FDIs and Country Attractiveness in Vietnam - UNCTAD

This text discusses the determinants of FDI inflow and its influence on Vietnam's economy. It also covers the major contributors and constraints of FDI in Vietnam and suggests ways for Vietnam to improve its investment and business climate for making its FDIs more attractive.

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Topic: FDIs and country attractiveness
Country: Vietnam
Committee: UNCTAD
Since the economic reforms' inception of 1986, Vietnam has been very successful in
attracting the inflows of foreign direct investment (Linh and Lin, 2014). Development of
Vietnam has been significantly contributed by the inflow of foreign direct investment
(‘FDI’) (Xuan and Xing, 2008). However, the determinants of the FDI inflow and its
influence on the economy of the country are still under research, because full
knowledge regarding the same is still not available (Freeman, 2002). The government
policy does not seem to be a significant factor towards the FDI at a provincial level, as
measured by the Provincial Competitiveness Index (Nguyen and Nguyen, 2007). The
biggest sources of foreign investment for the country were Japan, South Korea and
Singapore that contributed 25.9 per cent, 22.3 per cent and 13.4 per cent respectively
(Trading Economics, 2018b). The FDI of Vietnam stood to be USD 17.5 million for the
year 2017. The Gross Domestic Product (GDP) in Vietnam was worth $ 223.86 billion
for the year 2017. Its GDP value represents 0.36 per cent of the world economy.
Vietnam’s GDP averaged $68.78 billion from the year 1985 to 2017. For the year 2017,
the total FDI of the country constituted 6.301% of the total GDP of its economy, which
was 6.137% for the previous year.
The major contributors of the foreign direct investment of Vietnam are the
manufacturing sector; the services sector the agricultural sector and the traveling sector
(Nguyen and Xing, 2006). In the long term, the country focuses on the sectors which
emphasize skills development such as the manufacturing sector, the services sector
and information technology sector (Anwar and Nguyen, 2011). In Vietnam, the foreign
countries are offered huge taxes and other incentives like reduction or exemption in the
import duties, VAT and corporate income tax (Meyer and Nguyen, 2005). The
Government of Vietnam is increasingly focusing on incentivizing the foreign companies
which are engaged with the local companies in order to make inward FDI have a
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positive and long impact on the economy (Malesky, 2010). The infrastructure of the
country also plays a significant role in the economic development. The factors which
encourage FDI to be attracted to Vietnam are access to raw materials and infrastructure
of the country, transport and communication links and, wage costs and skills of the
labors. If a company has significant access to raw materials and has a good
infrastructure, its operations would be healthy, enabling it to have a good business.
Availability of low costs and rates of labor that have good skills is always a plus point.
The major factors which pose as the greatest constraints on the FDI of Vietnam are, the
customs trading rights, import prohibitions, price registration and stabilization issues,
investment barriers, etc. (Auffret, 2003). Certain criteria has been designated by the
investment law of Vietnam where some sectors are completely prohibited for foreign
investment whereas the other sectors are subject to some conditions. The country has
specific laws which are applicable on the investment in conditional sector like insurance,
banking, telecommunications, aviation, etc (Van An, 2006). The investments in such
conditional sectors are subject to additional an extensive review, which also required
the approval of the Prime Minister due to which the issue of investment licenses is
delayed (Van An, 2006). The low local supply chain coordination and the lack of skilled
labor are the other two major affecting factors of the foreign direct investment of the
country (Thanh, 2005). The participation rate of Vietnam in the labor force was
measured to be 76.70% for the year 2018 which in the previous year was 76.90%. The
government REGULATIONS and low-cost labor still remain the major constraints of the
country's FDI.
Vietnam can improve its investment and business climate for making its FDIs more
attractive by certain means. It can create a national skills development plan for
increasing its share of skilled labor in the total workforce. Here, the pillars of labor
market would be improved upon. The activities of investment promotion can be
modernized and focused on the priority sectors. The current incentive policies of the
current investment can be reviewed, and changes can be made accordingly for
ensuring the quality of FDI. The investment should be promoted and facilitated abroad.
The service sectors like logistics, education and financial services should be opened for
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increasing the growth and competitiveness. The pillars of global competitiveness index
that are affected here are institutions, information and product market. Certain
supporting policy should be implemented for helping the local suppliers and increasing
the linkages of FDI (Chien and Zhang, 2012). A new management agency of the FDI
should be set up with more capacity, budget and authority for implementing the
Strategies and policies effectively.
Reference List
Anwar, S. and Nguyen, L.P., 2011. Foreign direct investment and trade: The case of
Vietnam. Research in International Business and Finance, 25(1), pp.39-52.
Auffret, P., 2003. Trade reform in Vietnam: Opportunities with emerging challenges. The World
Bank.
Chien, N.D. and Zhang, K., 2012. FDI of Vietnam; Two-Way Linkages between FDI and GDP,
Competition among Provinces and Effects of Laws. iBusiness, 4(02), p.157.
Freeman, N.J., 2002, September. Foreign direct investment in Vietnam: an overview. In United
Kingdom Department for International Development workshop on globalization and poverty in
Viet Nam (p. 3e20).
Linh, D.H. and Lin, S., 2014. CO2 emissions, energy consumption, economic growth and FDI in
Vietnam. Managing Global Transitions, 12(3), pp.219-232.
Malesky, E.J., 2010. Provincial governance and foreign direct investment in Vietnam.
Knowledge Publishing House.
Meyer, K.E. and Nguyen, H.V., 2005. Foreign investment strategies and sub‐national institutions
in emerging markets: Evidence from Vietnam. Journal of management studies, 42(1), pp.63-93.
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Nguyen, A. and Nguyen, T., 2007. Foreign direct investment in Vietnam: An overview and
analysis the determinants of spatial distribution across provinces.
Nguyen, X. and Xing, Y., 2006. Foreign direct investment and exports: the experiences of
Vietnam (No. EMS_2006_13). Research Institute, International University of Japan.
Thanh, V.T., 2005. Vietnam's trade liberalization and international economic integration:
evolution, problems, and challenges. ASEAN Economic Bulletin, pp.75-91.
Trading Economics, 2018a. Vietnam GDP Growth Rate. [online] Available at:
<https://tradingeconomics.com/vietnam/gdp-growth> Accessed on: 14 Dec 2018.
Trading Economics, 2018b. Vietnam Foreign Direct Investment. [online] Available at:
<https://tradingeconomics.com/vietnam/foreign-direct-investment> Accessed on: 14 Dec 2018.
Van An, D., 2006. Building Up and Improvement of the Institution of the Socialist Oriented
Market Economy in Vietnam (No. 22837). East Asian Bureau of Economic Research.
Xuan, N.T. and Xing, Y., 2008. Foreign direct investment and exports the experiences of
Vietnam 1. Economics of transition, 16(2), pp.183-197.
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Figure 1: FDI of Vietnam
Source: (Trading Economics, 2018b)
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