Impacts Of Fdi In Vietnam

 IMPACTS OF FDI IN VIETNAM 1988-2007

IMPACTS OF FDI IN VIETNAM 1988-2007 REPORT HCM INTERNATIONAL UNIVERSITY 1/25/2008

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 IMPACTS OF FDI IN VIETNAM 1988-2007

TABLE OF CONTENTS I. INTRODUCTION ............................................................................................................................................................ 3 II. RECENT TRENDS AND DEVELOPMENTS IN FDI IN VIET NAM ................................................................ 3 III. THE IMPACT OF FDI ................................................................................................................................................11 THE IMPACT OF FDI ON EMPLOYMENT AND HUMAN RESOURCES ...............................................................................12 THE IMPACT OF FDI ON INDUSTRY ..................................................................................................................................14 THE IMPACT OF FDI ON TECHNOLOGY ...........................................................................................................................16 THE IMPACT OF FDI ON FOREIGN RESERVE ....................................................................................................................20 III. ATTRACT MORE FDI ......................................................................................................................................................22 VI. CONCLUSIONS .........................................................................................................................................................23

 IMPACTS OF FDI IN VIETNAM 1988-2007

I. INTRODUCTION Since the introduction of doi moi (renovation) economic reforms in 1986, Viet Nam‘s economy has been among the fastest growing economies in the region. Its economic structure reflected an increasing share of industry and services while the share of agriculture declined. Viet Nam has been successful in poverty reduction strategies and has been able to ensure rapid growth with relative equity. Among the factors that led to this success, foreign direct investment (FDI) has played a crucial role, providing Viet Nam‘s economy with its relatively scarce factor, capital, and representing an extremely important instrument for integration in the world economy, especially at the regional level. This paper attempts to analyze the recent developments in FDI flows to Viet Nam, particularly its impact on Viet Nam‘s economy and the economic, political, and institutional weaknesses that must be faced in order to ensure a future capacity to receive more foreign capital and to build a system able to realize more of the potential benefits of foreign direct investment. Particular attention has been given to the regional dimension of these issues because of the great historical importance of regional partners for Viet Nam, especially before the Asian crisis, and because of the ASEAN Free Trade Area‘s (AFTA) accession path that represents an important stage in Viet Nam‘s further integration in regional production networks. This paper is organized as follows: Section II discusses FDI developments and trends, drawing particular attention to the effects of the Asian crisis on capital flows. Section III considers the impact of FDI on different aspects of Viet Nam‘s economic development. Section IV examines different aspects of the business environment, policy regimes and trade-related issues, and their effects on Viet Nam‘s FDI inflows and impacts. Section V discusses AFTA and Viet Nam‘s accession chedule, and tries to contribute to a better understanding of the changes occurring in the regional comparative advantages of ASEAN economies with production specialization. The last section provides conclusions underlining the altered postcrisis opportunities as threats for Viet Nam‘s development, and the consequent policy recommendations regarding FDI-related issues.

II. RECENT TRENDS AND DEVELOPMENTS IN FDI IN VIET NAM Attracting foreign investment has been an integral part of the Vietnamese reform process since the late 1980s. Since the Law on Foreign Investment (LFI) was approved in 1988 there has been a substantial inflow. According to the Ministry of Planning and Investment, from that time to the end of 2003, the Vietnamese economy attracted total investment capital of about US$40.8 billion in terms of commitments, while the total realized capital was US$24.6 billion. Up to the end of 2003, investors from 64 countries and territories had invested in Viet Nam, but Asian economies accounted for the major part of these capital flows. Singapore is the principal foreign investor with 288 projects and $7370 million of registered capital; followed by Taipei,China (1,086 projects and $5998 million); Japan (418 projects and $4480 million); Republic of Korea

 IMPACTS OF FDI IN VIETNAM 1988-2007

(henceforth Korea) (662 projects and $4161 million); and Hong Kong, China (288 projects and $2975 million). These top five investor economies account for 61 percent of total FDI commitments in the period 1988-2003. Countries of the Association of Southeast Asian Nations account for 25 percent of the total investment, mostly because of Singapore‘s capital. However after the signing in July 2000 of the US-Viet Nam Bilateral Trade Agreement, investment from countries such as France, Netherlands, and United States has been increasing. Meanwhile, FDI from the United Kingdom is principally connected to investments of the 1990s in the oil and gas sector (Figure 1).

