impacts of fdi in vietnam

IMPACTS OF FDI IN VIETNAM 1988-2007

IMPACTS OF FDI IN VIETNAM 1988-2007 REPORT

HCM INTERNATIONAL UNIVERSITY 1/25/2008


TABLE OF CONTENTS

I. INTRODUCTION ............................................................................................................................................................ 3

II. RECENT TRENDS AND DEVELOPMENTS IN FDI IN VIET NAM ................................................................ 3

III. THE IMPACT OF FDI ................................................................................................................................................ 11

THE IMPACT OF FDI ON EMPLOYMENT AND HUMAN RESOURCES ............................................................................... 12

THE IMPACT OF FDI ON INDUSTRY .................................................................................................................................. 14

THE IMPACT OF FDI ON TECHNOLOGY ........................................................................................................................... 16

THE IMPACT OF FDI ON FOREIGN RESERVE .................................................................................................................... 20

III. ATTRACT MORE FDI ...................................................................................................................................................... 22

VI. CONCLUSIONS ......................................................................................................................................................... 23


I. INTRODUCTION

Since the introduction of doi moi (renovation) economic reforms in 1986,

Viet Nam‘s economy has been among the fastest growing economies in the

region. Its economic structure reflected an increasing share of industry and

services while the share of agriculture declined. Viet Nam has been successful in

poverty reduction strategies and has been able to ensure rapid growth with

relative equity. Among the factors that led to this success, foreign direct

investment (FDI) has played a crucial role, providing Viet Nam‘s economy with its

relatively scarce factor, capital, and representing an extremely important

instrument for integration in the world economy, especially at the regional level.

This paper attempts to analyze the recent developments in FDI flows to

Viet Nam, particularly its impact on Viet Nam‘s economy and the economic,

political, and institutional weaknesses that must be faced in order to ensure a

future capacity to receive more foreign capital and to build a system able to

realize more of the potential benefits of foreign direct investment. Particular

attention has been given to the regional dimension of these issues because of

the great historical importance of regional partners for Viet Nam, especially

before the Asian crisis, and because of the ASEAN Free Trade Area‘s (AFTA)

accession path that represents an important stage in Viet Nam‘s further

integration in regional production networks.

This paper is organized as follows: Section II discusses FDI developments

and trends, drawing particular attention to the effects of the Asian crisis on

capital flows. Section III considers the impact of FDI on different aspects of Viet

Nam‘s economic development. Section IV examines different aspects of the

business environment, policy regimes and trade-related issues, and their effects

on Viet Nam‘s FDI inflows and impacts. Section V discusses AFTA and Viet Nam‘s

accession chedule, and tries to contribute to a better understanding of the

changes occurring in the regional comparative advantages of ASEAN economies

with production specialization. The last section provides conclusions underlining

the altered postcrisis opportunities as threats for Viet Nam‘s development, and

the consequent policy recommendations regarding FDI-related issues.

II. RECENT TRENDS AND DEVELOPMENTS IN FDI IN VIET NAM

Attracting foreign investment has been an integral part of the

Vietnamese reform process since the late 1980s. Since the Law on Foreign

Investment (LFI) was approved in 1988 there has been a substantial inflow.

According to the Ministry of Planning and Investment, from that time to the end

of 2003, the Vietnamese economy attracted total investment capital of about

US$40.8 billion in terms of commitments, while the total realized capital was

US$24.6 billion. Up to the end of 2003, investors from 64 countries and territories

had invested in Viet Nam, but Asian economies accounted for the major part of

these capital flows. Singapore is the principal foreign investor with 288 projects

and $7370 million of registered capital; followed by Taipei,China (1,086 projects

and $5998 million); Japan (418 projects and $4480 million); Republic of Korea


(henceforth Korea) (662 projects and $4161 million); and Hong Kong, China (288

projects and $2975 million). These top five investor economies account for 61

percent of total FDI commitments in the period 1988-2003. Countries of the

Association of Southeast Asian Nations account for 25 percent of the total

investment, mostly because of Singapore‘s capital. However after the signing in

July 2000 of the US-Viet Nam Bilateral Trade Agreement, investment from

countries such as France, Netherlands, and United States has been increasing.

Meanwhile, FDI from the United Kingdom is principally connected to investments

of the 1990s in the oil and gas sector (Figure 1).

