TERM PAPER: FDI in Vietnam: Current Issues and Future Prospects

Student: Nhan T. Tran

Email: nhanfgc@gmail.com

Professor: Dr. Syed Tariq Anwar

International Marketing Fall Semester

FDI in Vietnam: Current Issues and Future Prospects CONTENTS Abstract Introduction I. 1. 2. 1. 2. 3. III. IV. Theory and literature review about FDI What is FDI?................................................................................................................................................ 6 Literature review .................................................................................................................................... 7 An overview of FDI in Vietnam...................................................................................................... 10 Achievements and challenges ....................................................................................................... 13 Prospects and Reforms: Implication for International Marketing ............................ 16 Conclusion ................................................................................................................................................ 21 References................................................................................................................................................ 22

II. FDI in Vietnam ............................................................................................................................................ 10

V. Table/charts................................................................................................................................................ 24

FDI in Vietnam: Current Issues and Future Prospects Abstract The purpose of this paper is to overview and find out the current status of FDI in Vietnam. First of all, the paper will give you an overview of FDI from starting opening the market to now and how FDI effect to Vietnams economy. As FDI plays an important role to the development of any developing country. It not only supply capital, but also brings new technology, management skills, which are necessary for the economic growth. From the findings of FDIs impacts to Vietnam, the paper will point out what existing problems or weaknesses in the policy framework, which reduce Vietnams attractiveness in drawing FDI. Then, the research suggests some policies, which may help Vietnam in attracting greater FDI in the future. Also, some suggestions for foreign investors is mentioned here in order to help them to be successful when investing in Vietnam.

FDI in Vietnam: Current Issues and Future Prospects Introduction FDI plays a crucial role and contributes significantly to development of developing countries. It not only supplies capital for economy, but also facilitates technology transfer which are the important factors enhancing economic growth. Vietnam introduced the reform economic policy called Doi Moi (Renovation) in 1986, which marked the beginning of economic growth. This reform process has resulted remarkable achievements in increasing gross domestic product (GDP) and reducing poverty. Real GDP growth has been constantly high, averaging nearly 7.1 per cent per annum in the 1990-2010 period, and has led to a sharp fall in poverty, from 58.0 per cent in 1990 to 10.6 per cent in 2010. GDP per capita, measured in current prices, exceeded USD 1,000 in 2010, allowing Viet Nam to reach lower middle-income status (VIIR, 2012 P.17). The first Law on Foreign Investment in 1987 marked the starting of attracting foreign direct investment (FDI) in Vietnam. A large amount of FDI has flown into Vietnam. By 2011, total FDI registered capital was around USD$ 230 billion over 14,998 FDI projects. The total implemented capital of these projects amounted to around USD$ 89 billion (GSO, 2012). And FDI in general has upward trends over years. As calculated, from 1988 to 2010, the annual growth rates of registered and implemented FDI came to an impressive number of 34.0 per cent, greatly outweighing the growth rates of other developing country recipients of FDI. It cannot deniable that FDI plays an important role in enhancing Vietnams impressive economic growth. It not only brings capital to the Vietnam economy but can also bring modern technology, managerial expertise and more industries, products and jobs. For example, in 2010, the contribution of foreign invested sectors to GDP was estimated 20 percent, compared to proportion of 14.5 percent in the period 2001 to 2005. Foreign
4

FDI in Vietnam: Current Issues and Future Prospects invested enterprises (FIEs) also contribute significantly to Vietnams export , jumping from 47 percent in 2005 to 57.2 percent in 2007 (VIIR, 2012 P.40). Besides, FDI helps to shift economic restructure toward industry and service and improve industrial production capacity. The share of the agricultural sector has reduced from 80 percent in 1988 to only 22 percent in 2011, while industry and services proportion has increased to 78 percent. Up to now, FDI sector has created jobs for about 2 million workers directly and a large number of indirect labor (VAFIE, 2012). Because of being an important factor to the economic growth, it is useful to know what the main determinants affects FDI inflow or what problems existing, which may reduce FDI into Vietnam. From there, Vietnam can improve or adapt to attract more FDI flow. The purpose of this research is to find out what problems challenging Vietnam in drawing FDI inflow. The paper is divided into 3 main parts. The first one gives brief information on FDI development in Vietnam since the late 1980s. Then, it shortly reviews impacts of FDI in Vietnam economy. In the final section, the study identifies solutions, which Vietnams policy makers may be looking for in order to improve its attractiveness to foreign investors. The change in policies will help to improve the host country environment for FDI. Also, in the final part, some recommendations for foreign investors are suggested with the purpose of helping investors achieve more successful in Vietnams business environment.