During these years Viet Nam‘s economy was able to attract foreign investment in all sectors. The oil and gas sector was where FDI was most focused during the first half of the 1990s, and up to the end it absorbed 8 percent of the total FDI in Viet Nam. The industrial sector accounted for the most important share of the capital inflows over the full decade: heavy industry for 21 percent, light industry for 13 percent, and food industry for 6 percent of the total registered capital. Another important role in attracting FDI was played by real estate services, which absorbed the highest amount of FDI within the tertiary sector. The share of agriculture, forestry, and fisheries was only a small part of the total, though it is slowly increasing (Figure 2). All 61 provinces of Viet Nam have attracted FDI but investors have so far located their investments mostly in urban areas where they can take advantage of more developed infrastructure. Ho Chi Minh City and Hanoi accounted for 26 and 19 percent, respectively, of the total FDI absorbed by Viet Nam in 1988-2003. Apart from these two principal

 IMPACTS OF FDI IN VIETNAM 1988-2007

Vietnamese cities, other areas attracted high amounts of FDI, especially in the southeast. The provinces of Dong Nai, Binh Duong, and Ba Ria–Vung Tau absorbed another 29 percent of total FDI, far more than the other principal northern provinces of Hai Phong, Lam Dong, and Hai Duong, which absorbed just 7 percent.

Central Viet Nam attracted only a very modest amount of FDI, mostly in Quang Ngai province. From these data a dualistic result is evident: 74 percent of the total amount of FDI absorbed by Viet Nam in the last 15 years was invested in only five of the 61 regions composing the Vietnamese state (Table 1).

T o a t t r a c

 IMPACTS OF FDI IN VIETNAM 1988-2007

t inve To attract investment with limited, Viet Nam has developed a system of industrial zones. Up to the end of 2002, 76 industrial zones have been built in different areas of the country. Among them 17 zones have been developed by joint ventures (JVs) and one by a 100 percent foreign-owned enterprise. The other 52 zones are Vietnamese-owned industrial zones. These zones have attracted a high proportion of the total FDI in the country: 1,202 projects have been approved for an amount of $9.4 billion, representing about 25 percent of the FDI that flowed into Viet Nam up to 2002. Viet Nam‘s LFI considers three forms of investment: business corporate contract (BCC), JV, and 100 percent foreign-invested company. The LFI establishes that for investments in the sectors of oil and telecommunications, the BCC form must be applied. Joint ventures are required for a wide range of sectors such as transportation, tourism, culture, port construction, airport terminals, and explosives production. For projects regarding investment in the construction of infrastructure, such as water and electricity supply, the law requires buildoperate-transfer contracts to be signed with the authorized state agency. Up to the beginning of 2002, just six projects for a total amount of $1.2 billion had been for this kind of contract. Meanwhile, BCC projects accounted for about 11 percent of total inflows and for a minimal portion of the number of approved projects. The projects under 100 percent foreign-owned enterprises account for 61 percent of licensed projects and 33 percent of committed capital, while JVs account for 34 percent of licensed projects and 53 percent of committed capital. But the tendency is for an increasing prominence of 100 percent foreign-owned projects. Two motivations can explain this trend: the first is that after a period of investigating and understanding the Vietnamese market, reliance on domestic counterparts is becoming comparatively less important. Second, foreign investors increasingly prefer the wholly owned form after learning about the difficulties of operating with domestic counterparts. Furthermore, about 98 percent of JVs have been made with Vietnamese state-owned enterprises (SOEs) (Doanh 2002). This happened because these links permitted the foreign investors to benefit from the SOEs‘ preferential treatment and because of the weakness of Viet Nam‘s domestic private sector. The inefficiencies that foreign investors had to face in carrying out projects with their local counterparts have contributed to the growth of interest in 100 percent foreign-invested companies (Table 2).

 IMPACTS OF FDI IN VIETNAM 1988-2007

Since 2001, the role of the Viet Kieu (Overseas Vietnamese) has been slowly increasing. That year, the state officially committed to protect their legitimate interests, encouraging them to keep close links with their native land. In reality, things are still difficult and the capital flow from over 2.6 million overseas Vietnamese is not comparable to the important resources People‘s Republic of China has received from Hong Kong, China; Taipei,China; and other Chinese sources. More important is the role played by remittances in recent years. In 2001 the remittance flow was over $2 billion, and in 2002 it reached $2.4 billion, mostly to the Ho Chi Minh City area (EIU 2003a). In 2003, the Committee of Overseas Vietnamese said remittances peaked at $2.7 billion, 60 percent of which went to Ho Chi Minh City. Between 1988 and 2003, the total amount of foreign capital inflows in Viet Nam was about $18.4 billion (Figure 3) (UNCTAD 2004).

A n a l y z i n g t h e d a ta, we can divide the FDI flows into three periods. Prior to 1994 the oil and gas sector was the focus of FDI in Viet Nam, permitting growth in crude oil exports, which represented the leading component of export growth until 1996. Since 1994, foreign investment expanded to a range of new sectors, first real estate and then different industrial activities. The latter in particular received capital flows from East Asian countries that were facing the boom preceding the 1997/1998 crisis as they sought new locations for their export production to face the rising cost of their local workforce. Foreign investment flowing into Viet Nam during these years played a very important role, not only in providing finance but also in facilitating export market access, introducing new ideas and processes, elevating skills and know-how, and proposing models that have been copied by domestic investors (Figure 4).

