Stronger links urged between FDI, domestic business

Significant contributions

The Law on Foreign Investment was adopted in Vietnam in 1987, creating an important legal basis for attracting foreign direct investment (FDI). Over the past 30 years, Vietnam has attracted about US$320 billion in FDI.

Minister of Planning and Investment Nguyen Chi Dung said Vietnam has become one of the most attractive investment destinations in the region, with 128 countries and territories investing in Vietnam. The FDI sector has also become a vital component of the Vietnamese economy, contributing about 25 percent to social investment capital and 20 percent to the gross domestic product (GDP). About 58 percent of total FDI capital has gone to the processing and manufacturing sector, helping Vietnam increase the value of products and creating a shift in the domestic economic sector. In 2017, the FDI sector made up 72 percent of total export value and generated about 3.5 million direct jobs and five million indirect ones.

The emergence of the FDI sector has helped Vietnam promote institutional reform, perfect the socialist-oriented market economy, increase competitiveness and strengthen integration into the world economy.

However, the FDI sector has not created the spillover effect on the economy that had been anticipated and has not promoted the development of domestic manufacturers, partly due to an absence of links between FDI businesses and domestic companies.

Bui Thu Thuy, deputy director general of the Enterprise Development Agency under the Ministry of Planning and Investment, said lack of connectivity between FDI businesses and domestic companies is one of the biggest problems that needs to be addressed.

Tripartite principle

Prof. Nguyen Mai, chairman of the Vietnam Association of Foreign Invested Enterprises (VAFIE), said connectivity between FDI businesses and domestic companies remains quite loose, affecting sustainable development of the Vietnamese economy. Further links would not only provide opportunities for stronger development of domestic companies to help them participate in the global value chain, but also benefit FDI businesses.

According to a representative of a large foreign-invested group in Vietnam, the purchase of domestic spare parts produced by local businesses would have more significance compared to imported parts and accessories thanks to easier tax refund and administrative procedures. FDI businesses would also save time and cost when purchasing domestic spare parts.

Economists say weak connectivity between FDI businesses and domestic companies is because most Vietnamese companies are small and medium-sized enterprises, which have low financial capacity and outdated technology. Therefore, it is hard for them to meet the strict requirements set out by FDI businesses. Although the government, ministries and departments have adopted support policies, these have not proven sufficiently effective.

In addition to the government’s support, FDI businesses and domestic companies need to be active in strengthening links. FDI businesses should make an effort to inform domestic companies about spare parts and accessories they need as well as to ease domestic companies’ access to global value chains. Meanwhile, domestic companies need to invest in modern machinery and equipment, promote technology innovation, conduct market research and training of human resources in order to produce products meeting the needs of FDI businesses.

The government should also adopt policies to create favorable conditions for FDI businesses with a focus on expanding trading relations with domestic companies. In addition, an intermediate goods channel is required and plays a particularly important role, helping FDI businesses and domestic companies understand each other and seek effective cooperation opportunities.