During these years Viet Nam‘s economy was able to attract foreign

investment in all sectors. The oil and gas sector was where FDI was most focused

during the first half of the 1990s, and up to the end it absorbed 8 percent of the

total FDI in Viet Nam. The industrial sector accounted for the most important

share of the capital inflows over the full decade: heavy industry for 21 percent,

light industry for 13 percent, and food industry for 6 percent of the total

registered capital. Another important role in attracting FDI was played by real

estate services, which absorbed the highest amount of FDI within the tertiary

sector. The share of agriculture, forestry, and fisheries was only a small part of the

total, though it is slowly increasing (Figure 2). All 61 provinces of Viet Nam have

attracted FDI but investors have so far located their investments mostly in urban

areas where they can take advantage of more developed infrastructure. Ho Chi

Minh City and Hanoi accounted for 26 and 19 percent, respectively, of the total

FDI absorbed by Viet Nam in 1988-2003. Apart from these two principal


Vietnamese cities, other areas attracted high amounts of FDI, especially in the

southeast. The provinces of Dong Nai, Binh Duong, and Ba Ria–Vung Tau

absorbed another 29 percent of total FDI, far more than the other principal

northern provinces of Hai Phong, Lam Dong, and Hai Duong, which absorbed just

7 percent.

Central Viet Nam attracted only a very modest amount of FDI, mostly in

Quang Ngai province. From these data a dualistic result is evident: 74 percent of

the total amount of FDI absorbed by Viet Nam in the last 15 years was invested in

only five of the 61 regions composing the Vietnamese state (Table 1).

T

o

a

t

t

r

a

c


t inve To attract investment with limited, Viet Nam has developed a system of

industrial zones. Up to the end of 2002, 76 industrial zones have been built in

different areas of the country. Among them 17 zones have been developed by

joint ventures (JVs) and one by a 100 percent foreign-owned enterprise. The

other 52 zones are Vietnamese-owned industrial zones. These zones have

attracted a high proportion of the total FDI in the country: 1,202 projects have

been approved for an amount of $9.4 billion, representing about 25 percent of

the FDI that flowed into Viet Nam up to 2002.

Viet Nam‘s LFI considers three forms of investment: business corporate

contract (BCC), JV, and 100 percent foreign-invested company. The LFI establishes

that for investments in the sectors of oil and telecommunications, the BCC form

must be applied. Joint ventures are required for a wide range of sectors such as

transportation, tourism, culture, port construction, airport terminals, and

explosives production. For projects regarding investment in the construction of

infrastructure, such as water and electricity supply, the law requires build-

operate-transfer contracts to be signed with the authorized state agency. Up to

the beginning of 2002, just six projects for a total amount of $1.2 billion had been

for this kind of contract. Meanwhile, BCC projects accounted for about 11 percent

of total inflows and for a minimal portion of the number of approved projects.

The projects under 100 percent foreign-owned enterprises account for 61 percent

of licensed projects and 33 percent of committed capital, while JVs account for 34

percent of licensed projects and 53 percent of committed capital. But the

tendency is for an increasing prominence of 100 percent foreign-owned projects.

Two motivations can explain this trend: the first is that after a period of

investigating and understanding the Vietnamese market, reliance on domestic

counterparts is becoming comparatively less important. Second, foreign investors

increasingly prefer the wholly owned form after learning about the difficulties of

operating with domestic counterparts. Furthermore, about 98 percent of JVs have

been made with Vietnamese state-owned enterprises (SOEs) (Doanh 2002). This

happened because these links permitted the foreign investors to benefit from the

SOEs‘ preferential treatment and because of the weakness of Viet Nam‘s

domestic private sector. The inefficiencies that foreign investors had to face in

carrying out projects with their local counterparts have contributed to the growth

of interest in 100 percent foreign-invested companies (Table 2).


Since 2001, the role of the Viet Kieu (Overseas Vietnamese) has been

slowly increasing. That year, the state officially committed to protect their

legitimate interests, encouraging them to keep close links with their native land.

In reality, things are still difficult and the capital flow from over 2.6 million

overseas Vietnamese is not comparable to the important resources People‘s

Republic of China has received from Hong Kong, China; Taipei,China; and other

Chinese sources. More important is the role played by remittances in recent

years. In 2001 the remittance flow was over $2 billion, and in 2002 it reached $2.4

billion, mostly to the Ho Chi Minh City area (EIU 2003a). In 2003, the Committee

of Overseas Vietnamese said remittances peaked at $2.7 billion, 60 percent of

which went to Ho Chi Minh City. Between 1988 and 2003, the total amount of

foreign capital inflows in Viet Nam was about $18.4 billion (Figure 3) (UNCTAD

2004).

A

n

a

l

y

z

i

n

g

t

h

e

d

a

ta, we can divide the FDI flows into three periods. Prior to 1994 the oil and gas

sector was the focus of FDI in Viet Nam, permitting growth in crude oil exports,

which represented the leading component of export growth until 1996. Since

1994, foreign investment expanded to a range of new sectors, first real estate and

then different industrial activities. The latter in particular received capital flows

from East Asian countries that were facing the boom preceding the 1997/1998

crisis as they sought new locations for their export production to face the rising

cost of their local workforce. Foreign investment flowing into Viet Nam during

these years played a very important role, not only in providing finance but also in

facilitating export market access, introducing new ideas and processes, elevating

skills and know-how, and proposing models that have been copied by domestic

investors (Figure 4).