 IMPACTS OF FDI IN VIETNAM 1988-2007

After 1997 Viet Nam‘s economy experienced a sharp decline in FDI disbursements. This is commonly supposed to be caused principally by the slowing reform process. In supporting the relevance of the environment for foreign investment as predominant over the impact of the Asian crisis, two arguments are often underlined: that the decline in implementation of investment commitments started before 1997, so the regional crisis made evident problems existing prior to the crisis; and that after 1999, investments returned to Korea, Malaysia, and Thailand but not to Viet Nam. Masina (2002) argues that the causal nexus between the slowing pace of doi moi and the decline in FDI flows has probably been overestimated. Considering the data on FDI commitments

by sector it is evident that there was an element of speculative FDI in real estate, as it dropped from $2.7 billion in 1995 and $3.3 billion in 1996 to $338 million in 1997. Subtracting these values from the total FDI commitments in Viet Nam during the period 1995-1997 we can see that the decline in FDI is entirely attributable to the real estate sector. In fact, the subtotals for the three years are respectively $4.0 billion, $4.4 billion, and $4.1 billion. During the 1990s the real estate sector was largely speculative and dominated by East Asian financial groups. The slowdown of commitments of FDI in 1997 was the result of the bubble‘s deflation in that sector. Moreover, analyzing the series regarding FDI disbursements in Viet Nam in 1995-1996, and considering the elevated instability of investments in the oil and gas sector because of the large size of this kind of project, the total disbursement after subtracting the values of the real estate and oil and gas sectors shows an increasing trend from $1.2 billion in 1995 to $1.7 billion in 1997. This confirms that before the crisis there was no evidence of a decline in FDI in Viet Nam.

 IMPACTS OF FDI IN VIETNAM 1988-2007

One element characterizing the precrisis period is that Viet Nam attracted higher FDI than much larger Asian economies, which suggests the presence of overinvestments or catch-up investments that could have characterized this economy in the years before the crisis. This involved not only real estate and the construction sector but also heavy industry as a result of optimism about Viet Nam‘s domestic market based on relatively little documented information. Comparing different Asian countries in 1997, Viet Nam appears as an economy with an excessively high FDI as a percentage of gross domestic product (GDP), raising suspicion that before 1997 there was overinvestment in Vietnamese productive sectors (Figure 5). This explanation of the FDI slowdown after 1997 is only partial. The contraction of foreign investment was also due to the financial crisis and the investment downturn that Asian economies in general had to face after 1997, which is a main explanation of the sharp decline in Viet Nam from 1998 onward. However, the crisis increased pressure to improve the investment climate for Viet Nam to compete as a leading production location in the context of diminished flows of investment funds.

It is only partially true that after 1999 investment has returned to other Asian countries more than to Viet Nam. Considering the maximum amount of FDI flows to selected Asian countries before the bubble burst, in the period 19992001, only the Philippines was able to attract an amount of investments higher than the peak its economy had achieved before the crisis. Malaysia in 1999 and 2000 showed a rise, about 50 percent, similar to Viet Nam‘s, but in 2001 it registered a sharp drop after Kuala Lumpur, by imposing controls on short-term capital flows, moved in a rather different direction from that favored by international financial institutions. Indonesia also showed a sharp decrease of FDI inflows after 1999, heavily affected by the volatile political and security situation. Thailand was able to rapidly restore its investment attraction capability, but overall it is not clear that capital returned to the area in general, and Viet Nam represents an exception (Figure 6).

 IMPACTS OF FDI IN VIETNAM 1988-2007

The more positive trend registered in Korea and Thailand is clearly connected to acquisitions of local corporations after these countries liberalized their markets in connection with conditions to receive loans from the International Monetary Fund (IMF). In fact, conventional ―greenfield‖ FDI, where new production capacity is created, actually sharply declined during that period. After the crisis, cross-border mergers and acquisitions (M&A) were the main engine of FDI flows. Mergers and acquisitions drove the corporate and bank restructuring process in affected countries. All affected countries benefited from increased M&A activity to varying degrees. Much of the FDI inflows received by Korea and Thailand after the crisis were associated with M&A activity. Viet Nam did not feel the need to speed up the pace of reforms because, even though regionally well integrated, the economy exhibited a degree of resilience toward the East Asian crisis and proved quite successful in maintaining macroeconomic stability. The slow pace of reforms may have provided a countercyclical element of stability in a period of international economical instability (van Arkadie and Mallon 2003). Consequently M&A, even after 1999, played a marginal role in FDI inflows to Viet Nam, in contrast to most other countries in the region. Viet Nam‘s current business legislation is not very conducive to the establishment of strong M&A activity: foreign investors may only acquire up to 30 percent of total shares in a local company in Viet Nam if the company operates within one of the 35 approved business sectors, and must get the approval of the prime minister‘s office before doing so. According to the IMF (2002), between 1988 and 1998 about two thirds of the disbursed and committed FDI in Viet Nam was from Hong Kong, China; Japan; Korea; Malaysia; Singapore; Taipei,China; and Thailand. The crisis strongly reduced and changed the investment outflows from these countries, and this consequently caused the heavy decrease in total FDI to Viet Nam (Figure 7). The decline of FDI inflows to Viet Nam in 1998 was mainly the result of a general