FDI in Vietnam: Current Issues and Future Prospects I. Theory and literature review about FDI 1. What is FDI? FDI can be defined in many ways depending on purposes and organizations. It is usually considered as a channel through which for technology and capital is able to transfer from developed counties to developing countries. Or other definition by Kotabe and Helsen, it is understood that investment in manufacturing and services facilities in a foreign country with an intention to engage actively in managing them (Global 5th edition P.36). According to the IMF and OECD definitions, direct investment reflects the aim of obtaining a lasting interest by a resident entity of one economy (direct investor) in an enterprise that is resident in another economy (the direct investment enterprise). The lasting interest implies the existence of a long-term relationship between the direct investor and the direct investment enterprise and a significant degree of influence on the management of the latter (Maitena D. & Banco D.E, 2003 P.2) One other official definition of FDI concentrates in what level of equity a company must have in a foreign entity to give control. According to the IMF, the landmark for making up direct foreign ownership is "10% or more of the ordinary shares or voting power of the entity in the host country". Most governments use the IMF definition as the basis on which to measure flows of FDI in their balance of payments (FDI magazine, 2011). Similarly to definition of IFM, EconomyWatch defined FDI as a type of investment that involves the injection of foreign funds into an enterprise that operates in a different country of origin from the investor. Investors are granted management and voting rights if the level of ownership is greater than or equal to 10% of ordinary shares. Shares ownership amounting

FDI in Vietnam: Current Issues and Future Prospects to less that the stated amount are termed portfolio investment and is not categorized as FDI (2010). In general, FDI is defined as an investment involving a longterm relationship and reflecting a lasting interest and control by a resident entity in one economy (foreign direct investor or parent enterprise) in an enterprise resident in an economy other than that of the foreign direct investor (FDI enterprise or affiliate enterprise or foreign affiliate). FDI implies that the investor exerts a significant degree of influence on the management of the enterprise resident in the other economy (World Investment Review, 2007 P.245). 2. Literature review a. Crucial factor for FDI FDI in one hand is one of crucial factors for the growth of country, especially developing countries as it supports finance, technology, management method, which is special important for development. For example, in the theoretical literature, FDI plays a role of a carrier of foreign technology that can boost economic growth (Findlay (1978) and Romer (1993)). Haddad and Harrsion (1993), Kokko et al. (1996), and Alfaro et al. (2004) point out that FDI can increase the growth rate in the host economy through technology transfer (cited in Economics bulletin, 2008). Multinational corporations (MNCs) that are a vehicle of FDI can help to improve human capital in host countries, for example through training courses offered to their subsidiaries local workers. The training course can be beneficial to all employees ranging from less skilled to highly skill workers. Research and development activities taken by MNCs also contribute to humean capital growth in hos countries and thus enable their economies to grow in the long run (Balasubramanyam and Salisu 1991, Blomstrom and Kokko 2001)
7

FDI in Vietnam: Current Issues and Future Prospects In the other hand, economic growth is also an important determent for attracting FDI. For instance, a research of Chakrabarti (2001) concludes that countries that are more successful in attracting FDI are developed countries with a high degree of openness or in other words, higher economic growth results in higher FDI inflow. Borensztein et al. (1998) examine the effect of FDI on economic growth in 69 developing countries over the two decades. They have utilized data on FDI flows from industrial countries and suggest that FDI is an important mean for the transfer of technology, and contributing relatively more to grow than domestic investment. Because of its important role, it is necessary for the host country to know what determent to draw FDI. As Faeth (2009) highlights, higher profitability in foreign markets enjoying growth, lower labor costs and exchange risks are the factors that attract FDI. b. Develop of FDI Internalization theory was first introduced by Buckley and Casson (1976). According to them, the market of intermediate goods is highly imperfect with information asymmetry, and contract enforcement and bargaining costs. A firm decides to internalize depends upon industry-specific factors such as the product kind, the market structure, the economies of scale, region-specific factors such as differences due to distance and culture, nation-specific factors such as political and financial factors and firm-specific factors such as management skills. MNCs that were high on research and development activities were high on the factor of internalization. Caves (1971) emphasized on differentiation of products as monopolistic advantage. According to him, in an imperfect market, MNEs engaged in product differentiation and were induced in horizontal FDI. This is because FDI was preferred over export or licensing when knowledge was employed in differentiation of products.
8

FDI in Vietnam: Current Issues and Future Prospects Based on Kindlebergers theoretical models (1969) along with those of Hymer (1976) and Caves (1971) (cited in Faeth, 2009), an alternative analytical framework emerges - a "new theory of trade" - that combines the advantages of ownership (knowledge) and location (market size and low transaction costs) with technology and the intrinsic characteristics of a country (factor endowments). c. Government policy of FDI Government policies that include tax breaks, subsidies and easy repatriation of capital (Faeth, 2009) can thus influence the choice between exporting, FDI and licensing. This issue has been examined by a number of authors, such as Bond and Samuelson (1986), Black and Hoyt (1989) and Hubert and Pain (2002) (in Faeth, 2009), who have concluded that financial and fiscal incentives, tariffs and lower corporate tax rates have positive effect on attracting FDI (Faeth, 2009). Corruption is another, equally important, factor in firms' decisions to opt for a particular place. Bnassy-Qur et al. (2007) and Cleeve (2008) are among those authors who say that low levels of corruption are linked to greater prosperity and have a considerable influence on the institutional quality of a country, and stimulate its development. The country investment conditions have a great impact on the foreign firm's internationalization process. This legislative framework is then applied by shaping the "provincial investment conditions" which imply also transaction costs (North, 1990) and influence the foreign firm's choice of investment mode. Meyer and Nguyen (2005) observe that foreign firm prefers the area where provincial institutions encourage their transactions. Recently, Phan's study (2012) indicates clearly that foreign investors prefer great cities and industrial zones in Vietnam. This preference could be explained by two major reasons. First,
9

