Vietnam’s economic uncertainties make the investment climate highly risky.
Amid the current restructuring climate taking a hold of Vietnam’s economy, the foreign direct investment (FDI) sector also needs an urgent revamp, writes Central Institute for Economic Management’s Macroeconomic Policies Research deputy head Nguyen Tu Anh.
As different facets of Vietnam’s economy are tweaked to leave the under pressure economy in better shape, what about the FDI sector which annually contributes around 20 per cent of the country’s gross domestic product (GDP).
This sector’s efficiency has been decreasing with one-time high expectations for technology transfer from foreign players to local firms yet to become a reality and signs of transfer pricing by foreign invested enterprises (FIEs) increasingly apparent. Restructuring the FDI sector has become an urgent need.
The FDI sector’s low contribution to Vietnam’s economy stemmed from a cocktail of objective and subjective factors. Objectively, Vietnam’s human resources remain having a low ability to adapt hi-tech jumps, the fledging private sector is still short of competitiveness to join the global production value chain and less-developed infrastructure system fails to keep up with businesses’ fast development pace.
What are subjective factors?
First, Vietnam’s investment stimulus system is complex and investment incentive policies are regulated by diverse legal documents, enacted by state bodies at different levels. This has challenged state bodies’ investment promotion and governance and firms understanding and accessing incentives.
Second, the country’s investment encouragement policies lack consistency and have vague targets. Priority investment fields and locations are regulated by diverse legal documents in different locations, while stimulus measures in training and credit support policies are inefficient.
Third, the existing legal system is not enforced strictly enough, paving the way for FIEs to commit tax fraud.
Fourth, macroeconomic development indexes are not stable, making production investment highly risky. As a result, investors have no motive to sink long-term investment into innovative technology and refined processing using skilled labourers. Consequently, foreign investors have mainly made full use of the local low-cost and low-skilled labour force and have seen no benefits in raising the technology bar and bettering worker’s skills to enable higher added value production.
Restructuring FDI sector following qualitative norms
Land reserved for non-agricultural investment projects has become increasingly scarce and allocating land to such projects is causing growing social unrest. Putting FDI quantity over quality has also further burdened on existing infrastructure, thus undermining overall investment efficiency. Thereby, luring massive FDI amounts in today’s reality may not be the best option. Let’s have a look at each investment model.
In respect to investors tapping a recipient country’s natural resources, in running after quantity in attracting foreign investment, natural resources will soon be depleted or not used effectively. Therefore, it is important to sort out the most capable investors.
In respect to investors with inbound investments to tap on domestic market, this covers consumer goods and input material producers serving the domestic market. To such investors, Vietnam needs to weigh a trajectory to gradually remove protective measures, forcing them to boost production and export efficiency. These investors are mainly part in the global production value chain of leading global firms already existing in Vietnam. These investors are worthwhile for Vietnam’s economy.
Foreign investors in Vietnam mainly leveraged a low-cost labour force and cheap energy costs. Hence, these investors mostly import a huge volume of input materials, process then export or sell them to the domestic market. If this trend continues, there will come a time when investment efficiency falls to a level which cannot be offset by investment incentives and this investment flow will stop. Thereby, it is important to weigh what will be optimal investments based on current infrastructure capacity, parallel to using every local source to enable infrastructure upgrades.
In respect to investors stepping into services areas, these investors mainly tap a natural bounty of geographical locations to either provide services to production and business process in Vietnam or rendering personal services like healthcare, education and insurance. Investors who stepped into Vietnam first would hinder late-comers’ growth. Therefore, unless these investors were sorted out to find most capable and responsible ones, Vietnam faces only receiving investors who cannot generate high added-value services to consumers and producers while tapping the country’s natural bounty.
In respect to investors cashing in on a recipient country’s legal system, these investors mainly take advantage of the country’s legal loopholes, loosened environment and occupational safety regulations, or make use of the recipient country investment incentives. To restrict such investors, diverse laws on investment, competition, trade, environment and taxation must be made unified to bolster law enforcement.
Policy-based investment restructuring
Vietnam’s current market remains modest in scope, which is a disadvantage in luring FDI. However, if the country succeeds in maintaining growth as in the past two decades, this disadvantage could be translated into an advantage within the next decade.
Vietnam’s economic uncertainties make the investment climate highly risky. To put the economy on an even keel, macroeconomic stability must be the top priority. Political and social stability is also a big challenge on the back of widening gap between the rich and poor.
As regards to natural resources, the country’s reserves of several minerals like oil and coal are medium sized. However, these resources are non-renewable and increasingly depleted. Hence, Vietnam will not attract investors leveraging its natural resources.
To appeal to investors, Vietnam needs to swiftly reform its education and training system to better labourers’ skills and enhance connectivity between training providers, enterprises and policy-makers.
Infrastructure is being considered one of the bottle-necks to economic development, particularly regarding power network and transport system. Investment efficiency of the entire economy could not be improved unless rational measures were taken to break the impasse, making the country more charming to investors.
Last but not least, transparency, policy predictability and regulatory capacity in current times are below expectations, particularly in information sharing. Fostering international integration will pull Vietnam’s regulatory system closer to the world’s regulatory system. In the meantime, Vietnam’s firmly moving forward with its new economic restructuring master plan to make the country’s regulatory environment more transparent and predictable to investor community. Regulatory reforms must aim to create a more level-playing field to businesses from assorted economic sector whereas the state should follow market rules when taking policies regulating economic development.
It must be taken into account that policies should aim for explicit targets, in which policies propelling foreign investment should be re-designed to fit specific target business groups.
Accordingly, potentially labour intensive firms which do not urgently require tax incentives may need more support in land and infrastructure access, while businesses which are expected to help boost workers’ skills and technology levels may need longer time with investment incentives and source further support in human resource training and technology application.
Preferential policies should be flexible and not be equally applied to diverse investor groups or investors of the same group. These policies should be implemented with certain conditions and time periods. TSTC investors effectively handling their commitments may be subject to extension or given more incentives.
Directly communicating with investors, particularly multi-national companies should be promoted. Negotiating specific investment stimulus schemes with these companies is also a smart move.