After 1997 Viet Nam‘s economy experienced a sharp decline in FDI

disbursements. This is commonly supposed to be caused principally by the

slowing reform process. In supporting the relevance of the environment for

foreign investment as predominant over the impact of the Asian crisis, two

arguments are often underlined: that the decline in implementation of

investment commitments started before 1997, so the regional crisis made evident

problems existing prior to the crisis; and that after 1999, investments returned to

Korea, Malaysia, and Thailand but not to Viet Nam.

Masina (2002) argues that the causal nexus between the slowing pace of

doi moi and the decline in FDI flows has probably been overestimated.

Considering the data on FDI commitments

by sector it is evident that there was an element of speculative FDI in real estate,

as it dropped from $2.7 billion in 1995 and $3.3 billion in 1996 to $338 million in

1997. Subtracting these values from the total FDI commitments in Viet Nam

during the period 1995-1997 we can see that the decline in FDI is entirely

attributable to the real estate sector. In fact, the subtotals for the three years are

respectively $4.0 billion, $4.4 billion, and $4.1 billion. During the 1990s the real

estate sector was largely speculative and dominated by East Asian financial

groups. The slowdown of commitments of FDI in 1997 was the result of the

bubble‘s deflation in that sector. Moreover, analyzing the series regarding FDI

disbursements in Viet Nam in 1995-1996, and considering the elevated instability

of investments in the oil and gas sector because of the large size of this kind of

project, the total disbursement after subtracting the values of the real estate and

oil and gas sectors shows an increasing trend from $1.2 billion in 1995 to $1.7

billion in 1997. This confirms that before the crisis there was no evidence of a

decline in FDI in Viet Nam.


One element characterizing the precrisis period is that Viet Nam

attracted higher FDI than much larger Asian economies, which suggests the

presence of overinvestments or catch-up investments that could have

characterized this economy in the years before the crisis. This involved not only

real estate and the construction sector but also heavy industry as a result of

optimism about Viet Nam‘s domestic market based on relatively little

documented information. Comparing different Asian countries in 1997, Viet Nam

appears as an economy with an excessively high FDI as a percentage of gross

domestic product (GDP), raising suspicion that before 1997 there was

overinvestment in Vietnamese productive sectors (Figure 5).

This explanation of the FDI slowdown after 1997 is only partial. The

contraction of foreign investment was also due to the financial crisis and the

investment downturn that Asian economies in general had to face after 1997,

which is a main explanation of the sharp decline in Viet Nam from 1998 onward.

However, the crisis increased pressure to improve the investment climate for Viet

Nam to compete as a leading production location in the context of diminished

flows of investment funds.

It is only partially true that after 1999 investment has returned to other

Asian countries more than to Viet Nam. Considering the maximum amount of FDI

flows to selected Asian countries before the bubble burst, in the period 1999-

2001, only the Philippines was able to attract an amount of investments higher

than the peak its economy had achieved before the crisis. Malaysia in 1999 and

2000 showed a rise, about 50 percent, similar to Viet Nam‘s, but in 2001 it

registered a sharp drop after Kuala Lumpur, by imposing controls on short-term

capital flows, moved in a rather different direction from that favored by

international financial institutions. Indonesia also showed a sharp decrease of FDI

inflows after 1999, heavily affected by the volatile political and security situation.

Thailand was able to rapidly restore its investment attraction capability,

but overall it is not clear that capital returned to the area in general, and Viet

Nam represents an exception (Figure 6).


The more positive trend registered in Korea and Thailand is clearly

connected to acquisitions of local corporations after these countries liberalized

their markets in connection with conditions to receive loans from the

International Monetary Fund (IMF). In fact, conventional ―greenfield‖ FDI, where

new production capacity is created, actually sharply declined during that period.

After the crisis, cross-border mergers and acquisitions (M&A) were the main

engine of FDI flows. Mergers and acquisitions drove the corporate and bank

restructuring process in affected countries. All affected countries benefited from

increased M&A activity to varying degrees. Much of the FDI inflows received by

Korea and Thailand after the crisis were associated with M&A activity. Viet Nam

did not feel the need to speed up the pace of reforms because, even though

regionally well integrated, the economy exhibited a degree of resilience toward

the East Asian crisis and proved quite successful in maintaining macroeconomic

stability. The slow pace of reforms may have provided a countercyclical element

of stability in a period of international economical instability (van Arkadie and

Mallon 2003). Consequently M&A, even after 1999, played a marginal role in FDI

inflows to Viet Nam, in contrast to most other countries in the region. Viet Nam‘s

current business legislation is not very conducive to the establishment of strong

M&A activity: foreign investors may only acquire up to 30 percent of total shares

in a local company in Viet Nam if the company operates within one of the 35

approved business sectors, and must get the approval of the prime minister‘s

office before doing so.

