FDI: The two sides of the coin

10:42 | 02/08/2017 Investment

(VEN) - The results of foreign trade in the first six months of this year show that businesses with foreign direct investment (FDI) continue to overtake companies with 100 percent domestic capital in terms of import and export value. In the opinion of experts, Vietnam appears increasingly dependent on FDI businesses in a wide range of fields, whereas domestic companies find it hard to improve their market position and enhance their competitiveness, despite great efforts.  

FDI contributions

In the first six months of this year, Vietnam’s export value reached US$97.8 billion, of which US$27 billion was generated by domestic firms, and US$70.8 billion by the FDI sector, including crude oil businesses.

Notably, the FDI sector’s export value grew 21 percent, higher than the 18.9 percent export growth recorded by all Vietnamese enterprises.

In the first half of 2017, the export value of 18 groups of products exceeded US$1 billion. In the FDI sector, the number of such groups was 11. However, major export products of FDI businesses do not include agricultural products, such as seafood, coffee, cashew nuts, rice, fruit and vegetables.

The export value of key products exported in the first six months of this year, mostly by businesses with strong foreign investment, was higher compared with the same period in 2016. For example, telephone and component exports reached US$20.1 billion, up 18.3 percent; electronic products, computers and components, US$11.3 billion, up 42.3 percent; machinery, equipment, instruments and spare parts, US$6.1 billion, up 36.3 percent. Meanwhile, pepper exports totaled US$724 million, down 15.5 percent; cassava and cassava products, US$500 million, down 9.9 percent.

Official data reflect the increasing contributions of foreign investments to the Vietnamese economy. Over the past nearly three decades since the Law on Foreign Investment in Vietnam took effect, the country has attracted 23,000 FDI projects and saw the disbursement of more than US$160 billion. The FDI sector has contributed about 18 percent to Vietnam’s gross domestic product (GDP), 23 percent to total investment in development, 50 percent of the industrial production value, and 70 percent of total export value.

Reducing dependence on FDI

In the opinion of experts, Vietnam appears increasingly dependent on FDI businesses in a wide range of fields, whereas domestic companies are having a hard time improving their market position and competitiveness, despite great efforts.

Citing the support industry sector as an example, Phung Duc Tien, a National Assembly deputy from Ha Nam Province, says Japanese and South Korean companies investing in Vietnam account for a majority of component and semi-product suppliers, while Chinese Taipei companies account for a smaller percentage, and Vietnamese businesses are at the bottom of the list. Meanwhile, Vietnam wants to attract not only foreign capital but also technology and management experience.

Vietnam currently has 1,383 businesses operating in the support industry sector, accounting for 0.03 percent of the total number of 500,000 businesses nationwide. FDI businesses can only obtain a small portion of needed supplies from domestic sources - 20-30 percent in the auto industry, and some 10 percent in the leather, footwear, textile and garment sectors, for example.

Nguyen Ba Son, a National Assembly deputy from the city of Da Nang, says domestic companies remain isolated from FDI businesses. Unless this changes, technology transfer will remain limited, hindering Vietnam’s long-term development.

Not only will it hold back development, but despite its significant contributions to the Vietnamese economy, the FDI sector has damaged development in some cases. Examples of such negative effects include cases of serious environmental pollution and transfer - some say dumping - of outdated technologies and machinery.

Caution required

In the opinion of experts, the state should be cautious in the type of investments it draws to Vietnam, and the terms and conditions. For example, appropriate policies should be adopted to promote domestic manufacturing and technological capabilities of FDI businesses, especially high-tech companies. At the same time, greater attention should be paid to developing qualified human resources, as well as improving the country’s science and technology infrastructure and the business environment. Such improvements would encourage FDI businesses to transfer their technologies and carry out design and manufacturing activities in Vietnam, rather than only using the local labor force for low-cost assembly.

Further, the state should support domestic businesses in keeping with the landmark resolution of the 12th Communist Party Central Committee on developing the private sector as a major driving force of the Vietnamese economy. The Law on Foreign Investment in Vietnam and related laws, especially the Law on Supporting Small and Medium Enterprises adopted recently by the National Assembly also provide tools and directions for such policies.

Hoang Chau