Impact of FDI on Vietnamese Economy

  1. Vietnam is an attractive destination to foreign investors

Vietnam is attracting an increasingly higher volume of foreign direct investment (FDI). In the last five years, FDI in Vietnam has reached $10-$12 billion per year (US Department of State 2014). FDI’s contribution to Vietnam’s GDP has increased from 13% to 18% during this period (US Department of State 2014). This could be explained by good investment climate of Vietnam, with cheap labour force, facilitating economic conditions, and favourable legal system.

Vietnam has an abundant, young, literate and cheap labour force. In 2014, the number of working people stood at 53.6 million, with 66% of the population under the age of 40 (US Department of State 2014). The population increased at the rate of 1.5% in 2015 (US Department of State 2014), producing 1.3-1.5 million new workers for the labour force annually (Vietnam Trade Office in the USA 2008). This means that Vietnam has a large, young, and growing labour force for the market. According to US Department of State (2014) and Vietnam Trade Office in the USA (2008), 94% of Vietnamese people are literate; they are hard-working and fast-learning. Therefore, foreign investors can train their Vietnamese workers in a short period of time. In fact, the abundant, cheap, and trainable labour force is one of the most attractive aspects of Vietnam to foreign investors.

Vietnam has a favourable economic condition for foreign investors with 270 industrial parks (US Department of State 2014). Infrastructure in these industrial parks has been improving significantly to meet the international standards (Herbert 2015). For instance, today’s businesses can store their pending products in local supervised warehouses as long as they register 24 hours in advance (US Department of State 2014). Another noticeable point is that companies in industrial parks tend to specialize in the same industry. For example, Saigon Hi-Tech Park hosts 80 companies, including 31 foreign-invested businesses, with the total capital of up to $3.5 billion, accounting for 48% of FDI into the city (Vietnam Trade Office in the USA 2008). Specialized industrial zones create conditions for businesses to receive taxing incentives and legal support from the government. In a nutshell, Vietnam has a highly facilitating economic condition for foreign-invested enterprises to do business in the country.

As a member of WTO, Vietnamese government maintains an outward-oriented policy. Foreign-invested businesses in Vietnam have the right to import materials, produce, sell, distribute, and advertise their products in the country, with minimum performance requirements (US Department of State 2014). Vietnamese government has opened ownership of several sectors for foreign investors, including full ownership for banks in 2008 and distribution services in 2009 (US Department of State 2014). The limit on ownership for individual foreign investors was raised from 15% to 20% in 2014 (US Department of State 2014). The government also implemented incentive policies for foreign investment. For example, businesses investing in rural areas with the minimum scale of 500 workers and enterprises with capital of 6,000 billion VND and above can benefit from the lowest tax rate (Herbert 2015, US Department of State 2014). In short, the legal system in Vietnam allows foreign investors to enjoy a high level of business freedom, protection and incentives in the country.

In conclusion, Vietnam has good investment climate for foreign investors. In fact, Vietnam ranks in the first half (90 out of 189) of most favourable countries for business investment (World Bank Group 2016). This could be explained by its cheap labour, established economic conditions, and encouraging governmental policies.

  1. Elements that contribute to Vietnam’s attractiveness to foreign investors

Vietnam’s cheap labour, facilitating legal system, and established economic conditions with open stock market can be further explained by specific conditions of the country.

Vietnam has an abundant supply of cheap labour. According to US Department of State (2014), the level of minimum wage in Vietnam ranges from 2.7 million VND to 1.9 million VND per month. This rate varies by regions, with the figure for businesses in remote provinces significantly lower. This means that labour in provincial areas are cheaper, and investment in manufacturing companies at rural sites is highly attractive. Furthermore, collective bargaining of Labour Union does not have much power in Vietnam. The US Department of State (2014) summarizes that the level of activity of Labour Union in Vietnam showed a considerable decrease from 532 strikes in 2012 to 251 strikes in 2013. Moreover, the majority of these strikes were illegal, due to the legal requirement that at least 50% of employees must vote for the strike. This implies that Vietnamese workers do not have the tendency to go on a strike. The inference agrees with the typical characteristic of respecting authority of Vietnamese workers. In short, the cheap, manageable labour force is one of the most favourable aspects of Vietnam.

