Econ
Vietnam urged to shift FDI inflows to priority sectors
After 30 years of attracting foreign investments, Vietnam is in search of a new national FDI approach, following recent findings that FDI in Vietnam is substantively driven by low labor costs and generous incentives.
A recent report by the International Finance Corporation (IFC) - a member of the World Bank identified potential priority sectors where targeted and pro-active FDI promotion was needed and desirable in support of economic development objectives.
Low-value FDI
According to Vice Minister of Planning and Investment Tran Manh Thang, Vietnam is facing a unique challenge, "as record FDI inflows contrast with still limited spillover and value-added benefits."
"To identify the sectors where FDI will add most value, it is simplest to start by defining what is meant by "low-value" FDI, said Wim Douw, IFC's senior expert.
Consequently, for a low-value assembly operation, it would mean all parts and materials (and associated services, such as product design, financial management) are imported, the finished goods are exported, and low-cost wages and utility supplies are the only value retained in the country, stated Douw.
The value addition is particular low if the products or the skills required are relatively simple and could be replicated by local entrepreneurs, unless the investor brings superior market-access or new technologies or techniques not easily accessible to local investors.
"As in Vietnam's case, as evidenced by the country's outstanding performance to date in attracting so much FDI in many sectors, the question of whether Vietnam offers an attractive proposition to investors does not help to differentiate between sectors - Vietnam already offers an attractive proposition for investors in virtually all sectors," Douw added.
So the key question when seeking to promote next-generation, "high-value" FDI is to identify those sectors where FDI is both feasible, desirable and adds the most value to Vietnam.
"At Vietnam's stage of development, the key is to focus on sectors where investors have a choice of locations and where foreign firms bring advantages not easily accessible to local firms," he said.
Priority sectors
According to IFC, some of the priority sectors are high technologies, manufacturing, supporting industries, tourism and hi-tech farming.
In the manufacturing sector, the focus is on producing high-grade metals, minerals, chemicals, plastics and hi-tech components, which are considered critical to increase local value - addition and competitiveness.
IFC's report stated that several prominent investors reported that their willingness to add more value was being restricted by the limited availability of local inputs including specialized steel, along with chemicals and plastics.
The absence of high precision tooling and lack of capacity in high-precision plastic injection molding is a challenge that can be converted into an opportunity given that the increased FDI inflows in several cases will take local production demand from the non-viable into a viable category, and thus benefit an entire sector.
Additionally, Vietnam also needs to focus on other sub-sectors such as logistics, high-value innovative agricultural products, or high-value niche tourism services.
"Meanwhile, short-term priorities are essential to beat competition through narrow window such as automotive and transport equipment OEMs and suppliers, environmental technologies (equipment for wind, solar, water-conservation)," Douw from IFC continued.
In mid-term, FDI attraction should be in parallel with sector liberalization and skill-development, while some were mentioned, including pharmaceuticals and medical devices, IT services and knowledge services.
However, in order to fully maximize benefits from the FDI inflows into priority sectors, Nguyen Duc Thanh, director of Vietnam Institute for Economic and Policy Research (VEPR) in an interview with the Vietnamese government portal warned Vietnam should have adequate human resources to meet requirements of foreign investors investing in priority sectors, while creating a transparent and fair environment for an efficient linkage between local and foreign companies.
Illustration photo.
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According to Vice Minister of Planning and Investment Tran Manh Thang, Vietnam is facing a unique challenge, "as record FDI inflows contrast with still limited spillover and value-added benefits."
"To identify the sectors where FDI will add most value, it is simplest to start by defining what is meant by "low-value" FDI, said Wim Douw, IFC's senior expert.
Consequently, for a low-value assembly operation, it would mean all parts and materials (and associated services, such as product design, financial management) are imported, the finished goods are exported, and low-cost wages and utility supplies are the only value retained in the country, stated Douw.
The value addition is particular low if the products or the skills required are relatively simple and could be replicated by local entrepreneurs, unless the investor brings superior market-access or new technologies or techniques not easily accessible to local investors.
"As in Vietnam's case, as evidenced by the country's outstanding performance to date in attracting so much FDI in many sectors, the question of whether Vietnam offers an attractive proposition to investors does not help to differentiate between sectors - Vietnam already offers an attractive proposition for investors in virtually all sectors," Douw added.
So the key question when seeking to promote next-generation, "high-value" FDI is to identify those sectors where FDI is both feasible, desirable and adds the most value to Vietnam.
"At Vietnam's stage of development, the key is to focus on sectors where investors have a choice of locations and where foreign firms bring advantages not easily accessible to local firms," he said.
Priority sectors
According to IFC, some of the priority sectors are high technologies, manufacturing, supporting industries, tourism and hi-tech farming.
In the manufacturing sector, the focus is on producing high-grade metals, minerals, chemicals, plastics and hi-tech components, which are considered critical to increase local value - addition and competitiveness.
IFC's report stated that several prominent investors reported that their willingness to add more value was being restricted by the limited availability of local inputs including specialized steel, along with chemicals and plastics.
The absence of high precision tooling and lack of capacity in high-precision plastic injection molding is a challenge that can be converted into an opportunity given that the increased FDI inflows in several cases will take local production demand from the non-viable into a viable category, and thus benefit an entire sector.
Additionally, Vietnam also needs to focus on other sub-sectors such as logistics, high-value innovative agricultural products, or high-value niche tourism services.
"Meanwhile, short-term priorities are essential to beat competition through narrow window such as automotive and transport equipment OEMs and suppliers, environmental technologies (equipment for wind, solar, water-conservation)," Douw from IFC continued.
In mid-term, FDI attraction should be in parallel with sector liberalization and skill-development, while some were mentioned, including pharmaceuticals and medical devices, IT services and knowledge services.
However, in order to fully maximize benefits from the FDI inflows into priority sectors, Nguyen Duc Thanh, director of Vietnam Institute for Economic and Policy Research (VEPR) in an interview with the Vietnamese government portal warned Vietnam should have adequate human resources to meet requirements of foreign investors investing in priority sectors, while creating a transparent and fair environment for an efficient linkage between local and foreign companies.
