Preview: Vietnam’s New 2018-2023 FDI Strategy Shifts From Low-Cost Labour To High-Tech Industry

16-Dec-2017 Intellasia | | 6:00 AM Print This Post

Vietnam’s Ministry of Planning and Investment, with the assistance of the World Bank, is currently drafting a new FDI strategy for 2018-2023 focusing on priority sectors and quality of investments, rather than quantity. The new draft aims to increase foreign investment in high-tech industries, rather than labour-intensive sectors. Manufacturing, services, agriculture, and travel are the four major sectors in focus in the draft.

Sectors in focus

The four major sectors in focus are:

Manufacturing It includes high-grade metals, minerals, chemicals, electronic components, plastics and high-tech;

Services Includes MRO (maintenance, repair, and overhaul) along with logistics;

Agriculture Includes innovative agricultural products i.e. high-value products such as rice, coffee, seafood and;

Travel High-value tourism services

Investment priority

The draft prioritises FDI investments on a short-term and medium-term basis. In the short-term, industries with limited opportunities for competition will be prioritised.

Industries include:

Manufacturing/Production Automotive and transport equipment OEMs and suppliers;

Environmental-friendly technology Water conservation, Solar, Wind investments

In the long-term, the emphasis is on sectors that focus on skills development, including:

Manufacturing Manufacturing of pharmaceuticals and medical equipment;

Services Services include education and health services, financial services, and financial technology (Fintech);

Information technology and intellectual services

The draft also includes recommendations about the further removal of entry-barriers and optimising incentives for foreign investors such that their effect on the economy is maximised.

FDI in 2017

In the first 11 months of 2017, the total FDI capital including newly registered, additional funds and share purchase value reached $ 33.09 billion, a year-on-year increase of 82.8 percent. FDI disbursed is expected to reach $ 16 billion, an increase of 11.9 percent over the same period last year.

The processing and manufacturing sector received the highest capital at $ 14.95 billion, accounting for 45.2 percent of the total. Electricity production and distribution and real estate attracted $ 8.37 billion and $ 2.5 billion respectively.

Japan was the leading investor amongst 112 investing countries, accounting for 27 percent of the total FDI at $ 8.94 billion, followed by Korea and Singapore with a total registered capital of $ 8.18 billion and $ 4.69 billion.

Ho Chi Minh attracted the highest FDI with a total registered capital of $ 5.68 billion, accounting for 17.2 percent of the total investment capital. Bac Ninh followed at $ 3.28 billion, while Thanh Hoa province ranked third with a total registered capital of $ 3.16 billion.

Need to do more

Going forward, Vietnam has to ensure that it moves away from a low labour cost economy to one focusing on technology and skilled labour. The government has to do more than just attract investments into high-value added activities. Vietnam should also focus on diversifying FDI sources, enabling domestic firms, and increasing investments in infrastructure.

Majority of the foreign investments in Vietnam are from Korea, Japan, and Singapore. Rather than been over-dependent on Asian countries, Vietnam has to promote itself further and increase investments from the EU, US, and other countries outside Asia-Pacific. With the EU-Vietnam FTA and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), Vietnam has an opportunity to increase investments from countries outside Asia.

Foreign firms in Vietnam are offered huge tax and other incentives such as exemptions or reductions in corporate income tax, import duties, and VAT. However, domestic firms that already lack the capital and technology of foreign firms are not provided any of those incentives, further hampering their growth. The government has to find a fine balance between providing incentives to domestic and foreign firms to improve competitiveness. To increase linkages, the government can incentivise foreign firms engaged with local firms, if it wants FDI to have a long and positive effect on the economy.

One key sector not mentioned in the draft is infrastructure. As the country progress and investments increase, infrastructure will play a crucial role in the economic development. Infrastructure projects, which are in dire need of funds in Vietnam cannot be fulfilled by the domestic sector and would require foreign capital. The government has to prioritise infrastructure projects and incentivise foreign investments to reduce the increasing gap between the current and needed investment levels. Infrastructure projects such as roads, railways, power grids, ports, and industrial parks should be a priority for the government going forward.

Once the draft is finalised by the Ministry of Planning and Investment, we will have further clarity regarding the scope of their strategy.

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.


Category: Economy, Vietnam

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