Return to VVG's Home Page

V V G - Business & Investment Articles

Copyright © 1999-2013  Vietnam Venture Group, Inc. All rights reserved.   January 4, 2003

A REPORT FROM V V G

An Assessment On the Economic Potential For FDI 
In Vietnam For Years 2001-2006

Conclusion: We continue in our long-held belief that Vietnam is a good place for making investments.  However, while the trend in official pronouncements over recent years tends to show a greater interest by the State in the needs of foreign investors, there is not yet controlling interest to spur foreign direct investment (FDI) forward.  

The policies the next five years are the same as before: to proceed with a market style economy with a Vietnamese form of socialism.  

Translation, there is yet no consensus among the leadership that an investorís rationale for putting money into Vietnam is to expand his markets and thus provide income to him. Those who control policy and enforcement do not yet appear to universally understand that a positive return on investment (ROI) in the FDI sector traditionally spurs the growth of the nation. 

Unless there is a more dramatic change vastly improving the current situation, the chill on FDI in Vietnam will remain and foreign capital will continue to go to China, Thailand, and Malaysia.  The money will be driven away by the impression that income derived from FDI is for the benefit of the State treasury or the nationís bureaucrats.  

We believe this attitude will change in time. But it is taking a darn long time.

 

Current Outlook for FDI.  Vietnamís economic outlook for period 2001 to 2006 were shaped by the results of the Ninth Party Congress.  Complicating that outlook is Vietnamís need for foreign hard currency (along with domestic tax collection).  Several long-standing and abhorrent practices that discourage foreign investors show no current signs of abatement.  

They include (1) corruption at nearly every level of government; (2) duel pricing that discriminates against foreigners; (3) extensive bureaucratic red tape that enhances corruption, fuels multiple-level pricing, and increases costs; and (4) lack of transparency in laws and policies.   

There has been some change.  The higher levels of government appear to us to be removed from taking money directly from foreigners, but their hands are still in the public till.

State propaganda decries corruption, yet Vietnam has been called one of, if not the most corrupt nations in Asia.  While laws prohibiting duel pricing have been on some books for many years, even in those limited sectors there is no enforcement. 

Worse, the government continues to encourage duel pricing by not universally prohibiting the acts and then enforcing the law. The promises to reduce bureaucratic red tape are nearly a decade old. While there has been limited reduction (particularly in licensing some new enterprise), FDI is hobbled for all but the wealthiest of companies. 

Existing policies and practices remain an effective bar to both private investors and small to medium-sized foreign investors who would otherwise help build the nation. Efforts to increase transparency in both the government decision-making process and the law occur only in the propaganda sector that regularly calls for such reform, but rarely announces any.

 

Sources of Hard Currency:  The four major sources for hard currency have been: Overseas Development Aid (ODA); Foreign Direct Investment (FDI); Export-derived Income (ExI); and Vietkieu who support domestic families with annual gifts (VKI).  Loans from foreign institutions are growing, but at a snails pace due to the continued inability of the State to earn hard currency to repay such debt.

Only one of the four sources of hard currency, ODA funding, directly competes with FDI.  ODA grants are uncompetitive and therefore harmful to the future growth of FDI in Vietnam.  The other sources are beneficial to FDI.

ODA funds come with many strings attached, but with very low rates of interest, if not outright bequests.  ODA founds appear to favor disbursements to companies from the donor nation even though this is strictly prohibited.  Companies from other nations with few or low ODA grants (such as the USA and EU countries) cannot compete in the sectors financed with ODA funds. While ODA funding has been directed towards infrastructure development, many foreign commercial enterprises from the donor nations have benefited. These benefits are not available to enterprises from other nations thus making ODA anticompetitive with FDI.

Japan has for years been the largest contributor of ODA funds to Vietnam. Some of the previous annual grants have exceeded US$ 2 billion.  Current grants are in the range of US$ 500 million.  Given (1) the continued economic woes in Japan, (2) the drop in the yen to dollar value ratio, and (3) that ODA funding not utilized will soon lapse, it is likely that ODA funds will not be as strong a factor in Vietnamís growth over the next five years as they have been over the prior ten years.

Export-derived Income (ExI) sends hard currency to the State and profits to the companies that sell the goods. To the extent that they are foreign invested enterprises (FIEís), such income encourages FDI from other concerns.  To the extent that ExI is generated by domestic or State-owned companies, they also put greater wealth into the population as a whole. Extra wealth should flow to the State in the form of taxes, and to the general public who will then spur domestic manufacture and sale of products.

Vietkieu (VK) support for domestic families is estimated to run from $1 billion to $3 billion annually.  There is no accounting or control on the receipt of these funds.  It is presumed that if each of the more than 2 million VK provides their families with $1,000 each year, the annual inflow will be $2 billion. It is probably a higher number. These funds are used to purchase domestic family needs and supplies to include high-end materials such as houses, house renovation, automobiles, motorbikes, and major appliances. To the extend that FDI is involved in the domestic sales of consumer and industrial goods, VKI supports the growth of FDI enterprises that bring new imported and better locally manufactured goods into Vietnam.

 

Vietnamís Competition For FDI. In early 1990, the Peopleís Republic of China received less than 20% of the FDI for all of Asia. Southeast Asian countries accounted for 60 percent.  Today those numbers are reversed.  Chinaís power in the region has always been strong, but it is now a major economic force as well.   Growth in China over the past 20 years has been at an average of 10 per cent per year. Foreign trade has increased faster, to $600+  billion in year 2002.  China is Japanís second largest trading partner and the 4th largest with the United States.  China today receives the second largest amount of the worldís FDI after the United States. Approved investment in China jumped by 50% last year following entry into the WTO.   

The geo-political and strategic importance of Southeast Asia makes Vietnam (in the center of the region) of great importance. However, Vietnam is rarely if ever mentioned in regional financial reports unless it is compared with strife torn Burma and Cambodia, or land-locked Laos.  

Indonesia and The Philippines are continuing their rapid economic melt downs due to civil strife.  Thailand, and Malaysia all continue to draw more FDI than does Vietnam in spite of the regional economic slowdown and severe internal pressures in all four nations.  And yet, Thailand and Malaysia show signs of improvement.

While Thailandís problems are only economic, they are substantial.  However, unlike its neighbor Vietnam, Thailandís economic recovery process is a model of transparency.  Thailand suffers no domestic unrest, and while corruption remains rampant, the current government seems to be expanding upon the building blocks of economic reform from the previous one. While Thailand is currently a major investor in Vietnam, it remains a key competitor for small, middle, and major foreign investors.

Continued violence in Indonesia and threats of violence in the Philippines keep new FDI at record slow levels of growth. However, recent domestic problems in Vietnam may plague Vietnamís growth as well.

 

Future Opportunities.  Properly planned and executed FDI projects will over time prove profitable in Vietnam.  Due to economies of scale, the 80 million population of Vietnam will never have the same market draw for FDI as does the 1.3 billion people of China.  

However, foreign investors who may tolerate economic and financially aberrant behavior from China have left Vietnam and will stay elsewhere when faced with the same patterns of corruption, bureaucracy, duel pricing, and lack of transparency from Vietnam.  

Always a pragmatic people, Vietnamese policies will change to favor FDI to better compete with its neighbors in Southeast Asia, and stand up to the extreme competition coming, and only increasing, from China. The only question is, why must it take so long?


 Articles | People | Southeast Asian Handicrafts |  
 V V G's Home Page | write to us