As a member of WTO, Vietnam maintains limited market entry barriers. In other words, foreign investors can access Vietnamese market easily, enjoying very low tax rates if they meet specific criteria. For example, imported goods and machinery used for domestic production that cannot be obtained locally are exempt from tax (US Department of State 2014). Furthermore, Vietnamese government has introduced tax incentives to encourage investment in priority sectors. Investment in modern, environmentally-friendly technology industry, and remote areas of the country with economic difficulty will enjoy the lowest tax rate and may even receive funding from the National High Tech Development Program (US Department of State 2014). These favourable taxing policies encourage a high volume of foreign investment into the country.

Vietnamese government has been extending its legislation to protect legal rights of foreign investors. A noticeable expansion is on property rights. According to US Department of State (2014), the Land-Law of 2003 has expanded to allow foreigners to conduct real estate transactions with land they legally own. Qualified foreign investors can even own apartments, constructions, etc. for production purposes, and lease land for a period of 50-70 years. Regarding intellectual property rights, Vietnamese policy makers revised the Intellectual Property Law in 2009 and passed several decrees on Administrative Sanctions for Industrial Property Infringement, with higher floor for fine on copyright infringement of VND 250 million for individuals and VND 500 million for institutions. In a nutshell, Vietnam has made considerable improvement in legal protection for foreign investors, and thus attracting more and more FDI into the country.

Vietnamese government has been developing partnership with international parties to encourage foreign investment. Vietnam and the United States have been discussing the Bilateral Investment Treaty (BIT) since 2008 (US Department of State 2014). In 5 October 2015, the two countries signed the Trans-Pacific Partnership (TPP), agreeing to address investment issues as a united trading community (MOIT 2016). The completion of TPP means a larger market for goods and services and lower tax rates for imported products (Boudreau 2015). This creates an even more friendly investment climate for foreigners interested in Vietnam. International collaboration is expected to improve the investment climate for foreigners in the country.

Last but not least, foreign investors in Vietnam not only enjoy an established infrastructure, but can also participate in an open stock market. According to US Department of State (2014), foreign investors in Vietnam have been able to partake in equitization process since 2011. Vietnam has established two stock exchanges, including Hanoi Stock Exchange (HNX) and Ho Chi Minh City Stock Exchange (HOSE). In April 2014, HNX had 376 listed companies with total market capitalization of $6.5 billion, and HOSE had 342 listed companies with total market capitalization of $14.7 billion. A trading floor was established for unlisted public companies in 2009, and registered 176 companies with total market capitalization of $1.4 billion in April 2014. The officially open stock market offers foreigners a creditable source of information to make investment decisions (Vo 2011).

In conclusion, cheap labour, favourable governmental policies (with easy market access, legal protection, and international collaboration) and open stock market are typical characteristics that make Vietnam an increasingly attractive destination for foreign investors.

  1. The potential effects of these to the growth of the Vietnamese economy

According to Pham (2016), elements of economic growth are comprised of investment, capital, human capital, technology, infrastructure, and so forth. Foreign investment not only contributes directly to Vietnam’s GDP, but also promotes the development of other factors in the economy.

Foreign investment contributes a significant part to Vietnam’s economic growth. According to US Department of State (2014), FDI of Vietnam has grown up to $10-$12 billion per annum in the last five years, with contribution to total GDP increasing from 13% to 18% during this period. In 2013, foreign-invested exports accounted for up to 67% of Vietnam’s export, showing an increase of 30% in comparison with the figure in 2000 (US Department of State 2014). This indicates an increasingly vital role of FDI to the development of Vietnam’s economy.