FDI in Vietnam: Current Issues and Future Prospects industrial zones are always encouraged by the local government's favorable legislations (such as reductions and exemptions of taxes, of import-export duties). Second, areas having a great number of FDI are usually more populated and more developed ones, not only economically, with better qualified manpower but also with a better infrastructure. All in all, the various theories on FDI set out a number of determinants that could explain foreign direct investment flows, involving the micro (e.g., organizational aspects) and macro (e.g., resource allocation) dimensions (Dunning and Lundan, 2008). Since this work aims to identify the factors that have been found to best explain FDI flows to a particular location, it concentrates on the macro dimension. II. FDI in Vietnam a. An overview of FDI in Vietnam From the first law on Foreign Investment in the late 1987 that granted legal status for FDI inflows, Vietnam has been greatly attracted attention from foreign investors. FDI inflow into Vietnam increased every year during the 1990s and in the 2000s. From 1988 up to December 2011, there were 14,998 FDI projects receiving investment licenses with total registered capital amounting to US $229,913.7 million. Registered capital reached the highest in 2008 with US$71,726 million and 1,557 projects. Then, the register capital fell sharply to US$23,107.3 in the following year. However, the implementation capital just reduced slightly from US$11,500.00 to US$10,000.00. Although the registered capital decreased in 2010 to US$19,886.10, implementation capital increased to US$11,000 and estimated the same in 2011 (GSO, 2012). Table 1 shows the overall trend of FDI inflows in Vietnam. The opening of the Vietnamese centrally planned economy moving forward market oriented economy in 1986
10

FDI in Vietnam: Current Issues and Future Prospects and the first Law on Investment introduced in 1987, which liberalizes and facilitates the FDI regime, together with the fast economic growth of the 1990s, led to a rapid increase in FDI inflows in the first half of 1990s, peaked in 1996 at US$10,164.10 million and dropped sharply after that. The 1997-1998 East Asian crises could be one of the reasons for the downturn in FDI inflows as two third of FDI volume in Viet Nam came from these countries in the early 1990s. Since 2004, FDI inflows into Vietnam increased rapidly again. This could be attributed to the improved investment environment, and the Governments permission for foreign investors to invest in some previously Government-monopolized industries, for example, electric supply, insurance, banking, and communications (Anh, 2005). In particular, WTO accession in 2007 enhanced Vietnams growth prospects, leading to faster surge in FDI inflows. However, due to the 2008 global financial crisis, FDI into Vietnam since 2008 felt down again. In addition, some other limitations as the lack of transparency in property and land rights, dispute resolution mechanisms, preferential treatment of local firms and suppliers, corruption, and infrastructure constraints in Vietnam are the other reasons of the decline in FDI flow (Schaumberg-Muller 2003, p.48). In term of counterparts, up to the December 2010, Vietnam has attracted FDI capital from many countries, in which Asia countries accounted for the most number both in projects and registered capital. Table 2 shows that Japan is the biggest foreign investor in term of commitment capital for the period 1988-2010 with US$ 24,381.7 million, accounted for 12.2% of total FDI invested in Vietnam, followed by Korea, Taiwan, and Singapore. After the signing of US Vietnam Bilateral Trade Agreement in July 2000, investment from United States has been increasing. The United States now is the eighth biggest countries invested in Vietnam with $10,431.6 million, accounted 5.24 percent of total registered capital.
11

FDI in Vietnam: Current Issues and Future Prospects About the kind of business activities, Vietnams economy has been able to attract FDI in all sectors. However, most of FDI projects in Vietnam have focused on manufacturing (US$ 93 billion) and real estate activities (US$ 47 billion). Other areas, which also draw interest from investors, are construction, accommodation and food service activities, electricity, gas, stream and air conditioning supply, and information and communication (see table 3). According to the Ministry of Planning and Investment, all 64 provinces and cities in 7 regions of Vietnam have attracted FDI, but foreign investors priority concentrate their investments in key economic areas where they can take advantage of more developed infrastructure. Table 4 shows the accumulation of projects until 31/12/2011, the Red River Delta and the South East regions have accounted for average rate of 27.4 percent and 57.6 percent of total FDI commitment, respectively. Other five regions received only 14.97 percent of total committed FDI inflows at the same time. Ho Chi Minh City and Hanoi accounted for 29.52 and 16.76 percent, respectively. The other southeast provinces such as Phu Yen, Binh Duong Ba Ria-Vung tau, and Dong Nai absorbed another 33.17 percent of total FDI, far more than the principal northern provinces of Hai Phong, Hai Duong and Quang Ninh, which absorbed just 7.64 percent. The factors caused this spatial concentration of investment is the infrastructure advantages such as volumes of roads, airports, freight, postal services and telecommunications of Red River Delta region and the South East region. FDI in Viet Nam is primarily green-field investment. This mostly because of enacting of the Law on foreign investment, FDI could only set up under the form of green-field investment. However, the mode of FDI has changed remarkably recently. In the period 1988 to 2001, the dominant form of foreign investment was joint-venture; wholly owned-foreign enterprises played a much less important role. The accumulated FDI data shows that there
12

