Communist Review - Vietnam’s “new generation” FDI attraction strategy involves a shift from attracting investors suitable for support of existing “products” to the development of suitable products (which means creating an appropriate business environment and appropriate investment conditions) for the types of investment that Vietnam needs in the future. This transformation requires synchronous and comprehensive solutions.

Foreign Direct Investment (FDI) attraction in Vietnam in recent years

Benefits brought by FDI:

First, FDI provides additional capital for socio-economic development.

Vietnam has so far attracted investment from 140 countries and territories worldwide, which accounts for approximately 25% of its total social investment capital, 55% of its total value of industrial production, and over 70% of its export turnover. Foreign capital has been poured into almost every locality in the country, with many projects invested by global giants such as Intel, Microsoft, Foxconn, Samsung, Sanyo, Sony, Fujitsu, Toshiba, and Panasonic, contributing to the formation of key industries in the country in the fields of oil and gas, electronics, and telecommunications.

As of January 20, 2022, all 63 provinces and cities across Vietnam  attracted 34,642 active foreign-invested projects with a total registered capital of nearly 415.6 billion USD. Their accumulated implemented capital was estimated at over 253.2 billion USD, accounting for nearly 61% of the total registered capital still in effect. Economic data for the first 11 months of 2022 released by the General Statistics Office showed that FDI in Vietnam totaled 25.14 billion USD as of November 20, 2022, a 5% decrease from the same period of the previous year but an improvement  against the 5.4% drop recorded in the previous month.

Second, FDI contributes to job generation, technology transfer and technological development.

In 2021, FDI enterprises created jobs for 4.6 million workers, accounting for over 7% of the total labor force in Vietnam⁽¹⁾. The FDI sector also generated indirect jobs for many workers in supporting industries or other enterprises within the supply chain for FDI businesses. The average salary of employees working in FDI enterprises was 11.2 million VND per month, higher than those in the state sector or non-state sector and approximately 1.2 times higher than the average level of the economy⁽²⁾.

The FDI sector also plays a significant role in enhancing the quality of Vietnam's workforce through in-house training or collaboration with training institutions. Survey data from the Ministry of Labor, Invalids and Social Affairs in 2017 indicated that more than 57% of FDI enterprises had implemented training programs for their workers. Self-training accounted for 40%, and partnerships with training institutions accounted for 17%⁽³⁾. As a result, the quality of the workforce and labor productivity within FDI enterprises have been enhanced, contributing to the improvement of human resources in Vietnam by means of labor mobility from the FDI sector to other sectors.

In addition to investment, FDI enterprises have deployed advanced machines, equipment, and technologies for production and have transferred technical processes, technological know-how, and management expertise to Vietnamese engineers, technicians, and managers. Many Vietnamese technical workers and managers have now been able to take on positions traditionally held exclusively by foreigners. This benefits not only businesses, as the hiring of a Vietnamese employee costs much less than a foreigner in the same job position, but it also benefits technological and human resource development in Vietnam, helping to enhance the country’s competitiveness in attracting foreign investment. Many tech giants from Japan, the Republic of Korea, the US, and some other developed countries have invested in Vietnam. Notably, Samsung Group plans to establish its largest facility in the world in Vietnam. Most recently, it has opened a large Research and Development Center in Vietnam, which employs 2,000 local engineers.

Third, FDI promotes extensive international integration

International integration and foreign investment are complementary. The negotiations and signing of free trade agreements (FTAs), especially new generation FTAs, have enhanced Vietnam's economic and trade relations with other countries, spurring foreign investors’s increasing interest in the Vietnamese market. While FTA commitments mainly involve the opening of the commodity market and tariff reduction, they also deal with the opening of the service market, investment, and policies for foreign investors.

Regarding committed investment areas, Vietnam and its FTA partners  adhere to important investment principles, including non-discrimination between domestic and foreign investors. Furthermore, Vietnam is expanding the areas which are open for FTA partners' investment. As a result, Vietnam is enjoying more opportunities to expand export markets and thereby becoming an attractive destination for FDI.

The positive impact of FTAs on Vietnam's economic institutions and business environment is the most important factor in attracting more FDI. Enforcing FTA commitments requires the Vietnamese government to improve the legal system and work out new policies and mechanisms to create a favorable business and investment climate for both domestic and foreign enterprises. This will, in turn, help Vietnam attract more FDI.

Fourth, connections between FDI enterprises and domestic enterprises are created

The FDI sector has generated spillover effects in terms of technology and management, benefiting the domestic private sector which is actively participating in the global supply chain. Since 2016, FDI enterprises have been reducing their reliance on input materials from countries of origin. The proportion of FDI enterprises purchasing input materials from countries of origin dropped from 58.7% in 2016 to 41.4% in 2020. Only 26.8% of FDI enterprises reported using third-party suppliers in 2020, down from 39% in 2016⁽⁴⁾.