 IMPACTS OF FDI IN VIETNAM 1988-2007

regional trend, but does not mean that national deficiencies regarding the environment for investment did not play a role in generating discontent among investors. Once the regional perspective

deteriorated and the total investment absorbed by the regional economies registered a sharp decline, the difficulties of doing business in Viet Nam also assumed more visibility as a reason for dissatisfaction among foreign investors. Thus, an improvement of the investment climate through important reforms is necessary for Viet Nam‘s economy to restore economic growth but, at the same time, a serious analysis of changing comparative advantage in East Asia and of the changing regional productive systems in the postcrisis environment is needed to identify appropriate policies and medium and long-term strategies.

III. THE IMPACT OF FDI THE IMPACT OF FDI ON THE ECONOMY GROWTH RATE The foreign-invested sector is consolidating its important role in Vietnam‘s economy. FDI has been an important supplementary source of funds for gross national investment and improved the balance of payment for the past years. According to recent studies, such as Freeman (2000), MPI (2003), Nguyen Mai (2004), FDI sector is having an increasing share in GDP. This sector also helps to strengthen production capacity and technological innovation in a number of industries, international market penetration (in particular, increasing export turnover), raising revenues for the States budget and generating employment, etc. In addition, FDI enterprises enable technology transfer and their pressures require domestic firms to renovate their technologies, and to raise production

 IMPACTS OF FDI IN VIETNAM 1988-2007

efficiency. Managerial and working skills in FDI projects are also improved, which is a positive and effective channel for spillover effects. The section below will discuss the general role of FDI in the overall economy. Vietnam pursued Economic Renovation (Doi Moi) program from a very low starting point. Therefore, FDI is an important supplement to domestic capital, so as to meet domestic investment demand. As depicted in Chart 4, the share of FDI in national investment has fluctuated considerably, because of up and down changes in FDI inflows on the one hand and changes in investment by domestic investor on the other hand. In the period 1994-1995, the share of FDI in gross national investment hit a record high level of 30 to 31 percent. After that, it gradually decreased and in 2005, implemented FDI only accounted for 15.5 percent of gross national investment (Chart 4).

The share of FDI sector in GDP has been increasing over the last decade. In 2004, FDI sector accounted for 15.2 percent of GDP, higher than that of about 6.4 percent in 199410. Besides, foreign-invested sector always has the most rapid growth, making it the most economically vibrant sector so far. The growth rate of this sector is always greater than the country average level

THE IMPACT OF FDI ON EMPLOYMENT AND HUMAN RESOURCES Recently, FDI projects in Vietnam currently employ 730,000 labors, accounting for only 1.5 percent of total labors in Vietnam, though higher than it was in 1996 (0.7 percent). The underlying reason is that the presence of FDI is mainly in capital intensive industries which use highly skilled labors. This may also explain why the wage level in FDI sectors is, on average, twice as large as that paid by domestic enterprise in the same industry. More importantly, these labors are able to access to advanced technology, with good working disciplines, and modern working methods. In particular, some Vietnamese specialists become gradually capable of taking over the management of firms and modern technology lines15. FDI also indirectly creates many jobs in service sector and

 IMPACTS OF FDI IN VIETNAM 1988-2007

those have close linkages with FDI enterprise through providing raw materials, intermediate products etc. However, official statistics on the employment indirectly created by FDI sector in Vietnam through backward and forward linkages are still unavailable. In analyzing FDI‘s impact on Viet Nam‘s economy, another aspect of relevance is that FDI did not create as much employment as expected. Despite their shares of GDP, total investment, and exports, foreigninvested enterprises in 2000 accounted for only 2 percent of the total number of people of working age in the labor force, according to Viet Nam‘s General Statistical Office. Other studies report even lower shares. For example, McCarty and Diep (2003) report estimates of FDI‘s share of total employment between 1991 and 2000 at 0.6 percent. In terms of contribution to total employment up to 2000, foreign-invested enterprises accounted for 6.4 percent of total labor in industry and construction; 0.2 percent in agriculture, forestry, and aquaculture; and 0.4 percent in service sectors (Figure 11).