According to the IMF (2002), between 1988 and 1998 about two thirds of

the disbursed and committed FDI in Viet Nam was from Hong Kong, China;

Japan; Korea; Malaysia; Singapore; Taipei,China; and Thailand. The crisis strongly

reduced and changed the investment outflows from these countries, and this

consequently caused the heavy decrease in total FDI to Viet Nam (Figure 7). The

decline of FDI inflows to Viet Nam in 1998 was mainly the result of a general


regional trend, but does not mean that national deficiencies regarding the

environment for investment did not play a role in generating discontent among

investors. Once the regional perspective

deteriorated and the total investment absorbed by the regional economies

registered a sharp decline, the difficulties of doing business in Viet Nam also

assumed more visibility as a reason for dissatisfaction among foreign investors.

Thus, an improvement of the investment climate through important reforms is

necessary for Viet Nam‘s economy to restore economic growth but, at the same

time, a serious analysis of changing comparative advantage in East Asia and of

the changing regional productive systems in the postcrisis environment is needed

to identify appropriate policies and medium and long-term strategies.

III. THE IMPACT OF FDI

THE IMPACT OF FDI ON THE ECONOMY GROWTH RATE

The foreign-invested sector is consolidating its important role in

Vietnam‘s economy. FDI has been an important supplementary source of funds

for gross national investment and improved the balance of payment for the past

years. According to recent studies, such as Freeman (2000), MPI (2003), Nguyen

Mai (2004), FDI sector is having an increasing share in GDP. This sector also helps

to strengthen production capacity and technological innovation in a number of

industries, international market penetration (in particular, increasing export

turnover), raising revenues for the States budget and generating employment,

etc. In addition, FDI enterprises enable technology transfer and their pressures

require domestic firms to renovate their technologies, and to raise production


efficiency. Managerial and working skills in FDI projects are also improved, which

is a positive and effective channel for spillover effects. The section below will

discuss the general role of FDI in the overall economy.

Vietnam pursued Economic Renovation (Doi Moi) program from a very

low starting point. Therefore, FDI is an important supplement to domestic capital,

so as to meet domestic investment demand. As depicted in Chart 4, the share of

FDI in national investment has fluctuated considerably, because of up and down

changes in FDI inflows on the one hand and changes in investment by domestic

investor on the other hand. In the period 1994-1995, the share of FDI in gross

national investment hit a record high level of 30 to 31 percent. After that, it

gradually decreased and in 2005, implemented FDI only accounted for 15.5

percent of gross national investment (Chart 4).

The share of FDI sector in GDP has been increasing over the last decade.

In 2004, FDI sector accounted for 15.2 percent of GDP, higher than that of about

6.4 percent in 199410. Besides, foreign-invested sector always has the most rapid

growth, making it the most economically vibrant sector so far. The growth rate of

this sector is always greater than the country average level

THE IMPACT OF FDI ON EMPLOYMENT AND HUMAN RESOURCES

Recently, FDI projects in Vietnam currently employ 730,000 labors,

accounting for only 1.5 percent of total labors in Vietnam, though higher than it

was in 1996 (0.7 percent). The underlying reason is that the presence of FDI is

mainly in capital intensive industries which use highly skilled labors. This may also

explain why the wage level in FDI sectors is, on average, twice as large as that

paid by domestic enterprise in the same industry. More importantly, these labors

are able to access to advanced technology, with good working disciplines, and

modern working methods. In particular, some Vietnamese specialists become

gradually capable of taking over the management of firms and modern

technology lines15. FDI also indirectly creates many jobs in service sector and


those have close linkages with FDI enterprise through providing raw materials,

intermediate products etc. However, official statistics on the employment

indirectly created by FDI sector in Vietnam through backward and forward

linkages are still unavailable. In analyzing FDI‘s impact on Viet Nam‘s economy,

another aspect of relevance is that FDI did not create as much employment as

expected. Despite their shares of GDP, total investment, and exports, foreign-

invested enterprises in 2000 accounted for only 2 percent of the total number of

people of working age in the labor force, according to Viet Nam‘s General

Statistical Office. Other studies report even lower shares. For example, McCarty

and Diep (2003) report estimates of FDI‘s share of total employment between

1991 and 2000 at 0.6 percent. In terms of contribution to total employment up to

2000, foreign-invested enterprises accounted for 6.4 percent of total labor in

industry and construction; 0.2 percent in agriculture, forestry, and aquaculture;

and 0.4 percent in service sectors (Figure 11).

The main reason why foreign investment does not create more

employment is reflected in the low labor requirements per unit of output

characterizing foreign-invested enterprises. This is fundamentally because labor

productivity is higher in foreign-owned enterprises (Quynh, Nguyen, and Bui

2002), and in destination sectors since Viet Nam started attracting foreign direct

investment.