Many Vietnamese businesses have directly benefited from joint ventures and partnerships with FDI enterprises, which facilitate conditions for them to participate in the production chains for export goods. For example, the number of Samsung's tier-1 suppliers increased from 35 in 2018 to 50 in 2020. The number of tier-2 suppliers also rose from 157 to 170. A total of 240 Vietnamese businesses have joined Samsung's supply network. By 2020, 5 of 33 suppliers for Toyota Vietnam were from Vietnam, accounting for 15.15%⁽⁵⁾.

Beside notable achievements, there are several limitations in the management and attraction of FDI:

First, state management capacity remains low

Coordination and sharing of sufficient, timely information between local government agencies, between the central and local levels, and between different ministries and sectors regarding FDI in each locality are inadequate.

Tax evasion and transfer pricing by some FDI enterprises have revealed weaknesses in managing FDI projects. The fact that 50-65%⁽⁶⁾ of FDI enterprises have reported prolonged loss and the majority of joint ventures have become 100% foreign-owned suggests an abuse of preferential policies, affecting state budget collection.

Moreover, projects with outdated technology have managed to find their way into Vietnam, causing unforeseen consequences and severely affecting sustainable development goals.

To address these issues, it is crucial to improve coordination among management agencies at different levels, enhance information sharing, and take more effective measures to combat tax evasion and transfer pricing by FDI enterprises. Additionally, abnormal trends in FDI project structures and technology choices should be closely monitored and tackled to secure state budget revenue and promote sustainable development.

Second, the spillover effects and added value of FDI remain modest 

Though record-high FDI capital has been reported, its “spillover effects and added value” remain very limited. Because most FDI projects in Vietnam are  labor-intensive, they are often coupled with low-wage employment, abuse of incentive policies, and widening skill gaps, pushing Vietnam closer to the risk of falling into the “middle-income trap.” As  the “life cycle” of an FDI project is traditionally from 20 to 30 years, even 40 years, Vietnam will have to coexist with a “low-level” economic structure for 20 to 30 years or more.

The supporting industry in Vietnam and Vietnamese enterprises’ participation in the production value chain of Vietnamese enterprises remain modest. After 35 years of attracting FDI capital, the connection between domestic and foreign investors remains weak and foreign partners’ spillover effects on domestic enterprises in terms technology and labor productivity are a long way from meeting expectations. This is evidenced by the fact that some 80% of FDI enterprises in Vietnam are 100% foreign-owned. In addition, the partnership between domestic and FDI enterprises is still progressing relatively slowly ⁽⁷⁾.

The weak linkage is also reflected in the low rate of localization of products manufactured by the domestic supporting industry. For example, in automobile manufacturing, most Vietnamese enterprises in the supplying industry are only able to supply components for domestic car assembly. According to the Vietnam Industry Agency of the Ministry of Industry and Trade, the localization rate for passenger cars with up to 9 seats currently averages between 7-10% while the set targets were 30-40% by 2020, 40-45% by 2025, and 50-55% by 2030⁽⁸⁾. Furthermore, the localization rate for the electronics industry currently stands at 5-10% against the set target of 45% by 2025⁽⁹⁾. Most electronic products in the Vietnamese market are either imported or assembled domestically using mostly imported components. Inadequate capacity of domestic enterprises and the low quality of their products are to blame.

Third, excessive "incentives" offered to foreign investors have affected tax revenue.

Localities across Vietnam tend to offer as many incentives as possible to compete with each other in attracting FDI. The disparity in tax rates between countries, among different entities within a country, and regulations regarding preferential tax rates and tax exemption and reduction have enticed enterprises into tax evasion and transfer pricing.

Solutions to enhancing the quality and effectiveness of FDI attraction

First, renovate investment promotion

The mindset on attracting FDI should be renovated by fundamentally changing the foreign investment orientation, particularly by promoting investment with suitable and practical objectives, rather than in a general manner. The “New-generation FDI attraction strategy” involves a shift from attracting investors suitable for existing products to developing suitable products (which means creating an appropriate business environment and appropriate investment conditions) for the types of investment that Vietnam needs in the future. In recent years, many localities have rejected small and outdated technology projects. Priority should be given to attracting new-generation FDI projects involving high technology, source technology, automobile and motorcycle industries, supporting industries, machinery, industrial equipment, logistics, high-value new agricultural products, environmental technology, renewable energy, information technology, financial services, and education.