The main reason why foreign investment does not create more employment is reflected in the low labor requirements per unit of output characterizing foreign-invested enterprises. This is fundamentally because labor productivity is higher in foreign-owned enterprises (Quynh, Nguyen, and Bui 2002), and in destination sectors since Viet Nam started attracting foreign direct investment. Regarding the first point, in all sectors, labor productivity tends to be higher among foreign-invested enterprises due to the more advanced technology to which foreign enterprises have access and that characterizes their production processes, but also because of the large amount of imported inputs utilized by foreign firms. It is estimated that in 1999 imports by foreign-invested enterprises accounted for 74 percent of the value of their turnover (Apoteker

 IMPACTS OF FDI IN VIETNAM 1988-2007

2000) and for 1998, IMF (2002) reports a share of imports equivalent to 82 percent. Until the productive processes of foreigninvested enterprises in Viet Nam involve mostly final stages of production, rather than assembling imported parts and components, the general impact on employment will remain low. Moreover, it dramatically reduces the effect on the balance of payments due to the large share of exports from foreign-invested enterprises. The second cause that strongly affected the potential impact of FDI on employment is the large share of FDI projects that were carried out in capital-intensive industries such as cars and motorbikes, cement, and steel instead of sectors characterized by more labor-intensive production. Furthermore, FDI in agriculture played a very marginal role among the general context of inward FDI, while agriculture still accounts for about 25 percent of GDP and two thirds of employment (Figure 12). Up to the end of 2001, industry played the major role in creating new jobs, accounting for 77 percent of total labor in the FDI sector. Agriculture, forestry, and aquaculture reached only 10 percent and the rest is attributed to services and transportation. During 2002, industry‘s share was 83 percent of the over 650,000 jobs created by the FDI sector while agriculture‘s share was 10 percent and services, 7 percent. In 2001, light industries attracted the largest share, or 50.6 percent of the total labor generated by the FDI sector. Light sectors, according to the Project Monitoring Department of MPI‘s classification system, includes textiles, garments, footwear, and industries producing consumption goods—industries often characterized as more labor-intensive products than other industries.

THE IMPACT OF FDI ON INDUSTRY

 IMPACTS OF FDI IN VIETNAM 1988-2007

Ever since the Doi Moi reforms unfolded in the early 90s, Vietnam‘s leaders have made industrialization and modernization the cornerstone of the country‘s

socio-economic

development

strategy…

where,

arguably,

―industrialization‖ is not confined to one particular economic sector but reads in the broader sense of ―industrious‖. The economic potential unleashed by the reforms delivered impressive growth: over the 12 years 1991-2002, GDP rose by an average of 7.6 percent per annum, in real terms. Industrial output led the charge with double-digit growth rates (11.6 percent per annum over the same period). Faster still was the progress recorded on the export front, driven by the successful forays of Vietnamese manufactures in foreign markets? As a result, Vietnam is today a vibrant, US$40 billion economy second only to China in the Asia region in terms of pace of growth. It has become an open economy, with total trade exceeding the domestic product. Industrial exports that made up 13 percent of GDP in 1991 today account for over a third of the creation of domestic economic value. Increased exposure to international trade and investment has revealed Vietnam‘s comparative advantage in light manufacturing: whereas heavy industrial and minerals made up 70 percent of industrial exports in 1991 at a time of limited economic interaction with the rest of the world, their relative importance had subsided by the end of 2002 to 40 percent while light manufacturing had risen over the period to 60 percent of industrial exports. The economic structure is being changed progressively under the impact of FDI. The industry‘s distribution and service‘s in the economy increased rapidly while

the

distribution

rate

of

agriculture-forestry-fishery

was

reduced

considerably. As the following illustrative exhibit: The distribution of d industry to GDP increase from 27.3% to 40.09%, service‘s increase from 32.5% to 38.5%and in agriculture-forestry-fishery decreased from 40.2% to 21.76%

2005

1985

industry and construction agriculture forestry - fishery

27.3

32.5

38.15

40.09

industry and construction agriculture - forestry fishery

service 40.2

service 21.76

 IMPACTS OF FDI IN VIETNAM 1988-2007

Also, the impact of FDI had changes the number of labor works in each components of the economy. The quantity of people work in agriculture decreased from 95% (1985) to 56.8% (Jul, 200%) and the one in service and industry considerably increased from to 43.2%. The more money from FDI invested to Vietnam, the more unemployment rate decreased.

In conclusion, FDI has changed wholly, profoundly the Vietnam socioeconomy. At the position of a poor agricultural economy, Vietnam has been developing more and more to become a developed industry economy.

THE IMPACT OF FDI ON TECHNOLOGY Since 1986, a greater part of technology used in Vietnam was very obsolete. The 1986 socio-economy reforms aimed to mobilize local as well as foreign capital, technology, management skills to promote industrialization in Vietnam. Thus, FDI was seen as the major potential source of updated technology and skill to replace the old, obsolete one.

