD 92.48 bn, as compared to Thailand with 1.2% GDP at USD 60.21 bn. Malaysia had 2.1% GDP with USD 61.51 bn; Indonesia had 2.1% GDP with USD 126.93 bn; Singapore GDP was at 25.4% with USD 508.95 bn; Philippines had 2. 1% GDP with USD 51.45 bn; and India GDP was 1.36% with USD 218.74 bn.
Vietnam surpassed Thailand, Malaysia, Philippines, and Myanmar in absolute investment value, in ratio to the size of its economy. Although Vietnam is much lower in absolute terms of value than India and Indonesia, the proportion of FDI investments as compared to its economy is 3.7 times to 5.7 times of these bigger Asian countries.
Change in trend
Recently, India has made some significant policy changes to attract more FDI. India will henceforth offer more financial incentives to FDI enterprises, instead of the earlier preferential tax and land incentives. Similarly, Indonesia and Thailand are also making specifically targeted adjustments to their policies. Since the end of 2015, the Indian Government has implemented a series of measures to stimulate FDI policies and improve the business environment. As a result, India attracted USD 40 bn in foreign investments in the fiscal year 2015 to 2016, and USD 43.48 bn in the fiscal year 2016 to 2017, the highest level ever.
The recent move to loosen policies to attract FDI by the Indian Government is supposed to compensate for the sharp decline in foreign exchange due to the impact of the Covid-19 pandemic. In 2019, India received USD 83 bn in remittances, accounting for nearly one fifth of the country's total foreign exchange reserves of USD 457 bn. For many years, India's remittance income has often been twice as high as FDI investment, but now the Covid-19 pandemic situation has slowed these remittances. The World Bank (WB) estimates that India's remittances will be reduced by 22% this year. Therefore, India will need more liberal FDI policies to fill the gap of declining remittances.
Prof. Dr. Nguyen Mai, President of the Vietnam Association of Foreign Invested Enteprises (VAFIE), said that changes in policies to attract FDI in India may be seen as policy implications for Vietnam as well. However, India's policy changes should not make it more difficult for Vietnam to retain and attract more of the leading world technology giants. Prof. Dr. Nguyen Mai pointed out that if India has a strategy, we too have our own and the problems faced in changing any policy must be considered very cautiously and not hastily put together based on any trend.
Over the last few years, a competitive trend has emerged with regards to employment in large industrial and economic zones. In such an environment, domestic firms have to bear the brunt. Beside this, the supply network of components for FDI enterprises is irregular. If such a basic auxiliary unit is not organized then FDI companies have to depend mainly on other cost benefits such as lower wages of workers. Unfortunately, this competitive advantage that Vietnam could once rely upon to attract FDI companies into the country is now fast diminishing.