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Việt Nam needs to improve effeciency of foreign investment activities

Update: November, 12/2020 - 14:18

Economic expert Nguyễn Bích Lâm

The Government should review and supplement regulations and conditions to attract foreign investment and also choose effective FDI projects. That is more important than the attraction of FDI for economic growth, especially in the period of resuming the domestic economy after the COVID-19 pandemic ends.

Economic expert Nguyễn Bích Lâm, former head of the General Statistics Office, talked to Vietnam News Agency about this issue.

Foreign direct investment (FDI) plays an important role in Việt Nam's socio-economic development. What are the results of foreign investment attraction?

Average FDI capital in the 2016-19 period accounted for over 23 per cent of the total investment capital to the domestic economy. Meanwhile, the foreign invested sector’s GDP accounted for 19.8 per cent of the total GDP.

The FDI enterprises attracted nearly 5 million workers, accounting for 31.8 per cent of the total number of employees in the corporate sector, and made the highest profit, accounting for over 42 per cent of the total profit in the corporate sector.

Efficiency in investment and business activities of the FDI sector reflected that indicators such as return on assets and return on net revenue were much higher than the domestic economic sector.

However, in the past 30 years, Việt Nam's FDI attraction has still had some inadequacies such as institutions and policies on foreign investment that have not kept up with demand on increasing FDI. Meanwhile, investment incentives have still had inconsistency and instability.

In addition, it has lacked close cooperation between the foreign invested sector with the domestic economic sector and limitation in productivity spillovers and technology transfers. FDI projects have not had much contribution to connecting the domestic economy to the global supply chain.

Most of the FDI projects are 100-per-cent foreign invested projects, while there are few joint ventures between foreign and domestic enterprises. Therefore, goals of technology transfer and management skill have not been achieved.

Supporting industries are not yet developed so participation of domestic enterprises in FDI projects is weak. The decentralisation of localities in attracting FDI still has many inadequacies.

In my opinion,  most of foreign investors to Việt Nam come from newly-developed countries and countries near Việt Nam. There are few investors from developed countries having modern technology.

Due to the COVID-19 pandemic and the US-China trade war, many US and Japanese companies want to move factories from China to other countries. Meanwhile, Chinese investors have also boosted investment to Việt Nam.

What are your views on the increase in Chinese investment in Việt Nam?

In recent years, China’s investment to Việt Nam has increased significantly in a number of projects but decreased in average registered capital per project.

The average registered capital of one project is too small. That means this project has outdated and cheap technology and environment pollution risks.

In the list of Chinese investment projects registered in Việt Nam, there are many small-scale projects and they are not projects to manufacture products.

From 2018 up to now, the foreign investment activities to Việt Nam tended to increase merger and acquisition (M&A), especially investment capital from China mainland and Hong Kong.

Foreign investors increasingly prefer the M&A form because investment to Việt Nam with this form is faster than direct investment with requirement of establishing a new legal entity.

How has the COVID-19 pandemic affected foreign investment in developing countries?

According to the United Nations Conference on Trade and Development (UNTAC), global foreign investment flows are estimated to decrease by between 30 and 40 per cent in the period 2020-2021.

All sectors will be affected, but foreign investment will drop sharply in consumer-related services such as airlines, hotels, restaurants and entertainment, as well as manufacturing industries and the energy sector.

The decline in global foreign investment is closely related to disruptions in global supply chains due to the pandemic.

If the reduction in global foreign investment takes place for a long time, the consequences of this situation for developing countries will be very serious because those countries have a diversified foreign investment flows and the potential benefits of this capital flow are enormous.

Foreign investment flows not only boost export revenue in developing countries but also create more jobs, positive impacts on infrastructure development and technology transfer, especially in the manufacturing sector.

Impacts of COVID-19 on global foreign investment will depend on quick or slow recovery of major economies in the world, such as the US, China, Japan, and the European Union.

What strategies and policies should Việt Nam amend and supplement to improve the efficiency of foreign investment to Việt Nam over the next decade?

The policy of attracting foreign investors is just the first step towards a successful FDI attraction strategy.

In the next decade, FDI attraction must be one of the important parts of the socio-economic development strategy for the period 2021-2030. Especially, the strategy must define clearly sectors and fields that need priority in calling foreign investment. It will not call foreign investment to sectors having products that domestic enterprises can manufacture.

The Government should consider the crisis caused by the pandemic as an opportunity to review measures on attracting FDI and improving the effectiveness of FDI projects in the country's industrialisation process. That will create economic links between the FDI sector and the domestic economic sector.

To achieve those goals, in my opinion, the Government should urgently offer solutions and support for the domestic business sector to overcome current difficulties in finding markets for goods consumption and markets for importing raw materials for production.

The Government’s support policies should aim at developing close links between the domestic business sector and the FDI sector and improving the competitiveness of the domestic business sector.

It should also amend regulations on industrial zones and export processing zones to create favourable conditions for the business community in building economic links, especially with the FDI sector. That would support for building and developing supporting industries in Việt Nam.

In addition, the Government should have solutions to take advantages of free trade agreements signed with partners and support from the international community to attract FDI.

M&A is becoming a trend in foreign investment. In the context of that Việt Nam integrates further into the international economy, the Government should set up foreign holding limits at equitised enterprises to avoid key economic sectors being controlled foreign investors.

The Government should specify a list of industries and sectors that need to call for foreign investment.

Along with that, it should review, amend and supplement regulations and sanctions to manage effectively the performance of foreign investment, handle strictly licensed projects that do not implement and have issues such as in tax evasion and debt and problems in the use of Vietnamese and foreign workers, land use and environmental pollution.

In addition, the Government needs to complete institutions and policies on managing and supervising foreign investment performance in accordance with the new economic relations and new business models. — VNS

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