Innovation for FDI efficiency improvement

09:49 | 17/04/2015 Investment

(VEN)- Over the past 25 years, foreign direct investment (FDI) has made an important contribution to promoting economic growth in Vietnam, but the use of FDI in the country still needs to be improved.

Innovation for FDI  efficiency improvement

Observing FDI in three aspects - registered capital, invested capital and average capital per project in the 1991-2014 period, it is clear that capital flows were unstable and heavily influenced by external conditions, especially the impact of the financial crises in 1998 and 2008. The gap between registered capital and invested remained relatively large, while average capital per project tended to decrease. This shows that, with existing resources, FDI absorption of Vietnam’s economy was critical and less effective. FDI efficiency remained humble if efficiency was evaluated based on growth potential, stability and quality criteria.

FDI’s contribution to economic growth increased constantly, from two percent in 1991 to 20 percent in recent years. However, evaluating FDI in terms of capital efficiency through the incremental capital output ratio (ICOR) shows that the foreign invested sector experienced the fastest ICOR growth, meaning that it had the lowest capital efficiency.

FDI efficiency has been slow to be improved because of several factors.

Firstly, regarding FDI attraction, in relations to its foreign partners, Vietnam remained in a passive position when receiving investment capital, while investment quality improvement was not invested properly. While policies were constructed to attract modern technology and learn from advanced management experience, indexes were mainly made up based on numbers of projects, registered capital and invested capital but not the efficiency of capital usage. A problem is that overly-preferential policies were issued to attract foreign investment, causing unhealthy competition among provinces. These policies were more preferential than those subject to domestic investors, creating an unfairly competitive environment.

Secondly, Vietnam hasn’t had industrial zones that are strong enough to join the global value chain. This obstructs intensive investment, transfer of advanced technologies, the development of support industries, the development of competitive industries and a stable structure capable of coping with changes in the world economy.

To improve FDI efficiency, Vietnam needs to take the initiative in receiving investment projects considering the long-term benefits that the projects would bring for the economy. It is important to build an FDI efficiency assessment system as a basis for FDI attraction and use. The formulation and issuance of a set of general, scientific criteria will make FDI efficiency assessment more practical. It is important to form industrial zones strong enough to facilitate intensive investment, develop forms of cooperation between FDI and domestic enterprises, and encourage the mobility of a qualified workforce in order to enhance the positive effects of FDI on the development of domestic firms in particular and the economy   in general.      

By Pham Thi Quynh Lien, Postgraduate at Zhongnan University of Economic & Laws