 IMPACTS OF FDI IN VIETNAM 1988-2007

In general, newer technology was brought into Vietnam with FDI since 1988 had contributed to the production and improved the capital, especially technology so that better satisfied the domestic and export demand. The technology invested at least meet Vietnam‘s quality standards and some International ones. Between 1988 and 1995, 219 foreign invested projects had been registered, including technology transfers, accounting for about 10% of total projects. The technology transfers had changed considerably and profoundly the current Vietnam technology. Many very important strategic industries were born by the presence of high technology, such as information technology, biotechnology, electronic communication. Moreover, instead of using electricity as the only energy resource, Vietnam is develop more and more energy resources, for instance energy from The sun, wind, nuclear. Petroleum is the main source of commercial energy, followed by coal, which contributes about 25 percent of the country‘s energy (excluding biomass). Vietnam‘s oil reserves are in the range of 270–500 million tons. The World Bank cites the lower bound of the range. Oil production rose rapidly to 403,300 barrels per day in 2004, but output is believed to have peaked and is expected to decline gradually. Vietnam‘s anthracite coal reserves are estimated at 3.7 billion tons. Coal production was almost 19 million tons in 2003, compared with 9.6 million tons in 1999. Vietnam‘s potential natural gas reserves are 1.3 trillion cubic meters. In 2002 Vietnam brought ashore 2.26 billion cubic meters of natural gas. Hydroelectric power is another source of energy. In 2004 Vietnam began to build a nuclear power plant with Russian assistance. Crude oil is Vietnam‘s leading export, totaling 17 million tons in 2002; in 2004 crude oil represented 22 percent of all export earnings. Petroleum exports are in the form of crude petroleum because Vietnam has a very limited refining capacity. Vietnam‘s only operational refinery, a facility at Cat Hai near Ho Chi Minh City, has a capacity of only 800 barrels per day. Several consortia have abandoned commitments to finance a 130,000barrel-per-day facility at Dung Quat in central Vietnam. Refined petroleum accounted for 10.2 percent of total imports in 2002. FDI had influenced deeply to the transportation and communication of the socio-economy of Vietnam. Vietnam‘s transportation system is in need of

 IMPACTS OF FDI IN VIETNAM 1988-2007

modernization and expansion. Ports are operating at only one-third of capacity. Roads are in generally poor condition, and the underdeveloped railroad system carries less freight than the inland waterways. Motorcycles are more popular than buses. In an effort to improve bus service, Hanoi plans to invite private companies to bid for operating rights for six municipal bus routes. Roads: Vietnam‘s roads extend over 210,000 kilometers, implying a network density twice as high as Thailand‘s and Malaysia‘s. However, the condition of the roads is generally poor; only 13.5 percent of the roads are considered to be in good condition. Only 29 percent of the roads are tarred, and road access is cut off to more than 10 percent of villages for at least one month per year because of monsoons. In 2005 the construction of the 1,690-kilometer Ho Chi Minh Highway, which eventually will link Hanoi and Ho Chi Minh City, was still underway. The project, which is expected to cost US$500 million, is the largest transportation project since the end of the Second Indochina War. Despite government efforts to promote the use of buses, motorcycles remain the preferred mode of local transport. There is one motorcycle for every seven people. Poorer citizens rely on bicycles, while only the affluent can afford cars. Railroads: Vietnam has six single-track railroad routes with a total length of 3,260 kilometers. The network‘s density is only about one-third the average for low-income countries. The longest railroad line measures 1,730 kilometers from Hanoi to Ho Chi Minh City and requires 32 hours to traverse on the Reunification Express. Of the nation‘s inventory of rolling stock, 25 percent is not operational. Twenty-five percent of the nation‘s operational rolling stock is more than 30 years old. Freight traffic picked up in 2000 and 2001 following five years of decline. Vietnam needs more than US$400 million between 2004 and 2009 to modernize its railroads. The government plans to build two subway lines in Ho Chi Minh City by 2007. Projectrelated costs are estimated at US$800 million. Ports: The principal ports in Vietnam, listed from north to south, are Haiphong, Quang Ninh, Danang, Qui Nhon, Ho Chi Minh City, and Can Tho. Altogether, Vietnam has seven international ports and five additional ports that specialize in transporting oil and coal. Country Profile: Vietnam, December 2005 freight volume is about 14 million tons annually, compared with only 4.5 million tons in 1993. However, total