FDI in Vietnam: Current Issues and Future Prospects was more than 60.0 per cent of implemented FDI flowing into Vietnam under the form of joint-venture companies for the period 1988-2011, and it now shift to the form of wholly owned-foreign enterprises. The changing relative importance of joint ventures and whollyowned foreign enterprises resulted from Viet Nams commitment upon joining the WTO that the use of the joint venture form is no longer stipulated when foreign investors apply for an investment license (VIIR, 2012) In general, Vietnam is a good destination for foreign investors. FDI inflowing into Vietnam is increasing over the years, especially capital from other Asia Country such as Japan, Korea. Although all provinces and cities have FDI projects, but almost projects focus in places where have better infrastructure or better transportation. b. Achievements and challenges From the first Law on Foreign Investment in 1987, FDI did not have a significant impact on the socio-economic situation the first three years 1988 - 1990. But from 1991 to 1997, it took place the first wave of FDI capital with 2,130 projects and registered capital of US$ 33.4 billion, and implemented capital of US$ 12.4 billion. However, from 1998 to 2004, due to the negative impact of the regional economic crisis, the capital for this period was US$ 24.38 billion, down 27 percent over the period 1991-1997 and majority in 3,968 new projects had small-scale. The year 2005 restarted the second wave of FDI into Vietnam, with registered capital of US$ 6.839 billion and implemented capital of US$ 3.3 billion. Since 2006, Vietnam has attracted large amounts of FDI. Disbursement figures also positive. The report of Ministry of Planning and Investment show that the total registered capital of 13,496 FDI projects, which

13

FDI in Vietnam: Current Issues and Future Prospects was still in period of validity, was $ 195.9 billion, implemented capital was $ 88.2 billion, accounting for 43.2 percent of the registered capital in the period 1988 and 2011. In general, FDI has contributed significantly to the implementation of Vietnam socioeconomic development objectives. First of all, FDI provides investment capital for developing economy. The share of FDI in total investment of the whole society was 30 percent in period 1991 - 2000, 16 percent in period 2001-2005, and increased to 28 percent in the period 2006-2011. FDI contribution to GDP in the period 2001 - 2005 was 14.5 percent, increasing to 20 percent in 2010. Besides, foreign invested enterprises also have a positive impact on tax. It is suggested that income tax contributed to state budget in 2010 was US$ 3.1 billion, raising 26 percent comparing with earlier year, and accounting for nearly 18.8 percent of total Government domestic revenue. In addition, FDI has generated about 40 percent of industrial output value. Export turnover of FDI companies has increased very fast. If during the period 2001 and 2005, it was only US$ 57.8 billion, from 2006 to 2010, it increased sharply to US$ 154.9 billion, representing 55 percent of total exports of Vietnam (including crude oil). Besides, one important research by Thanh and Duong (2011) highlighted, in the short term, a 1% increase in implemented FDI helps raise the exports of domestic firms by 0.25%. This shortterm impact is even larger than that for Vietnams total exports. One explanation of this is that various EIFs in Vietnam mainly supply goods and services to the domestic market and FDI is just a means for foreign enterprises to get over the import barriers in Vietnam. In the longer term, the elasticity of domestic enterprises exports to implemented capital of FDI is 0.61, or roughly 2.5 times larger than the short-term impact.

14

FDI in Vietnam: Current Issues and Future Prospects FDI also helps to shift economic restructure toward industry and service and improve industrial production capacity. The share of the agricultural sector reduced from 80 percent in 1988 to only 22 percent in 2011, while industry and services proportion increases to 78 percent (GSO 2012). Moreover, FDI plays an important role in creating jobs, increasing labor productivity, modernizing management and corporate governance, training and improving human resources. Up to now, FDI sector has created jobs for about 2 million workers directly and a large number of indirect labor (MPI 2012). Total employment in FIEs grew at an annual compound rate of 26% compared to 9.1% growth in local firms (Athukorala & Tien, 2012). In aspect of labors wages, FDI may have direct and indirect effects on average wages. The direct effects operate through MNEs paying higher wage levels than those paid by domestic firms operating in the same sector, hence raising average wages. The indirect effects arise through the positive impact that the entry or the presence of MNEs may have on wages in domestic firms. The empirical results from the research by Hoi and Richarch (2010) show that wage levels in domestic private firms are higher in sectors where there is a higher presence of foreign firms, and domestic private firms with backward linkages to foreign firms can gain productivity spillovers and pay higher wages. Last but not least, FDI has contributed to the development of Vietnam in many other ways such as technology transfer, improving the balance of international payment, increasing access to international markets and expending foreign affair, etc. The decline of FDI in Vietnam is more pronounced, while its recovery is slow and not steady if compared to other ASEAN economies. Especially, FDI flowing into Vietnam reduced highest in 2011 comparing with other ASEAN countries. Among the economies of Asian
15

