FDI and a transient economy

Vietnam has opened her door and attracted foreign investment for 30 years. FDI has brought about great achievements and efficiency, giving the country a new face, modernizing its infrastructure, boosting the gross domestic product (GDP) growth and improving people’s lives.

However, many experts, after analyses and assessments, have still shown anxieties and concerns, which even seem mounting amidst more incentives offered to continue FDI attraction.

In the process of drafting the Law on Foreign Investment in the late 1980s, policymakers and scholars had extensive discussions about the role of FDI, focusing on issues such as effects on the national economic sovereignty and expected targets like institutional and structural reforms, technology transfer and productivity increase. In general, what the country has achieved after three 10-year stages of FD

I attraction is an extremely open, heavily external reliant economy.

At a recent workshop on FDI attraction strategies, a leader of the Ministry of Planning and Investment frankly admitted that FDI projects are mainly assembly and sub-contracting in nature, have low local contents and do not create much added value.

Furthermore, FDI enterprises have not built a close connection in the production chain with Vietnamese businesses and boosted the development of the supporting industries, and their technology and management experience transfers are not up to expectation.

Promoting technology transfer is the focus of FDI attraction of many countries. In 2009, Vietnam ranked 57th in the world in this regard. However, the country’s ranking fell 46 notches to 103rd in 2014, much lower than other countries in the region.

FDI was also expected to create jobs and develop a high skilled, disciplined workforce with long lasting attachment in newly formed industries. However, the reality is not so.

A transient economy

The above analysis makes the author think of a concept which seems not present in theory. It is a transient economy with superficial prosperity which comes and goes, reminiscent of an interesting FDI project years ago—the five-star Saigon Floating Hotel in 1989-1997. At that time, there was no five-star hotel in HCMC. To meet the market demand, a Japanese investor bought the John Brewer Reef Floating Hotel from Australia and pulled it to Vietnam.

Eight years later when its business term ended with sufficient profit, the luxury hotel was relocated elsewhere, leaving an open space in the romantic Saigon River. Would this story bear some resemblance to the fate of the Vietnamese economy over the next 20 years when the country reviews her 50 years of FDI attraction and international integration? 

During recent discussions about the economic model Vietnam should follow after many years of different experiments, some opined that China is an appropriate model. They argued that the two countries have the same political system, and China is successful, so why not Vietnam? In reality, the Chinese economy has grown thanks to successful FDI attraction.

However, a look into the way and the motivation for opening the economy of each country at the start reveals a complete difference. China has a pro-active, long-term and systematic approach, while Vietnam seems to take it as a temporary solution.

Unfortunately, the country is still unable to get out of this passive position today when it once again has to accept low-quality FDI that China has rejected. They are the FDI projects which aim to take advantage of cheap labor or use outdated technology with low productivity and environmental standards. 

Many issues regarding the FDI attraction approach may need discussion or revisit when it comes to building a new FDI attraction strategy.

For example, why have authorities over the past many years always paid attention, encouraged and offered many incentives to multinationals, high-profile companies and big or mega projects? What will the investment environment be like if the country continues to follow this approach? The automobile industry is a case in point.

A foreign consultant remarked that Vietnam cannot compete with automobile giants in the world.

The crux of the problem is the supporting industries which are operated by thousands of small and medium enterprises. Unfortunately, they are the group that Vietnam pays the least attention to in its investment appeal efforts.