Regarding the first point, in all sectors, labor productivity tends to be

higher among foreign-invested enterprises due to the more advanced

technology to which foreign enterprises have access and that characterizes their

production processes, but also because of the large amount of imported inputs

utilized by foreign firms. It is estimated that in 1999 imports by foreign-invested

enterprises accounted for 74 percent of the value of their turnover (Apoteker


2000) and for 1998, IMF (2002) reports a share of imports equivalent to 82

percent. Until the productive processes of foreigninvested enterprises in Viet

Nam involve mostly final stages of production, rather than assembling imported

parts and components, the general impact on employment will remain low.

Moreover, it dramatically reduces the effect on the balance of payments due to

the large share of exports from foreign-invested enterprises. The second cause

that strongly affected the potential impact of FDI on employment is the large

share of FDI projects that were carried out in capital-intensive industries such as

cars and motorbikes, cement, and steel instead of sectors characterized by more

labor-intensive production. Furthermore, FDI in agriculture played a very marginal

role among the general context of inward FDI, while agriculture still accounts for

about 25 percent of GDP and two thirds of employment (Figure 12). Up to the

end of 2001, industry played the major role in creating new jobs, accounting for

77 percent of total labor in the FDI sector. Agriculture, forestry, and aquaculture

reached only 10 percent and the rest is attributed to services and transportation.

During 2002, industry‘s share was 83 percent of the over 650,000 jobs created by

the FDI sector while agriculture‘s share was 10 percent and services, 7 percent. In

2001, light industries attracted the largest share, or 50.6 percent of the total labor

generated by the FDI sector. Light sectors, according to the Project Monitoring

Department of MPI‘s classification system, includes textiles, garments, footwear,

and industries producing consumption goods—industries often characterized as

more labor-intensive products than other industries.

THE IMPACT OF FDI ON INDUSTRY


1985

27.3

40.2

32.5

industry and

construction

agriculture -

forestry - f ishery

service

2005

40.09

21.76

38.15

industry and

construction

agriculture - forestry -

fishery

service

Ever since the Doi Moi reforms unfolded in the early 90s, Vietnam‘s

leaders have made industrialization and modernization the cornerstone of the

country‘s socio-economic development strategy… where, arguably,

―industrialization‖ is not confined to one particular economic sector but reads in

the broader sense of ―industrious‖.

The economic potential unleashed by the reforms delivered impressive

growth: over the 12 years 1991-2002, GDP rose by an average of 7.6 percent per

annum, in real terms. Industrial output led the charge with double-digit growth

rates (11.6 percent per annum over the same period). Faster still was the progress

recorded on the export front, driven by the successful forays of Vietnamese

manufactures in foreign markets?

As a result, Vietnam is today a vibrant, US$40 billion economy second

only to China in the Asia region in terms of pace of growth. It has become an

open economy, with total trade exceeding the domestic product. Industrial

exports that made up 13 percent of GDP in 1991 today account for over a third of

the creation of domestic economic value.

Increased exposure to international trade and investment has revealed

Vietnam‘s comparative advantage in light manufacturing: whereas heavy

industrial and minerals made up 70 percent of industrial exports in 1991 at a time

of limited economic interaction with the rest of the world, their relative

importance had subsided by the end of 2002 to 40 percent while light

manufacturing had risen over the period to 60 percent of industrial exports.

The economic structure is being changed progressively under the impact

of FDI. The industry‘s distribution and service‘s in the economy increased rapidly

while the distribution rate of agriculture-forestry-fishery was reduced

considerably. As the following illustrative exhibit:

The distribution of d industry to GDP increase from 27.3% to 40.09%,

service‘s increase from 32.5% to 38.5%and in agriculture-forestry-fishery

decreased from 40.2% to 21.76%


Also, the impact of FDI had changes the number of labor works in each

components of the economy. The quantity of people work in agriculture

decreased from 95% (1985) to 56.8% (Jul, 200%) and the one in service and

industry considerably increased from to 43.2%.

The more money from FDI invested to Vietnam, the more unemployment

rate decreased.

In conclusion, FDI has changed wholly, profoundly the Vietnam socio-

economy. At the position of a poor agricultural economy, Vietnam has been

developing more and more to become a developed industry economy.

THE IMPACT OF FDI ON TECHNOLOGY

Since 1986, a greater part of technology used in Vietnam was very

obsolete. The 1986 socio-economy reforms aimed to mobilize local as well as

foreign capital, technology, management skills to promote industrialization in

Vietnam. Thus, FDI was seen as the major potential source of updated technology

and skill to replace the old, obsolete one.


In general, newer technology was brought into Vietnam with FDI since

1988 had contributed to the production and improved the capital, especially

technology so that better satisfied the domestic and export demand. The

technology invested at least meet Vietnam‘s quality standards and some

International ones.

Between 1988 and 1995, 219 foreign invested projects had been

registered, including technology transfers, accounting for about 10% of total

projects.

The technology transfers had changed considerably and profoundly the

current Vietnam technology. Many very important strategic industries were born

by the presence of high technology, such as information technology, bio-

technology, electronic communication.

Moreover, instead of using electricity as the only energy resource,

Vietnam is develop more and more energy resources, for instance energy from

The sun, wind, nuclear.

