Viet Nam needs breakthrough reforms in the national foreign direct investment (FDI) approach to sustain the country’s rapid economic development, competitiveness and inclusive prosperity, according to a report launched by the International Finance Corporation (IFC) and the Ministry of Planning and Investment (MPI) yesterday.

The Recommendations on Viet Nam Next Generation FDI Strategy and Vision 2020-30 report says Viet Nam has been an attractive destination for FDI for about 30 years. FDI capital has become a major driver of Viet Nam’s economic development and international integration, creating large numbers of jobs, diversifying exports, improving technology and facilitating economic restructuring.

In the last decade, annual FDI inflows shot up by a factor of nearly 10 to outperform most regional competitors. Over 2,740 projects worth a total capital of US$37.1 billion were registered in 2017, up 38 per cent year-on-year.

According to MPI data, total FDI registered in Viet Nam as of June 2018 reached $331.2 billion, of which actual FDI capital was about $180.7 billion.

As a percentage of GDP, Viet Nam’s FDI inflows exceeded those into even China or India and most large ASEAN countries. FDI inflows accounted for 6.1 per cent of Viet Nam’s GDP in 2016, higher than Malaysia (3.3 per cent), the Philippines (2.6 per cent), India (2 per cent) and China (1.2 per cent).

These investments have included many high-value projects from global leaders in many sectors, such as Samsung, Intel, LG, GE, Mitsubishi, Sanofi and Panasonic.

However, FDI in Viet Nam is substantively driven by low labour costs and generous incentives including tax holidays, concessionary rates and import duty exemptions.

While the incentive regime is clearly facilitating “first-generation investment”, it is misaligned with the goal of attracting more innovative, technologically advanced FDI requiring higher skilled labour, earning higher wages and fostering increased innovation and entrepreneurship.

“Attracting and using FDI in Viet Nam has some limitations. FDI capital has not created a breakthrough compared to other sources of capital, in terms of both quantity and quality,” said MPI’s Deputy Minister Vu Dai Thang

Thang said FDI had not met expectations in provisions of technology transfer, linkages and spillover effects.

Commenting on FDI strategy, Kyle Kelhofer, IFC Country Manager for Viet Nam, Cambodia and Lao PDR, said Viet Nam was a successful example of attracting FDI and many countries were replicating Viet Nam’s strategy.

To compete better, Viet Nam would need to have a better strategy to attract the next generation of higher quality streams of FDI, Kyle said.

In fact, investors had identified a lack of skilled labor as an impediment to growth, while the absence of integrated local supply chains, qualified domestic suppliers and effective policies to assist local players further blunted the competitiveness of firms.

“By addressing these issues, the Government is likely to unlock more opportunities for Viet Nam,” Kelhofer said, emphasising the impacts of global megatrends such as Industry 4.0, Artificial Intelligence (AI), free trade agreements, cluster and eco-system development, as well as climate change and new forms of FDI.

Eight recommendations

Wim Douw, IFC’s senior private sector specialist, highlighted eight recommendations to serve as key inputs for the Vietnamese Government to develop a new national FDI approach.

An immediate priority is the adoption of concrete policies that increase FDI linkages and spillovers, with a focus on introducing policies to increase FDI linkages and targeted supplier development programmes.

In line with meeting the challenges and opportunities of Industry 4.0, Wim said Viet Nam should introduce “Business Environment 4.0” commensurate with investors’ needs in the digital age. Instead of playing catch-up, this reset should offer a superior investment climate and operating experience with digital/online solutions compared to regional competitors.

Other recommendations include creating and implementing an integrated national skills development plan to accelerate Viet Nam’s transition from low to skilled labour, modernising investment promotion, moving from reactive to proactive promotion in priority sectors, overhauling current incentive frameworks, opening up important sectors that underpin competitiveness and growth and introducing strategic outward FDI promotion policies.

Above all, a strong FDI focal point agency (a “next generation” Foreign Investment Agency) with the proper profile, influence, organisational structure and budget is key to ensuring effective implementation of all these commendations.

The conference also discussed the experiences of HCM City, Dong Thap and Ha Nam provinces in attracting FDI, as well as recommendations from experts at different agencies.

MPI’s deputy minister said the ministry was ready to listen and collect recommendations for the new FDI policy approach, which would be included in the MPI Summary of 30 years of FDI in Viet Nam, expected to be submitted to the Government this October. – VNS