As the development level varies among localities in Vietnam, FDI attraction should be in a balanced and reasonable manner across regions and in line with the country’s socio-economic development planning. Localities with relatively modern infrastructure and a quality workforce should focus on attracting high technology, new technology, research and development projects, and modern service projects. Disadvantaged localities should continue to attract labor-intensive FDI projects which must also meet technological, environmental, and energy-saving requirements.

The list of national projects calling for FDI should clearly specify large-scale projects in each sector and in each region to ensure transparency for foreign investors and avoid competition between localities in attracting investment and between the investors themselves, which could negatively impact Vietnam's investment environment. Priority should be given to encouraging multinational corporations to establish headquarters, research and development centers,  and innovation hubs in Vietnam as well as to transfer technology and management expertise to Vietnamese businesses. It is important to continue attracting investment from traditional markets and partners while simultaneously expanding cooperation with other potential markets and partners.

Second, avoid offering excessive and irrational incentives for foreign investors.

The shift in trade, investment flows, and global supply chains following the COVID-19 pandemic is posing many challenges to Vietnam's tax system, especially as Vietnam tends to use tax incentives as a tool to encourage domestic investment and attract FDI rather than cooperating with other countries to boost economic growth.

Currently, many multinational corporations investing in Vietnam are offered a tax rate of 10%, which is half of the standard tax rate of 20%. FDI is essential for economic development, but excessive incentives or attracting FDI at any cost will burden the economy and result in an unfair business environment between domestic and FDI enterprises. Tax incentives should be selective. Excessive incentives should be eliminated to create a fair business climate and provide conditions for more individuals and organizations to participate in economic activities.

Third, prepare favorable conditions to attract high-quality projects.

Institutions and laws need to be fine-tuned to improve the effectiveness of FDI attraction and utilization and create a fair, transparent, and conducive investment and business environment. Greater attention should be paid to supervising and evaluating FDI projects, especially addressing various forms of "underground" and shadow investment in sectors and areas restricted for FDI, which includes the establishment of businesses under the names of Vietnamese individuals. Solutions include accelerating the development of the national information system on foreign investment to accurately assess FDI effectiveness in Vietnam and continuing to improve institutions and laws on FDI, particularly in the application of global minimum tax.

It is necessary to improve the investment and business environment, review investment policies, help investors overcome difficulties, and strengthen state management of FDI from project promotion, appraisal, and implementation to inspection and supervision. The government should promptly issue the decision on criteria for evaluating the effectiveness of the FDI sector.

Other solutions include improving the quality of education and training to prepare a skilled and technically competent workforce for new waves of investment.

Fourth, ensure synchronous infrastructure connectivity

Low-quality roads, poor infrastructure in industrial zones and urban areas, and inappropriate laws and cultural conditions will make it more challenging to attract high-quality FDI projects. In addition, many industrial parks with good infrastructure lack accommodation spaces for workers and an ecosystem for production and business activities. An IP is not just about factories. It should encompass an ecosystem which integrates favorable conditions for production and business and, more importantly, an ecosystem that promotes innovation.

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(1) Annual Report on Foreign Direct Investment in 2021, Vietnam’s Association of Foreign Invested Enterprises

(2) White Book on Vietnamese Businesses in 2020, Ministry of Planning and Investment

(3) "Foreign Direct Investment and Socio-economic Development Issues in Vietnam," by Do Thi Thu, July 19, 2021, http://mof.gov.vn/dau-tu-truc-tiep-nuoc-ngoai-va-van-de-phat-trien-kinh-te.html

(4) Report on the "Impact of COVID-19 on Vietnamese Businesses," Vietnam Chamber of Commerce and Industry and World Bank in Vietnam, March 12, 2021

(5) "Positive changes in Vietnam's Supporting Industry," by An Nhien, May 9, 2022, https://moit.gov.vn/tin-tuc/phat-trien-cong-nghiep/cong-nghiep-ho-tro-viet-nam-da-co-nhung-buoc-chuyen-minh-tich-cuc.html

(6) Ministry of Finance’s report submitted to the Prime Minister, February 2022

(7) Report on the "Impact of COVID-19 on Vietnamese Businesses,"  Vietnam Chamber of Commerce and Industry and World Bank in Vietnam

(8) "Status of the Development of the Supporting Industry in Vietnam's Automobile Sector," September 15, 2021, https://moit.gov.vn/tin-tuc/phat-trien-cong-nghiep/thuc-trang-phat-trien-cua-cnht-nganh-o-to-viet-nam.html

(9) "Vietnam's Localization Rate in the Electronics Industry is Only 5-10%," by Thuy An, April 15, 2021, https://vtv.vn/kinh-te/ti-le-noi-dia-hoa-nganh-dien-tu-viet-nam-chi-dat-5-10-20210415145803963.htm

This article was published in the Communist Review No. 1007 (February 2023)