Foreign direct investment reality and need to build new strategy

Viet Nam lures foreign investment from 130 countries and foreign with total registered capital of more than US$340 billion by the end of 2018. Graphics by VGP

As Viet Nam is transforming economy, there remain a number of weaknesses, including limited infrastructure, high rate of untrained workforce, and incomprehensive legal framework. Thus, the introduction of preferential FDI policies aims to make up for the weaknesses.

At present, preferential FDI policies are specified in the Law on Investment (2014), the Law on Corporate Income Tax (revised in 2013), the Law on Import-Export Tax (2016), Decree No. 118/2015/ND-CP of the Government detailing the implementation of the Law on Investment, Decree No. 123/2017/ND-CP regulating collection of land use fees, land rent and water (sea) surface rent, Decree No. 57/2018/ND-CP on incentive policies for enterprises investing in agriculture and rural development, Law on non-agricultural land use tax (2010) among others.

Businesses operating in Viet Nam are entitled to preferential tax and financial policies, including import tax reduction/exemption, corporate income tax reduction/exemption.

Important criteria for preferential level calculation include (i) the location of investment projects (in disadvantaged areas or some economic and high-tech industrial parks),  (ii) investment sectors specified by law, (iii) number of jobs created (for example a project creates at least 500 jobs in rural areas), (iv) large-scale project with total investment capital of at least VND 6 trillion and meeting other requirements.

However, the purposes of Viet Nam’s preferential FDI policies still remain scattered and some are overlapping.

Structure off foreign investment models and top 10 foreign investors in Viet Nam. Graphics by VGP

By reducing tax and diversifying forms of preferential tax, foreign investment inflows to Viet Nam have kept rising over years.

By the end of 2018, Viet Nam was home to 29,792 projects with accumulated investment capital of over US$340 billion. In 2018 alone, the disbursed volume of FID rose 9.1% from 2017 to US$19.1 billion.

The FDI sector has played an increasingly important role in the national economy over the last three decades.

The sector accounted for 23.4% of the country’s total investment capital while its export value increased by 12.9% to US$175.5 billion  in 2018.

Today, Viet Nam is an open economy with the total volume of trade in goods and services/GDP reaching 208.6%, indicating the fact that the country has fruitfully tapped domestic potential and utilized the global market.

The rising GDP share of the sector has contributed to shifting economic structure towards industrialization.

Between 2010-2018, industry and service respectively grew 6.9% and 6.3% on average.

The GDP share of agriculture sector fell to 16.7 in 2017 from 21.6% in 2005, the GDP share of service sector rose from 40.3% in 2005 to 43.8% in 2017, and the GDP share of industry sector picked up to 39.5% in 2017 from 38% in 2005.

The workforce in the FDI sector soared to 4,207,400 in 2017 from 358,500 (7.8% of the total workforce) in 2000.

Limitations

Viet Nam is deploying high-level preferential policies to attract investment projects in agriculture, farm produce processing, software production, and renewable energy.

However, foreign investment in agriculture sector, which makes up 15.34% of the country’s GDP, remains modest and only accounted for nearly 1.1% of the total foreign investment inflows in 2017.

The majority of FDI flowed to processing-manufacturing and real estate, making up 75% of the total registered capital in 2017.

Foreign investment in remote areas only accounted for 4.7% in 2017 despite many incentives have been introduced.

In addition, technological transfer from FDI enterprises to domestic enterprises remains modest while pricing transfer is still a challenge.

Top foreign-invested sectors. Graphics by VGP

It is widely acknowledged that the 4^th industrial revolution will produce profound changes to the global economy.

Domestically, the country’s growth remains unstable and unsustainable while Viet Nam set ambitious goal to become a high middle-income country.

To avoid the middle-income trap and take advantages of the sign free trade agreements, Viet Nam needs a new selective strategy in luring foreign investment.

The new strategy must figure out priority sectors and domains to provide a guide to active foreign investment attraction.

The Government needs to reduce incentives and overlapping of legal regulations while doubling efforts to improve the business environment and quality of infrastructure.

Poverty reduction goals should be financed by the State budget instead of calling on foreign investment through preferential policies.

Only profit-making businesses should be offered incentives.

The country also needs to reform vocational training system in a bid to raise the quality of workforce to meet the requirements of the all economic sectors, including the FDI one.

A system for evaluation of policies should be introduced to supervise and measure the effectiveness of policies./.

By Quang Minh