Petroleum is the main source of commercial energy, followed by coal,

which contributes about 25 percent of the country‘s energy (excluding biomass).

Vietnam‘s oil reserves are in the range of 270–500 million tons. The World Bank

cites the lower bound of the range. Oil production rose rapidly to 403,300 barrels

per day in 2004, but output is believed to have peaked and is expected to decline

gradually. Vietnam‘s anthracite coal reserves are estimated at 3.7 billion tons. Coal

production was almost 19 million tons in 2003, compared with 9.6 million tons in

1999. Vietnam‘s potential natural gas reserves are 1.3 trillion cubic meters. In 2002

Vietnam brought ashore 2.26 billion cubic meters of natural gas. Hydroelectric

power is another source of energy. In 2004 Vietnam began to build a nuclear

power plant with Russian assistance.

Crude oil is Vietnam‘s leading export, totaling 17 million tons in 2002; in

2004 crude oil represented 22 percent of all export earnings. Petroleum exports

are in the form of crude petroleum because Vietnam has a very limited refining

capacity. Vietnam‘s only operational refinery, a facility at Cat Hai near Ho Chi

Minh City, has a capacity of only 800 barrels per day.

Several consortia have abandoned commitments to finance a 130,000-

barrel-per-day facility at Dung Quat in central Vietnam. Refined petroleum

accounted for 10.2 percent of total imports in 2002.

FDI had influenced deeply to the transportation and communication of

the socio-economy of Vietnam. Vietnam‘s transportation system is in need of


modernization and expansion. Ports are operating at only one-third of capacity.

Roads are in generally poor condition, and the underdeveloped railroad system

carries less freight than the inland waterways.

Motorcycles are more popular than buses. In an effort to improve bus

service, Hanoi plans to invite private companies to bid for operating rights for six

municipal bus routes.

Roads: Vietnam‘s roads extend over 210,000 kilometers, implying a

network density twice as high as Thailand‘s and Malaysia‘s. However, the

condition of the roads is generally poor; only 13.5 percent of the roads are

considered to be in good condition. Only 29 percent of the roads are tarred, and

road access is cut off to more than 10 percent of villages for at least one month

per year because of monsoons. In 2005 the construction of the 1,690-kilometer

Ho Chi Minh Highway, which eventually will link Hanoi and Ho Chi Minh City, was

still underway. The project, which is expected to cost US$500 million, is the largest

transportation project since the end of the Second Indochina War. Despite

government efforts to promote the use of buses, motorcycles remain the

preferred mode of local transport. There is one motorcycle for every seven

people. Poorer citizens rely on bicycles, while only the affluent can afford cars.

Railroads: Vietnam has six single-track railroad routes with a total length

of 3,260 kilometers.

The network‘s density is only about one-third the average for low-income

countries. The longest railroad line measures 1,730 kilometers from Hanoi to Ho

Chi Minh City and requires 32 hours to traverse on the Reunification Express. Of

the nation‘s inventory of rolling stock, 25 percent is not operational. Twenty-five

percent of the nation‘s operational rolling stock is more than 30 years old. Freight

traffic picked up in 2000 and 2001 following five years of decline. Vietnam needs

more than US$400 million between 2004 and 2009 to modernize its railroads. The

government plans to build two subway lines in Ho Chi Minh City by 2007. Project-

related costs are estimated at US$800 million.

Ports: The principal ports in Vietnam, listed from north to south, are

Haiphong, Quang Ninh,

Danang, Qui Nhon, Ho Chi Minh City, and Can Tho. Altogether, Vietnam

has seven international ports and five additional ports that specialize in

transporting oil and coal.

Country Profile: Vietnam, December 2005 freight volume is about 14

million tons annually, compared with only 4.5 million tons in 1993. However, total


traffic is only about one-third of capacity. Vietnamese ships carry only about 20

percent of the country‘s international trade, although plans exist to expand the

merchant fleet substantially.

Inland Waterways: Vietnam‘s inland waterways, primarily the Mekong

River and Red River systems, carry more freight than the railroads, and the

volume of freight is rising slowly. According to the World Bank, transportation

productivity via the inland waterways is 40 percent below the system‘s potential,

assuming proper maintenance, navigation aids, and dredging.

Civil Aviation and Airports: Vietnam operates 17 major civil airports,

including three international gateways: Noi Bai serving Hanoi, Danang serving

Danang City, and Tan Son Nhat serving Ho Chi Minh City. Tan Son Nhat is the

largest, handling 75 percent of international passenger traffic. Vietnam Airlines,

the national airline, has a fleet of 30 aircraft that link Vietnam with 19 foreign

cities. In 2004 Vietnam Airlines had 5 million passengers, up 25 percent from the

prior year, and management expects the number of passengers to reach 12

million by 2010. In November 2004, Vietnam Airlines announced that it would

purchase 10 Airbus A310–200 aircraft and continue negotiations for four Boeing

7E7 ―Dreamliner‖ aircraft. Vietnam Airlines‘ goal is to expand its fleet to 73 aircraft

by 2010. Beginning in 2006, Vietnam

Airlines will cooperate with American Airlines in international flights under

a codeshare agreement. Vietnam Airlines‘ code will apply to American Airlines

flights from the United States to Vietnam, Japan, and Europe. American Airlines‘

code will apply to Vietnam Airlines flights from Vietnam to Japan and Europe.

