Tuesday, 19 Feb 2019

Reform is inevitable in Vietnam's quest for higher quality of FDI inflows

Updated at Tuesday, 10 Jul 2018, 07:10
The Hanoitimes - Vietnam has been an attractive investment destination for the past 30 years, resulting in enormous growth in jobs and exports, while returning comparatively limited gains to domestic producers and a lack of integration of local firms into the global value chain.
While open-door investment and trade policies have led to increases in FDI inflows, employment opportunities and diversification to exports - especially in the last decade with annual FDI inflows rocketing by almost 10 times to outperform most regional competitors, it is important to realize that Vietnam requires breakthrough reform to compete for higher quality streams of FDI, according to the International Finance Corporation (IFC) - a member of the World Bank. 
Overview of the workshop. Source: Ngoc Thuy.
Overview of the workshop. Source: Ngoc Thuy.
Time for a change

"The challenge we face is unique, as record FDI inflows contrast with still limited spillover and value-added benefits. Therefore, a new national approach to FDI is needed to achieve national development goals," said Vice Minister of Planning Investment Vu Dai Thang at the launch of IFC's report on Vietnam's next generation FDI strategy and vision in the 2020 - 2030 period on July 9. 

Consequently, the new strategy prioritizes activities that enhance cross sector competitiveness with higher skilled labor content and higher technology transfer and spillovers to the domestic economy, meeting the evolution of investor demands towards higher value-added activities, Thang continued.

On this issue, Jonas Grunder, deputy head of cooperation at the Swiss Embassy in Vietnam, stated that FDI in Vietnam is substantively driven by low labor costs and generous incentives. 

In fact, the dominance of market-seeking, labor-intensive and relatively low-value manufacturing has resulted in high FDI capital flows but relatively low domestic added value, low paid jobs, poor levels of spillover and "dual economy", incentive abuse, the skills gap widening and risks of falling into the "middle income trap", he added.

"By addressing these issues, the government is likely to unlock more opportunities for Vietnam," said Kyle Kelhofer, IFC country manager for Vietnam, Cambodia and Lao PDR. "The key tasks would be to identify which sectors - and under what circumstances - represent the most competitive opportunities for Vietnam to attract investment (FDI and domestic), create both more and better jobs, and increase sourcing from local firms."

Proposed breakthrough reforms

According to the report, eight proposed breakthrough reforms represent a "blueprint" for placing Vietnam on the right track towards addressing its challenges and attracting the next generation FDI needed to sustain its economic growth. 

An immediate priority is adoption of concrete policies that increase FDI linkages and spillovers, with a focus on introducing policies to increase FDI linkages and targeted supplier development programs. 

In line with meeting the challenges and opportunities of Industry 4.0, Vietnam should aspire to a business environment commensurate with business needs in the digital age. Instead of "playing catch - up", this reset should offer a superior investment climate and operating experiences with digital/online solutions compared to regional competitors. 

Other recommendations include creating and implementing an integrated national skills development plan to accelerate Vietnam's transition from low to skilled labor; modernizing investment promotion, moving from reactive to proactive promotion in priority sectors; overhauling current incentive frameworks; opening up important sectors that underpin competitiveness and growth; and introducing strategic outward FDI promotion policies. 

Above all, a strong FDI focal point agency with the proper profile, influence, organizational structure and budget is key to ensuring effective implementation of all these recommendations, the report assessed.
Nguyen Tung
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