FDI in Vietnam: Current Issues and Future Prospects Southeast Nations (ASEAN), fours countries including Brunei, Indonesia, Malaysia and Singapore have had highest FDI capital inflow. While developing countries such as Cambodia, Laos also recorded FDI flows relatively positive, FDI into Vietnam fell $ 570 million to $ 7.43 billion and is also the lowest in the past four years (WIR 2011 P.45). Overall in East Asia, China leads in FDI inflows with UDS$ 124 billion, followed by Hong Kong with $ 83 billion in 2011. China as a member of the WTO and a rapidly growing economy is expected to attract an increasing amount of FDI, in period 2005-2007 FDI inflow into China reached US$ 76 billion while the FDI inflow into ASEAN was US$ 64 billion (see table 5). In 2008, due to global financial crisis, FDI in all ASEAN countries reduced sharply to US$ 50 billion, but FDI in China still increased to amount of US$ 108 billion. From these numbers, there are no doubts that China is a strong competitor for FDI not only for Vietnam but also for all ASEAN-countries (WIR 2011 P.46). The pattern of FDI in the world has changed in recent years. If in the past, the most of investors or MNCs wanted to invest on "greenfield" projects, they now prefer merger and acquisition (M&A), which help them to access the new market more quickly and concurrently reduce costs and risks. Transnational companies have shifted to a strategy of building component production and assembly within vertically integrated production system so that investment in one country is closely coordinated with a chain of companies in various other countries. c. Prospects and Reforms: Implication for International Marketing Assessment of international organizations shows that Vietnam is still an attractive investment destination for foreign investors. World Investment Prospects Survey (WIPS) 2010 2012 belong to the United Nations Conference on Trade and Development
16

FDI in Vietnam: Current Issues and Future Prospects (UNCTAD) shows that Vietnam has promoted three ranks, ranking first in level of FDI attractiveness in ASEAN and is one of the 10 most attractive economies for foreign investors, especially for Japanese investors and other developing economies in Asia. Besides, Vietnam is also an attractive country for investors from the United States and EU countries. If in the past, investment inflows to Vietnam had been mainly from Asia such as South Korea, Japan, Taiwan, Singapore, Malaysia, and Hong Kong, recently there has been a new tendency. That is the investment inflows from the United States and EU countries. Especially, the United States can potentially become a giant investor in various areas in Vietnam. Also, investment inflows in the past were mainly in such industries as oil and gas exploitation, automobile and motorbike assembling, components, spare parts, steel, processing, and nowadays strongly focus on development of infrastructure, new urban areas and services such as information technology, finance, banking, tourism, trade, hotel construction, fishery, forestry, thus enabling these inherently-slowly-developed industries to strongly develop in the coming time. If in the past, investors to Vietnam were small and medium ones, making individual investment, at present a large number of giant and transnational corporations from the United States, EU, South Korea, Japan, China, Germany, Australia come to Vietnam for conducting surveys and planning to strongly invest in Vietnam. However, in order to draw more FDI and become more attractive to investors, it is necessary for Vietnam to deepen the reform and improving the business environment. In addition, the increasing international competition with China and other ASEAN-countries categorically requests from Vietnam a more rapid and systemic reform, up-grading its infrastructure if Vietnam wants to reverse the current obvious decline on FDI.
17

FDI in Vietnam: Current Issues and Future Prospects As the biggest limitations in alluring FDI include infrastructure, human resource and institutional incomplete, some suggestions for reforms that Vietnam need to do at this time are as below: Up-grading of infrastructure, especially in power supply is one of the top priorities. FDI will record more success if the country focuses on the creation of infrastructure that can grow and sustain the manufacturing sector (Komawar 2012). Also, the reform of public administration must produce tangible results for the business community like reform of regulations system as it has been initiated by the Enterprise Law. The establishment of a sound legal framework is an essential step that can ensure a stable investment environment and enhance investors confidence (Havard Law Review P.1995). All needs to be done in order to keep the environment at a competitive level. Training and re-training Vietnamese labor forces are on the agenda. As appreciation from investors, the quality of human resource in Vietnam is quite low. Therefore, it is necessary for Vietnam to increase the labor force quality in different ways like vocational training, foreign languages, health and industrial discipline. In addition, modernizing training facilities with professional teachers, including cooperating with foreign or international training corporations wherever needed, is an essential duty in order to provide an increasing pool of skilled workers which are nowadays a scarcity in contrast to a huge untrained and unemployed labor forces in rural regions. Other trade promotional measures include developing a system of investment promotion, providing information abroad on the investment opportunities and investment environment in Vietnam. Vietnam has to hold investment promotion program frequently in order to introduce investment opportunities or supply information about investment in
18