Pipelines: In April 1995, a 125-kilometer natural gas pipeline connecting

Bach Ho with a power plant near Vung Tau went into operation. With the

subsequent addition of compressors, the volume pumped rose to more than 1

billion cubic meters per year. In 2005 a 399-kilometer underwater pipeline, the

world‘s longest, began to carry natural gas onshore from the Nam Con Son basin.

The pipeline‘s anticipated capacity is 2 billion cubic meters per year, while the

basin has an estimated 59 billion cubic meters of natural gas reserves.

Telecommunications: The International Telecommunication Union rates

Vietnam‘s telecommunications market the second fastest growing in the world

after China. With rapid telecommunications growth leading to 4.9 million landline

telephones and 3.4 million mobile telephones as of mid-2004, Vietnam‘s

telephone penetration rate is still only 10 percent. As of mid-2004, Vietnam had

5.1 million Internet users, corresponding to 6 percent penetration. In 2000

Vietnam had about 600,000 personal computers, or 7.35 for 1,000 people. In 2003

Vietnam had 8.2 million radios, or 100.45 per 1,000 people. There were 65 AM


radio stations, 7 FM stations, and 29 shortwave stations. Also in 2003, Vietnam

had 3.6 million televisions, or 43.73 per 1,000 people. Television broadcast

stations numbered at least seven in 1998.

THE IMPACT OF FDI ON FOREIGN RESERVE

Asian governments, including Vietnam government have been

accumulating foreign reserves (largely United States securities) on a large scale, as

a result of maintaining fixed exchange rates or attempting to limit currency

appreciation in the face of a weakening US dollar.

The costs of FR:

First, ‗re-export‘ of capital inflows into foreign securities entails a real

resource transfer to foreigners when risk-adjusted returns on these assets are

lower than the risk-adjusted costs of external borrowing.

Second, domestic investment and consumption may be crowded out if

intervention results in higher interest rates and/or a lower exchange rate than

otherwise. Such crowding out necessarily occurs when the economy is at full

capacity, but it is less likely to be a concern where the economy has spare

capacity.

Third, resource misallocation costs can arise if the lower exchange rate is

unsustainable, due to excess investment in tradable goods production capacity.

Beside the benefits, FR also brings many losses to Vietnam. For instance,

another potential cost arises from the constraints of the ‗impossible trinity‘; that

is, the impossibility of simultaneously maintaining both a fixed exchange rate and

an independent monetary policy when capital is highly responsive to interest rate

differentials. Exchange rate targeting must entail some loss of monetary policy

autonomy unless capital mobility can be restricted.

To deal with the huge increasing in FDI into Vietnam and in order to

maintain fixed exchange rates and limit currency appreciation in the face of

weakening US dollar, Vietnam government tends to accumulate more and more

foreign reserve so that, the government can ensure that Vietnam economy runs

smoothly.


(Source: CIA WORLD FACT BOOK, www.indexmundi.com)

However, more expansionary monetary conditions have been associated

with increasing inflation rates in many Asian economies (Chart 12). This has

allowed a number of economies to emerge from an earlier period of actual or

near-deflation. That said, inflation may become more of a concern going forward

and tighter monetary conditions may be needed in some economies.

In conclusion, accumulating foreign reserve is the key to develop

Vietnam economy. But, it only strengthens the socio-economy of Vietnam if it‘s

run in the right way. Thus, the government plays an important role in setting up

the best policy for the development of Vietnam.


III. Attract more FDI

Attracting FDI is now one of very important tasks of Vietnam in this

golden era. The government issues a lot of policies and also reorganizes a lot of

things to attract more FDI to come to Vietnam nowadays, but there are a lot of

things need to be improved.

Firstly, the government should push more policies to attract more FDI

coming to VN, because this is golden period for developing Vietnam‘s economy.

Secondly, Vietnam has to improve itself a lot to keep these FDI and also make

Vietnam become a good point for investors to come in the future.

Nowadays, in the way to become a dragon of ASEAN, after joining WTO,

Vietnam are open more and more gates for outside investors from all around the

world. In attracting policies, we can see there are three big ways.

Firstly, keep marketing about Vietnam; show for the world its ―hidden

charm‖ that not only in culture, but also in economy. The biggest thing to market

about Vietnam is it geography location, Vietnam locates in a very good ocean

way, connect China, ASEAN, and India, with more than three thousands kilometers

ocean border. That‘s the very important location for trading and transporting.

