Incentives – not the key to attracting foreign investment

However, this rather simplistic supposition does not always bear out and, indeed, is not grounded in the reality of Vietnam’s experience.

According to many leading economists and market analysts, incentives are only one factor to attract investors, and most often not the most important factor.

Investment incentives – a minor factor

Dang Xuan Quang, the Ministry of Planning and Investment (MPI)s Foreign Investment Agency (FIA) Deputy Head said that in recent years Vietnam has offered many incentives to lure direct foreign direct investment (FDI) to the country, especially in remote areas and in the agricultural sector.

“However the effectiveness of these incentives has been noticeably limited,” Quang said.

In support of his assertion, Quang cites FIA statistics that revealed as of June 2014, Vietnam had 16,589 FDI projects with a total registered investment capital of US$239.773 billion.

Most of the projects operated in the larger metropolitan areas of Hanoi, HCM City, Ba Ria-Vung Tau, Binh Duong and Dong Nai, which account for 56% and 51.5% in the volume and value of FDI projects in Vietnam.

Other provinces such as Dak Nong, Bac Kan, Ha Giang and Lai Chau only comprise 0.15% and 0.22% of the total figures in terms of volume and value, respectively.

In these latter provinces the government and local officials offered tremendous incentives, particularly in the agro-forestry and fishery sectors.

However, as of June 2014 these provinces have only attracted a modest number of 508 projects with investment worth US$3.382 billion in total, accounting for 3.06% in volume and 1.41% in value of Vietnam’s FDI projects.

In direct contrast, Quang cites the real estate market, which in spite of having received no special incentives to speak of, has developed into a highly lucrative market that investors are eagerly pumping money into.

In the first half of the year, out of the total FDI in Vietnam of US$8.65 billion the Vietnamese real estate sector has attracted US$692.3 million.

Meanwhile only a fraction of that total, US$27.38 million, or 0.3% of total FDI, was injected into the agro-forestry and fishery sector.

This is a clear and unambiguous example of a situation where investment incentives were not effective in luring investment.

Human resource – a key role

Dr. Le Dang Doanh, a leading economic expert, said the key to luring foreign investors, setting aside the provision of incentives, is improving infrastructure, increasing the quality of human resource and boosting institutional reforms.

The United Nations Industrial Development Organisation (UNIDO) recently released a study on Vietnam’s industrial sector. Nearly 1,500 surveyed FDI businesses said preferential incentives were a supplementary factor in their decision to invest.

“The survey results indicated many businesses who did not receive preferential incentives are operating well and have expansion plans,” Doanh said.

Brian Portelli, an official of UNIDO, shares Doanh’s views saying that from his knowledge and experience there have been no clear differences in operation results in Vietnam between firms having investment incentives and those without them.

He listed preferential tax and other incentives, political stability and favourable business climate as primary factors affecting their decision to invest in the country. Human resource also plays a vital role, he added.