Home Vietnam How Vietnam will reduce the dependence on FDI enterprises?

How Vietnam will reduce the dependence on FDI enterprises?

by Inside Out
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Vietnam is determined to develop the economy in depth and shorten the time it takes to become a country with a high average income. To achieve this goal, the external force is important, but the internal one is the key decisive factor.

After more than 30 years of reform, the economic structure has seen clear changes. Of which, the role of the private sector and foreign direct investment (FDI) enterprises holds a very important position, with 90 percent of the workforce, 80 percent of industrial production value, 70 percent of gross domestic product (GDP), and 65 percent of total social investment. This means that up to two-thirds of the important socio-economic indicators in the country belong to private and FDI enterprises, according to Dr. Vu Thanh Tu Anh, Director of the Fulbright School of Public Policy and Management.

Related: How to set-up a FDI enterprise in Vietnam

However, the private sector, including 750,000 enterprises, accounts for less than 10 percent of GDP and a low proportion over the past 20 years, less than half of that of the FDI sector with nearly 20,000 enterprises. Because the economy has not built and developed a strong force of private enterprises, it is increasingly dependent on FDI enterprises. According to calculations, the export turnover of FDI enterprises accounts for 70 percent of the total export turnover of the country, 50 percent of industrial production value, 30 percent of the labor force, and 24 percent of the budget.

This dependence is not short-term but structural, medium, and long-term, because domestic enterprises cannot connect to the global value chains. Vietnam has fallen into the trap of manufacturing and processing industries with extremely low value and low skills, and it is hard to escape that trap. The country exports a wide variety of electronic components, phones, garments, and wooden products. However, the export market shares and the proportion of most key products are contributed by FDI enterprises with 100 percent of phones and accessories, 99 percent of electronics and computers, 94 percent of vehicles and spare parts, 79 percent of footwear, 76 percent of bags, suitcases, umbrellas, 60 percent of garments, and 49 percent of wooden products. Moreover, to export these items, enterprises import raw materials with the corresponding rates, such as electronics and computers with 92 percent, phones and accessories with 89 percent, machinery and equipment with 63 percent, fabrics of all kinds with 63 percent, chemicals with 58 percent, auto parts with 55 percent, and plastic materials with 51 percent. Vu Thanh Tu Anh said.

In terms of production value compared to added-value, for instance, in the value-added structure of Samsung Thai Nguyen implemented in 2018, out of the VND100 of added-value, up to VND45.52 belonged to Samsung. The next VND30 also belonged to Samsung through return on equity, and nearly VND16 dong belonged to important links (mostly Korean enterprises) in the supply chain. Thai Nguyen Province only received benefits through taxes, but if subtracting incentives, such as land and expenses, taxes were only negative numbers, and Vietnamese workers received VND8.4. On average, of the VND100 of added-value of Samsung exports, Vietnam only contributed VND2.14.

‘The situation is the same for many other FDI enterprises. This is a problem that if we cannot solve it, we will never have the opportunity to participate in the supply chain to improve competitiveness,’ Dr. Vu Thanh Tu Anh concerned.

Vietnam is also facing a global downward trend of FDI. In the context of the trade war, with the process of automation and the outbreak of the Covid-19 pandemic, the tendency of enterprises retreating to their own country is increasingly happening. Therefore, the country can no longer count on the FDI external force.

The draft strategic orientation for socio-economic development for the period from 2021 to 2030 has set an average GDP growth target of 7 percent per year, with a contribution of 30 percent of industrial value in GDP. At the consultation workshop on the above draft held by the Institute of Development Strategy under the Ministry of Planning and Investment in coordination with the United Nations Development Program (UNDP) in Vietnam in Ho Chi Minh City, many experts said that these two targets are infeasible because the current industrial value in GDP is merely at the threshold of 17-18 percent. Meanwhile, the average growth rate of GDP has been decreasing and decreasing rapidly in the last two decades. While the average GDP growth rate in the 1990s and 2000s was 7.6 percent and 7.2 percent, respectively, it dropped to 6.3 percent in the period from 2011 to 2019. In 2020 alone, it declined to about 5.9 percent.

To achieve the above targets while building an autonomous economy based on technological mastery and proactive integration, in the next ten years, if Vietnam does not have the political determination to mobilize all domestic resources, there will be no opportunities for development. It is necessary to have fundamental changes in institutions and market orientation, with priority given to supporting the strong development of the private sector in order to create a breakthrough in quality, according to Dr. Tran Du Lich, member of the Economic Advisory Group of the Prime Minister.

In the industrial sector, it is necessary to step up the restructuring of industrial parks and develop domestic supporting industry parks in order not to depend too heavily on FDI enterprises. Only in that way, the country will we enjoy the tax exemption and reduction from the signed and effective trade agreements, said Dr. Tran Du Lich.

In addition, it is necessary to develop a separate program to improve labor productivity, considering it as one of the most fundamental breakthrough measures to increase the competitiveness of the economy. Currently, the labor productivity of Vietnam remains low in the ASEAN+6 group. At the same time, the country should focus on studying policies for high-tech startup models to promote the startup movement.

For the FDI sector, besides selective attraction, aiming at priority sectors of the economy, finding ways for domestic enterprises to connect to the supply networks of multinational corporations must become an important policy priority of the Government in the coming time.

Mr. Vu Tuan Anh, an expert in consulting and training enterprises, shared the same point of view that it is necessary to support the private sector in building national brands and trust. The Government should have support programs for start-ups to help private businesses to restructure, reform their business models, or simply rise to a more efficient level than the present. To promote public consumption in Vietnam, the State needs to have specific and detailed policies for each industry, helping the private sector to access public procurement programs easier and more effectively, generating sustainable revenue for the private sector. Thereby, the State can elicit all resources, and private enterprises can really play a special role in the goals of socio-economic growth.

Citing further the mobilization of resources, Mr. Vu Tuan Anh said that the source of annual overseas remittances of $4.3 billion sent to Ho Chi Minh City is huge. If there is a reasonable support policy, this will be a quite important resource to contribute to the production and business activities of the city. If not, overseas remittances will continue to flow into real estate because if buying a piece of land in Ho Chi Minh City, the profit will be 2-3 times higher after 5-10 years, so no one will spend money to invest in building and operating a factory.

Reviewing the economic development of Ho Chi Minh City, it is obvious that FDI enterprises have made important contributions. From only contributing 11.3 percent in 1995, it increased to 22.9 percent by 2010 and currently 17 percent of GRDP of the city. As for export turnover, FDI enterprises contributed 8.8 percent in 1995, 23.9 percent in 2010, and 55.9 percent now. According to the People’s Committee of Ho Chi Minh City, the spillover effects from FDI enterprises to domestic enterprises have not been as expected. Technology transfer between FDI and domestic enterprises is not high. FDI enterprises investing in HCMC still focus on the real estate sector, accounting for 43 percent of the total investment capital, according to the Saigon Giai Phong Newspaper.

By Thuy Hai – Translated by Thanh Nha

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