 IMPACTS OF FDI IN VIETNAM 1988-2007

traffic is only about one-third of capacity. Vietnamese ships carry only about 20 percent of the country‘s international trade, although plans exist to expand the merchant fleet substantially. Inland Waterways: Vietnam‘s inland waterways, primarily the Mekong River and Red River systems, carry more freight than the railroads, and the volume of freight is rising slowly. According to the World Bank, transportation productivity via the inland waterways is 40 percent below the system‘s potential, assuming proper maintenance, navigation aids, and dredging. Civil Aviation and Airports: Vietnam operates 17 major civil airports, including three international gateways: Noi Bai serving Hanoi, Danang serving Danang City, and Tan Son Nhat serving Ho Chi Minh City. Tan Son Nhat is the largest, handling 75 percent of international passenger traffic. Vietnam Airlines, the national airline, has a fleet of 30 aircraft that link Vietnam with 19 foreign cities. In 2004 Vietnam Airlines had 5 million passengers, up 25 percent from the prior year, and management expects the number of passengers to reach 12 million by 2010. In November 2004, Vietnam Airlines announced that it would purchase 10 Airbus A310–200 aircraft and continue negotiations for four Boeing 7E7 ―Dreamliner‖ aircraft. Vietnam Airlines‘ goal is to expand its fleet to 73 aircraft by 2010. Beginning in 2006, Vietnam Airlines will cooperate with American Airlines in international flights under a codeshare agreement. Vietnam Airlines‘ code will apply to American Airlines flights from the United States to Vietnam, Japan, and Europe. American Airlines‘ code will apply to Vietnam Airlines flights from Vietnam to Japan and Europe. Pipelines: In April 1995, a 125-kilometer natural gas pipeline connecting Bach Ho with a power plant near Vung Tau went into operation. With the subsequent addition of compressors, the volume pumped rose to more than 1 billion cubic meters per year. In 2005 a 399-kilometer underwater pipeline, the world‘s longest, began to carry natural gas onshore from the Nam Con Son basin. The pipeline‘s anticipated capacity is 2 billion cubic meters per year, while the basin has an estimated 59 billion cubic meters of natural gas reserves. Telecommunications: The International Telecommunication Union rates Vietnam‘s telecommunications market the second fastest growing in the world after China. With rapid telecommunications growth leading to 4.9 million landline telephones and 3.4 million mobile telephones as of mid-2004, Vietnam‘s telephone penetration rate is still only 10 percent. As of mid-2004, Vietnam had 5.1 million Internet users, corresponding to 6 percent penetration. In 2000 Vietnam had about 600,000 personal computers, or 7.35 for 1,000 people. In 2003 Vietnam had 8.2 million radios, or 100.45 per 1,000 people. There were 65 AM

 IMPACTS OF FDI IN VIETNAM 1988-2007

radio stations, 7 FM stations, and 29 shortwave stations. Also in 2003, Vietnam had 3.6 million televisions, or 43.73 per 1,000 people. Television broadcast stations numbered at least seven in 1998.

THE IMPACT OF FDI ON FOREIGN RESERVE Asian

governments,

including

Vietnam

government

have

been

accumulating foreign reserves (largely United States securities) on a large scale, as a result of maintaining fixed exchange rates or attempting to limit currency appreciation in the face of a weakening US dollar. The costs of FR: First, ‗re-export‘ of capital inflows into foreign securities entails a real resource transfer to foreigners when risk-adjusted returns on these assets are lower than the risk-adjusted costs of external borrowing. Second, domestic investment and consumption may be crowded out if intervention results in higher interest rates and/or a lower exchange rate than otherwise. Such crowding out necessarily occurs when the economy is at full capacity, but it is less likely to be a concern where the economy has spare capacity. Third, resource misallocation costs can arise if the lower exchange rate is unsustainable, due to excess investment in tradable goods production capacity. Beside the benefits, FR also brings many losses to Vietnam. For instance, another potential cost arises from the constraints of the ‗impossible trinity‘; that is, the impossibility of simultaneously maintaining both a fixed exchange rate and an independent monetary policy when capital is highly responsive to interest rate differentials. Exchange rate targeting must entail some loss of monetary policy autonomy unless capital mobility can be restricted. To deal with the huge increasing in FDI into Vietnam and in order to maintain fixed exchange rates and limit currency appreciation in the face of weakening US dollar, Vietnam government tends to accumulate more and more foreign reserve so that, the government can ensure that Vietnam economy runs smoothly.

 IMPACTS OF FDI IN VIETNAM 1988-2007

(Source: CIA WORLD FACT BOOK, www.indexmundi.com) However, more expansionary monetary conditions have been associated with increasing inflation rates in many Asian economies (Chart 12). This has allowed a number of economies to emerge from an earlier period of actual or near-deflation. That said, inflation may become more of a concern going forward and tighter monetary conditions may be needed in some economies. In conclusion, accumulating foreign reserve is the key to develop Vietnam economy. But, it only strengthens the socio-economy of Vietnam if it‘s run in the right way. Thus, the government plays an important role in setting up the best policy for the development of Vietnam.

