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|The prime minister has underlined how central FDI is to the country’s growth Photo: Le Toan|
Prime Minister Nguyen Xuan Phuc told last week’s conference reviewing activities of the Ministry of Planning and Investment (MPI) in 2017 and outlining plans for 2018 that MPI must help the government devise more favourable policies to lure more high-quality foreign direct investment (FDI) as soon as possible this year.
“This is aimed to grab regional and global FDI waves currently surging into markets that have favourable conditions, including Vietnam. We can see such waves from China, South Korea, Japan, and Europe thanks to tariffs recently slashed by free trade agreements,” PM Phuc said.
“Many people and experts, especially many National Assembly members, are belittling the role of FDI, saying that the economy is too heavily reliant on it,” he went on to say. “However, without FDI, how would the economy have been able to develop as quickly as it is currently doing? And how would the country’s scientific and technological achievements have been possible without FDI?”
“FDI is a big part, maybe even the mainstay of the economy. It has been playing a very important role in the development of Vietnam’s exports, job generation, technological transfers, and management skills,” PM Phuc added.
A few weeks ago, Party General Secretary Nguyen Phu Trong said at a government-led teleconference, “The FDI sector is an indispensable part of the national economy. It is to be encouraged and given favourable conditions for development.”
Over the past 25 years, FDI firms’ share of Vietnam’s GDP rose from 2 per cent in 1992 to about 23 per cent last year. Currently, they employ more than two million people and account for 25 per cent of total development investment capital, for more than 70 per cent of export turnover, and for 50 per cent of industrial production value.
Last year, $35.88 billion worth of FDI entered the economy, up 44.4 per cent year-on-year, including newly- registered capital ($21.3 billion, up 42.3 per cent), expanded capital of active projects ($8.4 billion, up 49.2 per cent), and share acquisitions ($6.2 billion, up 45.1 per cent). Total disbursed FDI hit $17.5 billion last year, up 10.8 per cent year-on-year.
Professor Nguyen Mai, chairman of the Vietnam Association of Foreign Invested Enterprises, told VIR that without FDI, the economy could not have reached the high annual growth rates of more than 6 per cent over the past several years, not to mention the rate of 6.81 per cent achieved last year.
“For example, Samsung has turned Vietnam into a global smartphone producer. It made up nearly 25 per cent of the country’s total export turnover of $214 billion last year,” he said.
In 2017, Samsung’s total production value in the country hit about $55 billion, up 31 per cent year-on-year, with the firm’s total export turnover reaching $53 billion. Samsung is responsible for 5.43 per cent of Vietnam’s manufacturing and processing growth and 3.88 per cent of the country’s industrial production growth.
IFC regional manager Kyle Kelhofer also told VIR that without FDI, Vietnam’s economy would have failed to develop as quickly as it is currently doing.
“Over the past three decades, FDI has been a major driver of Vietnam’s economic development. Successive FDI and other key policies have deepened Vietnam’s global integration and translated into diversified exports and a large number of jobs,” Kelhofer said.
According to him, the challenge now is to further deepen these gains, increase spillover effects for all firms, and perform higher-value-added activities. Moving up the value chain and developing more sophisticated products would enable a more competitive and innovative business sector.
“This is why efforts to leverage more local linkages, spillover effects, skills, and innovation, as well as develop a strategy to attract next-generation FDI with higher value addition are all crucial to increase productivity and create better jobs,” Kelhofer said.
“We have great opportunities to attract the FDI flows, which is becoming stronger in 2018, though we would need to build a clearer strategy to lure more of it. We also need to select FDI more effectively, with a focus laid on big projects, multinational groups, and projects with advanced and environmentally-friendly technology,” Minister of Planning and Investment Nguyen Chi Dung said. “We would also need to boost the linkage of FDI and local firms to develop domestic enterprises, especially the currently weak supporting industries.”
Kelhofer said that most importantly, Vietnam must address the absence of robust supporting industries – a key bottleneck to growth. “This can be achieved, as suggested by a World Bank study on small- and medium-sized enterprise linkages released in 2017, by taking a number of key steps. These include strengthening the institutional framework and inter-ministerial co-ordination, facilitating information flows and contacts between domestic and foreign-owned firms, providing targeted support to strengthen domestic suppliers – including use of behavioural incentives – and reducing horizontal constraints on the business environment,” Kelhofer said.