FDI in Vietnam: Current Issues and Future Prospects Vietnam. Hopefully the reforms could bring the rich potential of the Vietnam's economy into play and attract FDI, reducing the gap between Vietnam and the regional economies. Implications for International Marketing: 1. Setting up factory In general, Vietnam has a good environment, infrastructure is improving gradually, and quality of labor force is also higher, while the cost price is competitive if comparing with other countries as Thailand, China. The foreign companies, especially in manufacturing field what require using many labors can invest in Vietnam to best use of cheap labors. Therefore, they can save manufacturing cost and reduce product price. Or in other word, the foreign company can apply cost leadership strategy here. It is easy for them to build a largescale factory in Vietnam because the Government encourages big projects that use a large amount of workers. Usually, with these big projects, the local Government has preferential tax policies in the first two years, that really support for the company in a new environment. 2. Understanding customers In order to be successful, foreign investors should research carefully about culture, business environment, and legal and political system in Vietnam. Although, Vietnam is a quite traditional country, it also has the trend to modernize. In addition, income is higher, and standard of living is improved gradually. As a result, consumers more and more pay attention to quality product. In the mind of Vietnamese customers, they prefer products importing from developed countries or products of MNCs which have a good reputation in the market. However, if compared to other countries, income in Vietnam is still quite low, therefore, Vietnamese customers is still quite sensitive with the price. It means that low price with acceptable quality products will be easier to access Vietnamese consumers. The
19

FDI in Vietnam: Current Issues and Future Prospects MNCs, therefore, can apply global marketing strategy here. The companies entry the market by setting the wholly owned subsidiaries or exporting the same products as parent countries, but deleting some of characters to reduce price. 3. Competing with Chinese goods One more thing, investors should know about Vietnamese customers is that they usually consider Chinese products as low quality ones. In addition, some problems related to products imported from China recently have caused more suspicion to the quality of Chinese products. Vietnamese consumers feel not safety when using these products. Besides, the conflict between Vietnam and China about sea boundary this time has led to the boycott to Chinese products from a part of customers. This is a chance for MNCs to penetrate into Vietnam market, where is used to be dominated by Chinese products. 4. M & A Being affected by global financial crisis in 2008, many Vietnamese companies have to face with difficulties or risks of going bankrupt. As FDI is a vehicle for MNCs to invest in foreign countries. MNCs can take this opportunity to invest in Vietnam by acquiring Vietnamese companies. This facilitates MNCs accessing the market more quickly. Also it helps the company saving cost, which may be very huge if investing on greenfield projects. 5. Choosing field of investment During the last time, most of projects concentrate in manufacturing areas which are intensive labor use such as shoes, clothes. Also, as the data from GSO, projects and capital flowing in real estate area stand number two. However, some of limitations and difficulties happening in recent time show that this is not really a safety and stable for long-term

20

FDI in Vietnam: Current Issues and Future Prospects investment. Vietnam is in period of modernizing, so MNCs can focus on sector, which requires high technology like producing computer or electronic units, etc. III. Conclusion In conclusion, FDI is an important factor for Vietnams economic growth. According to Dr Patrick Kormawa, the Regional Director and Country Representative of UNID, FDI will enable the country to explore and develop their potential. It not only supports Vietnam in capital, but also helps the country to increase GDP, export turnover and create employment opportunities. However, FDI into Vietnam is reducing recently time. Of course, there are some reasons from external factors as competing from China or other ASEAN countries or affecting of global financial crisis. It also cannot deniable that there are some internal reasons as poor infrastructure, unstable and non-transparency legal policies, and low quality human resource. In order to improve the Countrys competiveness in attracting FDI, it is necessary to upgrade infrastructure, complete legal system and increase the labors skills. As regard to foreign investors, to do business successful in Vietnam, they should research carefully about culture, consuming habit, and business environment. As each country has different culture and different consuming habit. What products are preferred in parent countries may not gain the favor in the host countries. Moreover, business environment in each country also has differences. It is necessary to make a depth research to take the best advantage of the host country and reduce risks, which may happen when investing there.