FDI gives Vietnam access to funding that otherwise is unavailable. According to US Department of State (2014), FDI accounted for 23% of Vietnamese total capital in 2013. Thanks to the open stock market, foreigners have been able to access information about Vietnamese companies to make better investment decisions. This promotes foreign investment and grows the economy.

Foreign investors also contribute to training more skilled and productive workers. In particular, 6,000 managers, 25,000 engineers, and 300,000 employees have been trained, with a large proportion partially abroad. This upgrades Vietnamese human capital and in turns fuels economic growth.

Vietnam views foreign investment as an important element in its development strategy. By encouraging investment in high-tech and rural sectors, the government aims at encouraging technological progress of the country, by attracting technology that otherwise is not available. Foreign investment in underdeveloped areas also helps develop the infrastructure, laying foundation for more economic development for these regions. In short, foreign investment contributes significantly to the long-term development of Vietnam’s economy.

Although there have been no significant foreign investment in infrastructure, FDI encourages Vietnamese government to develop the nation’s infrastructure itself. Most noticeably, Vietnam has developed a system of 270 industrial zones throughout the country (US Department of State 2014). Although the development of infrastructure may increase government spending and in turns decrease Vietnam’s GDP, in the long run, such development will facilitate business activities of companies and grow the economy.

By being open to foreign investment, Vietnam is adopting globalisation. According to Garnett et. al (2011), globalised economy has significantly higher growth rate. By attracting a high volume of foreign investment, Vietnam has been able to accelerate its economic growth.

REFERENCES

Boundreau, J 2015, The biggest winner from TPP trade deal may be Vietnam, Bloomberg, viewed 27 March 2016, <http://www.bloomberg.com/news/articles/2015-10-08/more-shoes-and-shrimp-less-china-reliance-for-vietnam-in-tpp>.

Eldenburg, LG, Brooks, A, Oliver, J, Vesty, G & Wolcott, S 2011, Management accounting, 2nd edn, John Wiley & Sons Australia, Australia.

Herbert, A 2015, The guide to understanding Vietnam’s industrial zones, Vietnam Brief, viewed 27 March 2016, <http://www.vietnam-briefing.com/news/the-guide-to-understanding-vietnams-industrial-zones.html/>.

McIntyre, S 2013, Channel as collateral: Hong Kong firm gives handbag-backed loans, Reuters, viewed 27 March 2016, <http://www.reuters.com/article/us-hongkong-handbags-idUSBRE98807B20130909>.

Ministry of Industry and Trade of the Socialist Republic of Vietnam 2016, Ký kết xác thực lời văn Hiệp định Đối tác xuyên Thái Bình Dương, MOIT, viewed 27 March 2016, <http://tpp.moit.gov.vn/>.

Pham, TTT 2016, ‘Saving, investment and financial system’, course notes from ECON1192 Macroeconomics 1, RMIT University Vietnam, Vietnam, viewed 27 March 2016, Blackboard@RMIT.

US Department of State 2014, 2014 investment climate, viewed 27 March 2016, <http://www.state.gov/documents/organization/229305.pdf>.

Vietnam Trade Office in the US 2008, Labour in Vietnam, viewed 27 March 2016,

<http://www.vietnam-ustrade.org/index.php?f=news&do=detail&id=35&lang=english>.

Vo, XV 2011, Foreign Ownership in Vietnam stock markets – an empirical analysis, Research Gate, viewed 27 March 2016,

<https://www.researchgate.net/publication/50992601_Foreign_ownership_in_Vietnam_stock_markets_-_an_empirical_analysis>.

Welker, J 2012, Loanable funds vs Money Market: what’s the difference?, viewed 28 March 2016, <http://welkerswikinomics.com/blog/2012/05/08/loanable-funds-vs-money-market-whats-the-difference/>.

World Bank Group 2016, Ease of doing business in Vietnam, viewed 27 March 2016, <http://www.doingbusiness.org/data/exploreeconomies/vietnam/>.

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