Foreign-invested enterprises are more likely to contribute to capital formation, tax revenues and job creation when compared to State-owned enterprises and the domestic private sector.
According to a new report rolled out by the UN Industrial Development Organisation (UNIDO) at a workshop hosted here yesterday by the Foreign Investment Agency.
UNIDO’s Vietnam Industrial Investment Report 2011 also foreign-invested enterprises (FIEs) were better able to establish themselves in both high-technology industries, such as computers, electronics and optical products and low-tech industries, such as leather goods manufacturing.
The report was based on a survey of 1,494 enterprises operating in industry and construction, with FIEs accounting for 58 per cent of respondents.
FIEs on average generated more employment, grew at higher rates, operated at higher rates of capacity utilisation, and were more profitable, the report said. Most manufacturing firms in Vietnam were labour-intensive and that had had a positive impact on employment generation.
The report faulted FIEs, however, for a heavy reliance on imported raw materials and for engaging in the production of low value-added products geared primarily to export markets.
Since 2008, investment from the foreign-invested sector has outpaced investment from the domestic private sector. The rate of disbursements had become less volatile and been on a relatively stable upward trend since 2006, the report said, suggesting that the gap between registered and disbursed foreign investment might be decreasing over time.
WTO accession had been expected to have a significant impact on international trade patterns, particularly in terms of diversifying export products and expanding export markets. However, overall exports remained underpinned and led by the foreign-invested sector, with a concentration in labour-intensive manufacturing.
The majority of export firms remained heavily dependent on imported inputs, with FIEs complaining of a general shortage of input suppliers that meet the requirements and demands of enterprises. This seemed to be a common challenge to the entire Vietnamese economy.
UNIDO’s survey findings also seemed to suggest that the growth impact of FDI was less positive due to the probable incidence of transfer pricing.
At yesterday’s workshop, UNIDO experts suggested that, to help improve the quality of foreign investment, the role of the Foreign Investment Agency, an agency of the Ministry of Planning and Investment, should be enhanced to include investment promotion and monitoring.
Investment promotion needed to focus on attracting more support industries to Vietnam in a bid to enable more industrial subcontracting and increase the local content of manufactured goods.
UNIDO experts said that existing investors were crucial in promoting new foreign investment into Vietnam. Support services therefore served a dual objective of triggering re-investment by existing investors and encouraging their role as ambassadors to promoting new investment.
They also said that the country needed to reassess its economic growth model, in terms of a thorough analysis of the relationship between export generation, employment creation, added value and productive efficiency in manufacturing industries.
Policymakers needed to undertake an in-depth evaluation of the performance of FIEs operating in industrial zones and the economic benefits generated by incentive schemes provided to these enterprises, while they also needed to re-assess the economic benefits of investment incentives granted to FIEs, seeking to target manufacturing sectors with high added-value potential.
Provinces urged to rethink investment stance
South-eastern provinces and cities should review their foreign investment policies and improve governance to attract large investors, a conference heard in HCM City last week.
Despite many difficulties last year, HCM City, Long An, Ba Ria-Vung Tau, Binh Duong, Binh Phuoc, Dong Nai, and Tay Ninh Provinces achieved high rankings in the country’s Provincial Competiveness Index (PCI) in 2011, economist Pham Chi Lan said.
With their good infrastructure and dynamism, the region has potential to raise its competitiveness even further, she said.
They need to improve their business support services, labour training, and transparency, she said.
“Just cheap labour will no longer be an advantage for Vietnam, and the country should therefore enhance labour productivity via improving the quality of human resources.”
Dau Anh Tuan of the Vietnam Chamber of Commerce and Industry said foreign firms mostly chose to invest in Vietnam due to its cheap raw materials, low labour costs, and preferential tariffs.
FDI companies have hailed localities for improving in aspects like entry costs, land-use stability, and infrastructure, but said they need to make progress in areas like protecting property rights and labour quality, he said.
The 2011 PCI was based on a survey of 6,922 domestic firms and 1,970 FDI ones on nine aspects of governance at the provincial level, including entry cost, land access and security of tenure, transparency and access to information, time taken for complying with regulations, informal charges, business support services, labour, and training and legal institutions.