 IMPACTS OF FDI IN VIETNAM 1988-2007

III. Attract more FDI Attracting FDI is now one of very important tasks of Vietnam in this golden era. The government issues a lot of policies and also reorganizes a lot of things to attract more FDI to come to Vietnam nowadays, but there are a lot of things need to be improved. Firstly, the government should push more policies to attract more FDI coming to VN, because this is golden period for developing Vietnam‘s economy. Secondly, Vietnam has to improve itself a lot to keep these FDI and also make Vietnam become a good point for investors to come in the future. Nowadays, in the way to become a dragon of ASEAN, after joining WTO, Vietnam are open more and more gates for outside investors from all around the world. In attracting policies, we can see there are three big ways. Firstly, keep marketing about Vietnam; show for the world its ―hidden charm‖ that not only in culture, but also in economy. The biggest thing to market about Vietnam is it geography location, Vietnam locates in a very good ocean way, connect China, ASEAN, and India, with more than three thousands kilometers ocean border. That‘s the very important location for trading and transporting. And Vietnam now is one of the most stable politic places in the world, and every businessman knows that stable politic with the right of possession is extremely important. The last one, cost of nearly everything is lower than developed countries in the world, cheap raw natural resources and labor; it‘s one of the main reasons for outside corporations come here to invest. Secondly, Vietnam also makes a lot of contracts and conferences with other multi-national organization such as EDB, US, AESEAN-Japan, APEC, ASEAN, ASEM, OECD, and MIGA-FIAS to hold more international relationships, and from that point, will attract more FDI. Thirdly, Vietnam also has to have a good procedure to help outside investors come here to work effectively and efficiently. It‘s very important, because if they come here and then know nothing more to do, or everything‘s a mess, no one comes there and show them what to do in Vietnam, they will easily go away. And there are a lot of left problems for Vietnam to solve… Some problems are not due to us, nowadays, some big corporations have withdrawn a lot of money from Vietnam to invest other countries, and one reason is that they diversify their portfolio. That is one of the thing we cannot change.

 IMPACTS OF FDI IN VIETNAM 1988-2007

But there are a lot of things we can change to improve our FDI figure. About the government, there are some points we can show up. Firstly, currency policy of Vietnam now is based on Dollar, and some of investors from EU have said that we did not pay much attention to Euro, therefore they feel and face to a lot of inconvenient conditions here. Vietnam is also somehow fluctuation in FDI policies. For example, in December of 2003, government issued 2 decrees, number 158 and 164 that related to VAT and income tax, FDI of Japan immediately suffered. It went down sharply at that time, and when government changed the decree, the FDI of Japan has gone up again. This example shows that because of unstable in policies; the Vietnam government has missed a haft year of FDI from Japan. The government is being criticized because of slow clearance for FDI, if those bad administrations are still in Vietnam, the future of economy of Vietnam will suffer. The last thing, recently, the minimum wage of Vietnam has increased, it makes the cheap labor in here is less competitive with other developing countries all around the world, it also did impact to FDI coming here. The last big point is about Vietnam itself. Bad infrastructure, cost a lot in transportation, it will reduce the chance to be invested of Vietnam. As everybody yells nowadays, the cost of everything become too high. Vietnam are losing the competitive cost due to this problem. Even the population is high, with cheap labor, but Vietnam is still lack of skillful labor. Besides that, a lot of labor strikes happen recently has influenced badly to reputation of Vietnam. Anyway, to attract more FDI to Vietnam, the government has to do a lot, a lot of things. Vietnam should attract more FDI with marketing about Vietnam, helping investors coming here, issue more attracting policies. Another thing to improve is the system of government, handle bad reputations, focuses more on Euro. And the last thing is improve Vietnam as a whole, with infrastructure, reduce cost, keep labor from striking, and improve skill of labors.

VI. CONCLUSIONS Foreign direct investment has represented an extremely important source of growth for the Vietnamese economy. However, its impact on employment and its technological spillover effects have been limited. Even the imposed local content requirements have not yielded the desired results. The principal reason for these disappointing results appears to lie in the underdevelopment of the private sector and its consequent inability to take advantage of the presence of foreign firms through potential linkages.

 IMPACTS OF FDI IN VIETNAM 1988-2007

Strengthening the private sector will involve a number of changes. It will require creation of a more level playing field between state and private firms. It will also depend on increasing access to land use rights and the capacity to use them for collateral and for equity in investment ventures. In parallel, the private banking system will need to broaden and deepen, supported by a credit culture based on assessed risk and return. In general, a more transparent and complete regulatory system will be required to establish a rule-based commercial environment. In part, the current situation reflects the policy emphasis on continuing growth led by export of labor-intensive manufactures. The anti-import bias in the trade regime may well have distorted the kinds of flows of foreign capital in favor of capital-intensive industries anyway, especially since 1997. Meanwhile, AFTA is progressively influencing the domestic market, with greater competition and efficiency leading to lower prices and profits. If Viet Nam continues reforms in governance, the financial sector, and its legal system, regional integration through the AFTA and ASEAN Investment Area could present the country with a much larger market in which to reveal its comparative advantage and improve its productivity.

 IMPACTS OF FDI IN VIETNAM 1988-2007

REFERENCES 1.

Foreign Direct Investment in Vietnam Ha Thanh Nguyen, Hung Vo Nguyen and Klaus E. Meyer

2.

VN FDI & Postcrisis Regional Integration - VITTORIO LEPROUX AND DOUGLAS H. BROOKS September 2004

3.

Globalization, FDI and employment in Viet Nam - Rhys Jenkins

4.

Tạp Chí Nghiên Cứu Kinh Tế (344/2007)

5.

The impacts of foreign direct investment on the economic growth in Vietnam (Nguyen Thi Tue Anh, Vu Xuan Nguyet Hong, Tran Toan Thang, Nguyen Manh Hai)

6.

Vietnam Development Report 2007

7.

Impact of FDI on poverty reduction in Vietnam