21

FDI in Vietnam: Current Issues and Future Prospects

References
Athukorala, P. and Tien, T. Q. (2012). Foreign direct investment in industrial transition: the experience of Vietnam. Journal of the Asia Pacific Economy. 17 (3), 446-463. DOI: 10.1080/13547860.2012.694699. Balasubramanyam, V. and Salisu, A., 1991. Export promotion, import substitution and direct foreign investment in less developed countries. In: A. Koekkoek and L. Mennes, eds. International trade and global development. London: Routledge, 191210. Blomstrom, M. and Kokko, A., 2001. Foreign direct investment and spillovers of technology. International journal of technology management, 22 (5/6), 435454. Bnassy-Qur, A.; Coupet, M.; Mayer, T. (2007), Institutional determinants of foreign direct investment, World Economy, 30 (5), 764-782. Borensztein E., Gregorio J. D, and Lee J.W., n.d. How does foreign direct investment effect economic growth? Journal of International Economics 45 (1998) 115135Caves, R. (1971), International corporations: the industrial economics of foreign investment, Economica, 38 (149), 1-27. Chakrabarti, A., 2001. The determinants of foreign direct investment: sensitivity analyses of cross-country regressions. Kyklos, 54, 89113. Cleeve, E. (2008), How effective are fiscal incentives to attract FDI to Sub-Saharan Africa?, The Journal of Developing Areas, 42 (1), 135-153. Definition of Foreign Direct Investment: a methodological note. http://www.bis.org/publ/cgfs22bde3.pdf Definition and Sources, 2007. World Investment Report. United Nations conference on Trade and Development. 4, 245-249 http://unctad.org/en/docs/wir2007p4_en.pdf Defining FDI The A to Z of FDI, 2011. http://www.lexisnexis.com.databases.wtamu.edu:2048/hottopics/lnacademic/ Dunning, J.H.; Lundan, S.M (2008), Theories of foreign direct investment, in John H. Dunning e Sarianna M. Lundan (org.), Multinational Enterprises and the Global Economy, Cheltenham: Edward Elgar Publishing Limited, 79-115. Faeth, I. (2009), Determinants of foreign direct investment a tale of nine theoretical models, Journal of Economic Surveys, 23 (1), 165-196. FDI into Vietnam continues to fall: down 27.3% in first half of 2012. http://amchamvietnam.com/?id=5632
22

FDI in Vietnam: Current Issues and Future Prospects Freeman, N.J., 2002. Foreign direct investment in Vietnam: an overview. In: DfID Workshop on Globalisation and poverty in Vietnam. Working Paper, Hanoi, 2324 September 2002. Foreign direct investment projects licensed by main counterparts. General Statistic Office of Vietnam. http://www.gso.gov.vn/default_en.aspx?tabid=471&idmid=3&ItemID=13119 FDI vao Vietnam giam manh nhat Dong Nam A, 2012. http://gafin.vn/20120706044759420p0c33/fdi-vao-viet-nam-giam-manh-nhat-dongnam-a.htm FDI will help in developing countries potential (2012, 24 November). http://www.businessdayonline.com/NG/index.php/news/latest/47990-fdi-will-helpin-developing-countries-potential-unidoProtection of Foreign Direct Investment in a new world order: Vietnam a case study (1994). Harvard Law Review. 107 (8), 1995-2012. Hoang, D. N., 2012. 25 nm thu ht FDI ti VN: Nhng vn tnti. Vietnams Association of Foreign Invested Enterprises. http://vafie.org.vn/index.php?mod=article&cat=tintucdautu&article=572 Hoi, L. Q and Richard, P. (2010). Foreign Direct Investment and Wage Spillovers in Vietnam ASEAN Economic Bulletin. 27 (2), 159-172. DOI: 10.1355/ae27-2a. Le, D. 2002. Foreign Direct Investment in Vietnam Results, Achievement, Challenges and Prospect. International Monetary Fund Conference on Foreign Direct Investment. Hanoi, Vietnam Sajid, A. and Lan, P. N., 2010. Foreign direct investment and economic growth in Vietnam. Asia Pacific Business Review. 16 (1-2), 183-202, doi: 10.1080/10438590802511031. Schaumburg-Mller, H. 2003. Rise and fall of foreign direct investment in Vietnam and its impact on local manufacturing upgrading. European Journal of Development Research, Vol. 15, No. 2, December 2003: 44-66. Thanh, V. T. and Duong, N. A. (2011). Revisiting Exports and Foreign Direct Investment in Vietnam. Asian Economic Policy Review. 6 (1), 112-131. DOI: 10.1111/j.17483131.2011.01187.x. Vietnam Industrial Investment Report 2011. United Nations Industrial Development Organization and Ministry of Planning and Investment. Vietnam FDI. Retrieved from http://www.vietnam-report.com/vietnam-fdi/ Wu, J. Y. and Hsu, C.C. Does Foreign Direct Investment Promote Economic Growth? Evidence from a Threshold Regression Analysis. Economics Bulletin. 15, 1-10. World Investment Report 2011. United Nations Conference on Trade and Development.
23

FDI in Vietnam: Current Issues and Future Prospects

Tables
Table 1: Vietnam FDI registered and Implemented Capital Number of projects Total registered capital (Mill. USD) Implementation capital (Mill. USD) 88,945.5

Total 14,998 22,9913.7 1988 37 341.7 1989 67 525.5 1990 107 735.0 1991 152 1,291.5 1992 196 2,208.5 1993 274 3,037.4 1994 372 4,188.4 1995 415 6,937.2 1996 372 10,164.1 1997 349 5,590.7 1998 285 5,099.9 1999 327 2,565.4 2000 391 2,838.9 2001 555 3,142.8 2002 808 2,998.8 2003 791 3,191.2 2004 811 4,547.6 2005 970 6,839.8 2006 987 12,004.0 2007 1,544 21,347.8 2008 1,557 71,726.0 2009 1,208 23,107.3 2010 1,237 19,886.1 2011 1,186 15,598.1 Source: General Statistic Office of Vietnam (GSO 2012)

