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WB economist assesses FDI in Việt Nam

Update: September, 12/2018 - 09:00
Sebastian Eckardt

Soon after the National Assembly passed the Law on Foreign Investment in Việt Nam in 1987, the country started witnessing Foreign Direct Investment inflows which have made considerable contributions to the national economy. To mark the 30th year of Việt Nam’s FDI attraction, Vietnam News Agency talked to Sebastian Eckardt, lead economist at the World Bank Vietnam.

Could you please assess the general impacts of FDI on the Vietnamese economy over the last 30 years?

Việt Nam has been quite successful in attracting FDI ever since the country opened up to foreign investment, and if we look at the impacts, we can say that FDI has contributed in various ways, including industrialisation, where a lot of investment went into the manufaturing sector, building capacity across a range of sectors, including electronics, but also more traditionalised industries such as garments and shoe factories, and so on.

[The FDI flows] are really feeding Việt Nam’s strong export performance and creating jobs with higher productivity and better paying jobs, directly and also indirectly, by then creating demand for services for construction, and even agricultural products that are used to supply some of these factories. So I think it’s a very successful part of Việt Nam’s overall economic development over the last three decades.

What do you think about Việt Nam’s potential for FDI attraction compared to other countries in the region?

Việt Nam is definitely one of the leaders in the region. It has attracted FDI across a diversified set of economic activities. About 12,000 different firms are operating here, either producing or of course companies that are here to sell products to the Vietnamese market. So there is a lot of inflow and Việt Nam has been quite a success.

Now what is important to note though is that a lot of this investment is currently in labour intensive and relatively low skilled work, so Việt Nam is competitive in one particular part of the value chain where the value added per worker is relatively low, because a lot of the components are imported, and Việt Nam is only doing the final assembly.

I think there is still an agenda in terms of moving to the next level of attracting different types of FDI, diversifying across the value chain and particularly moving into higher value component of the value chain, be it R&D or downstream like marketing and brand development. That would add a lot more value and would generate higher benefits to the economy of Việt Nam.        

Over the last 30 years, Việt Nam has improved its business environment in order to attract more foreign investment. How do you assess the results achieved from this and please analyse the challenges that Việt Nam is facing on this matter?

If we look at the ingredients Việt Nam has been successful with so far we can say that there are some natural advantages. Geographic location, and as I mentioned, the population. What Việt Nam has done quite well is capitalising on those fundamental advantages and opening up to trade, joining the WTO and coming into several multi and bilateral trade agreements; more agreements than any other economies in East Asia except for Singapore, so Việt Nam is really one of the most open economies.

At the same time Việt Nam has focused on the investment and business environment by reducing hurdles to investment, lowering taxes and improving border and customs clearance procedures, and so on. The government has made it a clear priority to cut red tape, to streamline procedures and to get rid of those procedures that may not be needed.

Countries are facing constraints such as transfer pricing, tax evasion and even negative environmental impacts when it comes to attracting FDI. How should we resolve this?

For that you need smart regulations so I think that’s absolutely correct to have an expanding economy that is increasingly sophisticated and has a lot of financial and real interaction with the outside world. That poses a challenge and requires regulations to be adapted, for example, as you mentioned transfer pricing we know is an issue for multinational operations that invest a lot.

It’s important that you have a good leadership framework to tackle all those issues, so it’s predictable for firms on the one hand but also empowering the authorities to prevent tax avoidance or profit shifting. You need to create a level of playing field between those enterprises and domestic firm so you need a good legal regulatory framework and good capacity in tax service. What we see in many countries are basically specialised offices in the tax service that deal with large enterprises that need very sophisticated analysis to ensure they pay their due share to the tax system here in Việt Nam.

The world economy is entering the fourth Industrial Revolution and like some other countries, Việt Nam is looking forward to attracting top foreign investors in the IT sector. In your opinion, what should we do to complete this mission?

The IR4 I is widely seen as impacting some of the industries in which Việt Nam has traditionally been quite successful and I think there are concern not only here in Việt Nam but more generally that technology will modernise manufacturing and basically make some labour intensive manufacturing redundant. There are some risks in terms of jobs so I think Việt Nam needs to invest in skills. We know that technological progress is of course a good thing, and I think there is a good reason to be optimistic that the IR4, like the other industrial revolutions, will actually improve the lives of millions of people. But it is important to prepare people with the right skills so they can find jobs and productive employment that complement these technologies rather than compete with technology. I think investing in good education, especially science-technology and maths is important because those are really the skills that I think will be in demand in the future so Việt Nam needs to continue that and really make sure it has the human capital that remains competitive as technology changes the way things are produced, how services are delivered.

Could you tell us how developed countries attract more FDI and utilise it, and the challenges that FDI companies are facing in Việt Nam.

In many developing countries you see similar things happening with the FDI sector often operating quite independently from the rest of the economy. That’s because there’re specific policies to attract those enterprises with specific privileges and incentives I specify special economic zones, and they never really connect with domestic enterprises.

That’s very different if you look at developed countries where you see they become part of the broader economic organism of the country and I think that’s also clearly the challenge for Việt Nam to ensure that these enterprises here connect more and build supply chains here in Việt Nam and linking domestic firms.

If you look at foreign investment in developed countries, one of the considerations is whether you have a supply network that often forms part of the comparative advantage of the developed economies and Việt Nam. As a part of the move towards higher value activities, [the country] needs to work on that and make sure that the domestic environment really provides a fertile ground and allows FDI firms to become part of the overall economy, not operating in isolation. — VNS   

 

 

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