A new FDI development model is needed to
kick-start Vietnam’s economy and act as a guiding hand to champion the nation’s
socio-economic development, writes Professor Nguyen Mai, former deputy chairman
of State Commission for Cooperation and Investment (now Ministry of Planning
and Investment).
Foreign
direct investment (FDI) currently occupies 23-25 per cent of Vietnam’s
development investment capital.
This is more than 45 per cent of total industrial production value, 60 per cent of total export value, nearly 19 per cent of budget revenue and 19 per cent of gross domestic products and underscores its importance to the national socio-economic development strategy for 2011-2020.
A modern development model is needed to improve FDI socio-economic benefits for all.
Four orientations in attracting FDI
The modern growth model transformation will place greater demands on FDI. First, ameliorating FDI to generate better quality and higher efficiency, achieve sustainable development and develop a low-carbon economy, modernise technology and build up a contingent of skilled workforce is key.
The quality and efficiency of FDI projects needs to be weighed based on the country’s socio-economic development targets and those of each economic sector, region as well as locality.
Sustainable development and developing a low-carbon economy requires investors to meet environmental standards and pump money into world-class waste-water treatment facilities to meet these requirements.
Modern technology requires investors to import cutting-edge equipment and facilities for each project, while hi-tech projects must put a rational investment portion into research and development.
Quickly shifting from low-cost to a skilled workforce is a single arrow reaching two targets - labour intensive industries, particularly services demanding less investment amounts and hi-tech and modern services areas attracting FDI with the commitment to build up managers, engineers and workers with skills on par with global standards.
Second, innovating FDI policies means shifting from attracting FDI into improving FDI with emphasis placed on hi-tech and modern service projects which help train human resources.
Policies should stimulate connectivity between trans-national companies (TNCs) and local enterprises. If local businesses have grown stronger the government should give instructions to form foreign joint ventures to promote FDI.
Third, continuing attracting FDI for enterprises to muscle up supporting industries development and appreciating FDI from developed countries and leading TNCs from Organization of Economic Cooperation and Development (OCED) is necessary.
In the meantime crafting suitable measures to lure investment from newly emerging economies like China, India, Russia, Brazil and oil-rich Gulf countries is needed. Fourth, attracting FDI into different territorial areas, localities, industrial parks (IPs) and economic zones (EZs) is necessary. Big cities wooing hi-tech and modern services projects and training quality human resources is key.
The occupational structure at IPs must be formed to promote natural and social advantages of each region while occupational structures at EZs and hi-tech parks must be shaped capitalising on cutting-edge technology of each project. Based on these new orientations it is important to revise legal systems to match the country’s growth model.
This is more than 45 per cent of total industrial production value, 60 per cent of total export value, nearly 19 per cent of budget revenue and 19 per cent of gross domestic products and underscores its importance to the national socio-economic development strategy for 2011-2020.
A modern development model is needed to improve FDI socio-economic benefits for all.
Four orientations in attracting FDI
The modern growth model transformation will place greater demands on FDI. First, ameliorating FDI to generate better quality and higher efficiency, achieve sustainable development and develop a low-carbon economy, modernise technology and build up a contingent of skilled workforce is key.
The quality and efficiency of FDI projects needs to be weighed based on the country’s socio-economic development targets and those of each economic sector, region as well as locality.
Sustainable development and developing a low-carbon economy requires investors to meet environmental standards and pump money into world-class waste-water treatment facilities to meet these requirements.
Modern technology requires investors to import cutting-edge equipment and facilities for each project, while hi-tech projects must put a rational investment portion into research and development.
Quickly shifting from low-cost to a skilled workforce is a single arrow reaching two targets - labour intensive industries, particularly services demanding less investment amounts and hi-tech and modern services areas attracting FDI with the commitment to build up managers, engineers and workers with skills on par with global standards.
Second, innovating FDI policies means shifting from attracting FDI into improving FDI with emphasis placed on hi-tech and modern service projects which help train human resources.
Policies should stimulate connectivity between trans-national companies (TNCs) and local enterprises. If local businesses have grown stronger the government should give instructions to form foreign joint ventures to promote FDI.
Third, continuing attracting FDI for enterprises to muscle up supporting industries development and appreciating FDI from developed countries and leading TNCs from Organization of Economic Cooperation and Development (OCED) is necessary.
In the meantime crafting suitable measures to lure investment from newly emerging economies like China, India, Russia, Brazil and oil-rich Gulf countries is needed. Fourth, attracting FDI into different territorial areas, localities, industrial parks (IPs) and economic zones (EZs) is necessary. Big cities wooing hi-tech and modern services projects and training quality human resources is key.
The occupational structure at IPs must be formed to promote natural and social advantages of each region while occupational structures at EZs and hi-tech parks must be shaped capitalising on cutting-edge technology of each project. Based on these new orientations it is important to revise legal systems to match the country’s growth model.
Revising
incentive policies
From
the Law on Foreign Investment in 1987 to the Law on Enterprises and the
Investment Law 2005, Vietnam bestowed tax reductions and exemptions on FDI
projects based on sectors and localities.
In fact, tax breaks help lure FDI but work differently for investor groups and localities. Investors being small- and medium-sized enterprises appreciate tax intensives, while big investors with long-term visions need a transparent, open and stable legal environment parallel to good technical infrastructure and quality human resources. Tax breaks worked perfectly well in areas with auspicious natural conditions, but were less charming in highland areas with poor infrastructure.
Many localities overused investment incentives while ignoring socio-economic benefits in their localities. In some locations the provincial authorities had to borrow from investors to pay land acquisition costs without knowing whether budget revenue after projects got rolling would be enough to pay off the debt.
If more incentives come, can new FDI bolster budget collections and improve community welfare?
Some international studies warned governments racing to ramp up investment incentives have become a global issue and there was a need to rationalise regulations on incentives, thus avoiding the overuse of incentives distorting this preferential mechanism.
Besides tax incentives, investment incentives also cover financial and non-financial preferences. Most popular are government subsidy packages, low-cost credit, credit insurance and government playing the role of stakeholder. Developed countries mainly apply financial incentives and several ASEAN countries have scaled up usage of financial incentives in some recent years.
In Vietnam, just hi-tech projects and projects using build-operate-transfer (BOT) and build-transfer (BT) investment models honoured financial incentives.
Non-financial incentives include use of infrastructure and services at competitive costs, priority in choosing markets and promises to meet investors’ demands for foreign currencies.
The right to choose FDI
State management agencies need to better handle the rights an investment recipient country gets. Investment and particularly FDI is closely linked to interests and interest sharing. Foreign investors jumped into Vietnam chasing profits and Vietnam attracts FDI to materialise socio-economic development targets.
While investors have the right to choose countries and localities to pour their investment, including the right to move a factory or business from one country to another, investment recipient countries get the right to choose projects, investors, promote or restrict foreign direct investment.
Regrettably, in many locations management authorities of IPs and EZs did not fully exercise their rights and lost the initiative with investors’ designs.
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