And Vietnam now is one of the most stable politic places in the world, and every

businessman knows that stable politic with the right of possession is extremely

important. The last one, cost of nearly everything is lower than developed

countries in the world, cheap raw natural resources and labor; it‘s one of the main

reasons for outside corporations come here to invest.

Secondly, Vietnam also makes a lot of contracts and conferences with

other multi-national organization such as EDB, US, AESEAN-Japan, APEC, ASEAN,

ASEM, OECD, and MIGA-FIAS to hold more international relationships, and from

that point, will attract more FDI.

Thirdly, Vietnam also has to have a good procedure to help outside

investors come here to work effectively and efficiently. It‘s very important,

because if they come here and then know nothing more to do, or everything‘s a

mess, no one comes there and show them what to do in Vietnam, they will easily

go away.

And there are a lot of left problems for Vietnam to solve…

Some problems are not due to us, nowadays, some big corporations

have withdrawn a lot of money from Vietnam to invest other countries, and one

reason is that they diversify their portfolio. That is one of the thing we cannot

change.


But there are a lot of things we can change to improve our FDI figure.

About the government, there are some points we can show up. Firstly,

currency policy of Vietnam now is based on Dollar, and some of investors from EU

have said that we did not pay much attention to Euro, therefore they feel and face

to a lot of inconvenient conditions here. Vietnam is also somehow fluctuation in

FDI policies. For example, in December of 2003, government issued 2 decrees,

number 158 and 164 that related to VAT and income tax, FDI of Japan

immediately suffered. It went down sharply at that time, and when government

changed the decree, the FDI of Japan has gone up again. This example shows that

because of unstable in policies; the Vietnam government has missed a haft year

of FDI from Japan. The government is being criticized because of slow clearance

for FDI, if those bad administrations are still in Vietnam, the future of economy of

Vietnam will suffer. The last thing, recently, the minimum wage of Vietnam has

increased, it makes the cheap labor in here is less competitive with other

developing countries all around the world, it also did impact to FDI coming here.

The last big point is about Vietnam itself. Bad infrastructure, cost a lot in

transportation, it will reduce the chance to be invested of Vietnam. As everybody

yells nowadays, the cost of everything become too high. Vietnam are losing the

competitive cost due to this problem. Even the population is high, with cheap

labor, but Vietnam is still lack of skillful labor. Besides that, a lot of labor strikes

happen recently has influenced badly to reputation of Vietnam.

Anyway, to attract more FDI to Vietnam, the government has to do a lot, a

lot of things. Vietnam should attract more FDI with marketing about Vietnam,

helping investors coming here, issue more attracting policies. Another thing to

improve is the system of government, handle bad reputations, focuses more on

Euro. And the last thing is improve Vietnam as a whole, with infrastructure, reduce

cost, keep labor from striking, and improve skill of labors.

VI. CONCLUSIONS

Foreign direct investment has represented an extremely important

source of growth for the Vietnamese economy. However, its impact on

employment and its technological spillover effects have been limited. Even the

imposed local content requirements have not yielded the desired results.

The principal reason for these disappointing results appears to lie in the

underdevelopment of the private sector and its consequent inability to take

advantage of the presence of foreign firms through potential linkages.


Strengthening the private sector will involve a number of changes. It will

require creation of a more level playing field between state and private firms. It

will also depend on increasing access to land use rights and the capacity to use

them for collateral and for equity in investment ventures. In parallel, the private

banking system will need to broaden and deepen, supported by a credit culture

based on assessed risk and return. In general, a more transparent and complete

regulatory system will be required to establish a rule-based commercial

environment.

In part, the current situation reflects the policy emphasis on continuing

growth led by export of labor-intensive manufactures. The anti-import bias in the

trade regime may well have distorted the kinds of flows of foreign capital in favor

of capital-intensive industries anyway, especially since 1997. Meanwhile, AFTA is

progressively influencing the domestic market, with greater competition and

efficiency leading to lower prices and profits.

If Viet Nam continues reforms in governance, the financial sector, and

its legal system, regional integration through the AFTA and ASEAN Investment

Area could present the country with a much larger market in which to reveal its

comparative advantage and improve its productivity.


REFERENCES

1. Foreign Direct Investment in Vietnam Ha Thanh Nguyen, Hung Vo Nguyen and Klaus E. Meyer

2. VN FDI & Postcrisis Regional Integration - VITTORIO LEPROUX AND DOUGLAS H. BROOKS -

September 2004

3. Globalization, FDI and employment in Viet Nam - Rhys Jenkins

4. Tạp Chí Nghiên Cứu Kinh Tế (344/2007)

5. The impacts of foreign direct investment on the economic growth in Vietnam (Nguyen Thi Tue

Anh, Vu Xuan Nguyet Hong, Tran Toan Thang, Nguyen Manh Hai)

6. Vietnam Development Report 2007

7. Impact of FDI on poverty reduction in Vietnam

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