328.8 574.9 1,017.5 2,040.6 2,556.0 2,714.0 3,115.0 2,367.4 2,334.9 2,413.5 2,450.5 2,591.0 2,650.0 2,852.5 3,308.8 4,100.1 8,030.0 11,500.0 10,000.0 11,000.0 11,000.0

24

FDI in Vietnam: Current Issues and Future Prospects Table 2: Top 10 FDI countries as of 31 December, 2011

Source Country Japan Korea Taiwan Singapore British Virgin Islands Hong Kong Malaysia United States Cayman Islands Thailand

Number of projects 1,555.00 2,960.00 2,223.00 1,008.00 503.00 658.00 398.00 609.00 53.00 274.00

Total registered capital (Mill. USD) 24,381.70 23,695.90 23,638.50 22,960.20 15,456.00 11,311.10 11,074.70 10,431.60 7,501.80 5,853.30

Source: Vietnam GSO 2012

25

FDI in Vietnam: Current Issues and Future Prospects Table 3: Foreign direct investment projects licensed by kinds of economic activity Number of valid projects 7,987 373 839 314 68 713 134 318 469 70 669 75 73 1,137 115 27 152 104 13,637 Source: Vietnam GSO 2012 Total registered capital (USD) 93,053,036,629 47,002,093,570 12,499,828,279 11,830,450,512 7,397,576,933 5,697,348,354 3,636,188,809 3,261,787,463 3,218,267,739 2,974,765,137 2,066,900,735 1,321,550,673 1,015,496,074 982,999,594 716,481,106 709,884,540 354,721,448 187,693,821 197,927,071,416

Sector Manufacturing Real estate activities Construction Accomodation and food service activities Electricity, gas, stream and air conditioning supply Information and communication Art, entertainment and recreation Transportation and storage Agricuture, forestry and fishing Mining and quarrying Wholesale and retail trade, repair of motor vehicles and motorcycles Financial, banking and insurance activities Human health and social work activities Professional, scientific and technical activities Other service activities Water supply, sewerage, waste management and remediation activities Education and training Administrative and support service activities Total

26

FDI in Vietnam: Current Issues and Future Prospects Table 4: FDI structure by Cities/ Province as of 31/12/2011 Number of projects 13,440 3,682 345 809 135 7,746 678 45 2,253 95 253 338 42 64 210 76 21 54 2,135 1,075 274 3,967

% 100.00 27.40 2.57 6.02 1.00 57.63 5.04 0.33 16.76 0.71 1.88 2.51 0.31 0.48 1.56 0.57 0.16 0.40 15.89 8.00 2.04 29.52

Total registered capital (Mill. USD) 199,078.90 47,443.20 2,856.50 41,458.00 772.80 93,694.20 10,257.50 2,696.70 23,596.00 3,794.00 5,286.10 6,133.20 7,121.70 1,916.80 3,463.10 4,976.50 3,803.90 6,480.70 15,461.60 18,200.40 25,891.10 32,019.60

% 100.00 23.83 1.43 20.82 0.39 47.06 5.15 1.35 11.85 1.91 2.66 3.08 3.58 0.96 1.74 2.50 1.91 3.26 7.77 9.14 13.01 16.08

WHOLE COUNTRY Red River Delta Northern midlands and mountain areas North Central area and Central coastal area Central Highlands South East Mekong River Delta Petroleum & Gas SOME OF CITIES/ PROVINCES Hanoi Quang Ninh Hai Duong Hai Phong Thanh Hoa Thu Thien Hue Da Nang Quang Nam Quang Ngai Phu Yen Binh Duong Dong Nai Ba Ria-Vung Tau Hochiminh Source: Vietnam GSO 2012

27

FDI in Vietnam: Current Issues and Future Prospects Table5: FDI capital inflow and outflow into Vietnam and region period 2005-2011 FDI flows Pre-Crisis annual average Vietnam Inward (USD million) Outward (USD million) Memorandum China Inward Outward Thailand Inward Outward Southeast Asia Inward Outward Asia and Oceania Inward Outward Developing economies Inward

2005-2007

2008

2009

2010

2011

3,685.00 111.00

11,500.00 300.00

10,000.00 700.00

11,000.00 900.00

11,000.00 950.00

76,213.00 18,630.00 9,642.00 1,500.00

108,312.00 95,000.00 52,150.00 8,455.00 4,057.00 56,530.00 4,845.00 4,172.00

114,734.00 123,985.00 68,811.00 9,733.00 5,415.00 65,117.00 9,572.00 10,634.00

64,313.00 35,581.00

50,254.00 32,255.00

47,408.00 32,997.00

92,760.00 44,171.00

116,559.00 59,890.00

287,145.00 382,658.00 317,178.00 386,138.00 424,759.00 155,394.00 223,211.00 211,002.00 273,209.00 280,588.00

442,915.00 650,017.00 519,225.00 616,661.00 684,399.00

Outward 229,567.00 328,121.00 268,476.00 400,144.00 383,754.00 Source: UNCTAD 2011

28