Private sector development to enhance FDI efficiency

Private sector development to enhance FDI efficiency

By Dr. Phan Huu Thang

Success is the major achievement of foreign direct investment (FDI) attraction in Vietnam over the past 33 years while shortcomings are still a minor aspect. However, if those shortcomings are not rectified early, FDI attraction over the coming time, for the immediate future to 2030, will not continue to fare as well as expected. In discussion over the theme “Continuing reform to attract FDI successfully,” besides necessary contents regarding shortcomings in FDI attraction over the past time, the author would like to deal with two contents: (1) Existing shortcomings which need urgent rectification; and (2) Development of the private sector to enhance the quality and efficiency of FDI in Vietnam.

In the conference held to review 30 years of FDI attraction in Vietnam by the Ministry of Planning and Investment in October 2018, the following shortcomings in FDI attraction were pointed out at varying degrees but they have yet to be rectified.

Supporting industries have not yet caught up with the growth and demand of FDI; the protection of the environment from the impact of investment and production activities by FDI enterprises is still under threat and faces insecurity; national defense, economic security and social order are facing negative foreign investment activities; hi-tech attraction is not yet successful; cooperation and alliance between local and FDI enterprises are not close, and possibly non-existent, so to say; and the legal system and policies for investment, business, land and construction are asynchronous and constantly amended and supplemented, eroding the competitiveness of the investment environment.

The main reasons for these shortcomings are summarized as follows:

The development of supporting industries has yet to catch up with the growth and demand of FDI enterprises, as Vietnamese enterprises are mainly micro, small and medium businesses short of capital and technology, so they cannot meet the requirements to produce components and parts of the main products, especially those which require hi-tech investment; the training of high-quality manpower for the supporting industries is still inadequate and weak; and though policies to develop the supporting industries are available, enterprises are generally let to manage by themselves. Private enterprises qualified for spearhead areas of the supporting industries have not yet been selected to develop links in the global supply chain in Vietnam. Though State-owned enterprises hold huge assets of the country, most of them are unable to build links in the global supply chain in Vietnam.

Environmental disasters, which have been bigger and more dangerous one after another (Vedan and Formosa are typical examples), are due to loose, irresponsible State management in all phases from investment assessment to equipment and technology import and coordination among ministries and sectors and between them and local authorities. 

National defense, economic security and social order will be at risk if illegal and shadow investments with the collusion of Vietnamese businesses continue, with loose management of State agencies. Foreign laborers, especially unskilled Chinese workers, have entered Vietnam in droves, competing with local labor.

Hi-tech attraction is not strong because supporting industries have not been adequately developed. Foreign hi-tech companies with large-scale investments in Vietnam like Samsung, Intel and LG cannot find Vietnamese enterprises qualified for participation in their production chains. In addition, most FDI enterprises are very small, with those capitalized at less than US$10 million accounting for up to 89.5% of the total (2017 figures). Obviously, with such small capital, they cannot have high technology for transfer to their Vietnamese partners.

Alliance between FDI enterprises and local busiensses is not close enough, and possibly non-existent, so to say. The underdevelopment of the supporting industries, the majority of 100% FDI enterprises (accounting for up to 80% of FDI enterprises) and the low added value made by Vietnamese enterprises are clear evidences for the lack of alliance.

Private sector development for better FDI efficiency

Why is the private sector mentioned in FDI discussion?

Vietnam must have really strong local enterprises to have a self-reliant economy. This poses an urgent need, that is the attraction and use of FDI in the next phase must bring about qualitative efficiency, meaning that the value of the production chain in Vietnam must belong to Vietnamese enterprises. Meanwhile, the private sector currently has a dominant presence in the economy, with some 800,000 enterprises operational as of October 2020, but over 95% of them are micro, small and medium busiensses. Therefore, the concentration of all resources available (capital, including land, high-quality manpower, incentives and so on) to develop the private sector economy is an urgent need for FDI attraction in the next phase. If private enterprises remain micro, small and medium, lack capital and technology, and still face administrative troubles, Vietnam will not have sufficient enterprises big and strong enough to be able to ally and partner with foreign enterprises so as to master each area and each industry and trade in the economy. If the situation prolongs, Vietnam will still be a vague shadow in the global supply chain with insignificant value gained though the country can attract much FDI capital.

So, Vietnam must change her thinking about and the method for FDI attraction in the new phase, or the new approach to FDI so to say, that is attracting FDI in pace with the development of local enterprises.

With this approach, in the next phase, Vietnam should focus on developing spearhead enterprises in areas and industries which the country need FDI attraction. Those enterprises will be the pioneers, with the specific task of allying and cooperating with foreign enterprises in investment, production and participation in the global supply chain in Vietnam. There should be plans to develop a specific number of Vietnamese enterprises annually by industry and geographical area for investment cooperation with foreign enterprises.

In this regard, it needs special attention to the development of private enterprises, as the role of the private sector in FDI attraction in the past was vague. Specifically, in the initial stage of the open-door policy from 1987 to 2005, the participation of private enterprises in foreign investment activities was not given due attention. As a result, 100% foreign investment gradually became the main investment form among FDI enterprises.

In the initial phase of international economic integration, from 2005 to 2013, FDI attraction was “foreign oriented” as the law encouraged and created favorable conditions for FDI in Vietnam. The 2005 Investment Law opened the door wide to foreign investment, while incentives and measures to encourage Vietnamese enterprises to ally with foreign partners were not clear enough to support the alliance.

Since 2014, Vietnam has paid attention to local enterprises. The freedom for people and enterprises to do business in industries and trades not banned or required conditions by the law has been legalized. However, there are still no concrete measures to promote and encourage local private enterprises to expand cooperation with foreign enterprises.

In 2017, to enhance the role and the responsibility of private enterprises, the Government issued Resolution 98/NQ-CP dated October 3, 2017 on the action program to implement the Party’s Central Committee’s Resolution 10-NQ/TW dated June 3, 2017 on the development of the private sector economy to an important driver of the socialist oriented market economy. Later, the Politburo issued Resolution 50-NQ/TW dated August 20, 2019 on foreign investment. These are two important documents, which need coordination for synchronous implementation to rectify the shortcomings in FDI attraction and to develop the private sector economy for alliance with FDI to bring about the best benefit for the country.