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Oct 05, 2018 / 08:35

Vietnam is an FDI success story: International experts

Countries are competing aggressively with each other for FDI, and "Vietnam is winning," said an expert.

Vietnam is an FDI success story, for which the FDI has become a major driver of Vietnam's economic development, stated Kyle Kelhofer, International Finance Corporation (IFC) country manager for Cambodia, Lao PDR and Vietnam. 
 
Illustrative photo.
Illustrative photo.
Competitive wages, stable political and economic environments, sound infrastructure, a favorable geographic location as well as a robust investment and trade policy framework have led to dramatic increases in FDI inflows, Kelhofer said at a conference summarizing Vietnam's effort in attracting FDI on October 4. 

"By any measure, the country's FDI attraction achievements have been exceptional," he said. 

In 2016, FDI into Vietnam exceeded inflows into other ASEAN countries, except Singapore. As a percentage of GDP, Vietnam's FDI inflows already exceed those of China and India. The year 2017 also witnessed Vietnam post a record in FDI disbursement of US$17.5 billion, against a backdrop of global declines in FDI flows of 23% during 2017. 

Nevertheless, there remain significant opportunities to further leverage FDI and strengthen linkages with domestic firms for more spill-over effects and domestic value-added. 

Additionally, to avoid the "middle-income trap" and achieve high income status, it is clear that Vietnam requires a next-generation FDI strategy to leverage value-added and FDI spillovers to unlock the benefits FDI brings. 

Hironobu Kitagawa, chief representative of JETRO Hanoi, stated that a survey conducted last year by JETRO among Japanese businesses operating in Vietnam revealed that up to 70% of the businesses planned to expand their operations. "This indicates Vietnam continues to be the destination of interest for many Japanese investors," Kitagawa said. 

Christopher Maline, CEO of Boston Consulting Group (BCG), said countries are competing aggressively with each other for FDI, and "Vietnam is winning." However, in the next 10 years, a big part of global FDI will be poured into new innovation-driven sectors, for which the winner in this race would need a big domestic market and advanced innovation system. 

In addition to improve innovation capacity, Vietnam has to create an outstanding environment for companies to come to Vietnam and stay in long-term, Maline argued.

Work remains to be done

While the overall policy framework is clear, implementation is still weak and evidenced by the recurrence of challenges identified several years ago. "Major horizontal and vertical weaknesses are not helping," Kelhofer added. 

Horizontal weaknesses, such as extensive overlaps between ministries, manifest in lack of convening power and extensive fragmentation as a result of poor cooperation and coordination. Vertical overlaps, such as ineffective coordination and synchronization along with potentially wasteful overlaps between national and sub-national levels, perpetuate a "race to the bottom" scenario when it comes to incentives.  

Under this context, it is necessary for Vietnam to implement major skills development initiative, aiming to accelerate the transition from growing skills gaps to a superior supply of skilled labor. 

Moreover, Vietnam should better align its current regime with next generation FDI objectives bearing in mind that "profit-based" incentives are less suitable for encouraging supplier development, green technology, value addition and workforce training compared with performance-based incentives. 

Importantly, Industry 4.0 will continue to be the most challenging and potentially disruptive, which requires a "business environment 4.0". The implication being that Vietnam must "leap-frog" from "playing catch-up" to offering a superior investment climate, Kelhofer said.  

Meanwhile, restrictions on investment in communications, logistics, education, health and financial services remain which can be critical to global value chain or serve as catalyst for sustained economic growth and competitiveness. 

Ambassador - Head of the EU Delegation to Vietnam Bruno Angelet said that the country should continue working towards removing existing trade and investment barriers and improving business climate. 

According to Angelet, transparency is key for investors to know the regulations and procedures to follow. "A fair, transparent, stable and predictable business climate tops in the EU businessmen's priorities when they mull on their investment plans."

It is also vital that Vietnam guarantee a stable legal framework for investors to operate and a functioning enforcement system. 

"We urge Vietnam to improve the recognition and enforcement of foreign arbitral awards and to set up a grievance system for investors to avoid disputes," Angelet added.

Echoing Angelet's view, the head of JETRO Hanoi stressed that "the shortest pathway for Vietnam to attract investments will be through building a transparent legal framework and ensuring its explicit and reasonable enforcement in order to facilitate operations of businesses."