ASEAN Economic Bulletin Vol.26, No.1, April 2009 - Surden Surge in FDI and Infrastructures Bottlenecks.. the Case in Vietnam

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ASEAN Economic Bulletin58Vol. 26, No. 1, April 2009

ASEAN Economic Bulletin Vol. 26, No. 1 (2009), pp. 58–76

ISSN 0217-4472 print / ISSN 1793-2831 electronic© 2009 ISEASDOI: 10.1355/ae26-1e

Sudden Surge in FDI andInfrastructure Bottlenecks

The Case in Vietnam

Tien Quang Tran

Through examining trends and patterns of foreign direct investment (FDI) in Vietnam over thetwenty years of reform (1986–2008), this paper found a big increase in registered FDI recently. This is not in accordance with the increase in actual capital disbursement because of low absorptive capacity of the economy in terms of poor infrastructure, restricted and unstable policy, and weak competitive capacity of domestic firms. Moreover, newly massive flows of FDI brought an explosion to infrastructure development in the form of officebuildings, hotels, industrial zones, resident parks and ports. This could help to improve thesituation of infrastructure because it has not kept pace with the rapid economic growth overthe past decade and are considered as major constraints in attracting more FDI.

Keywords:

Vietnam, foreign direct investment (FDI), mergers and acquisitions (M&A), entry mode,infrastructure.

I.Introduction

During the reform period (initiated since 1986),Vietnam has already achieved notable success inattracting FDI, and it has become an importantcomponent in gross national investment. By 2008,foreign-invested sector accounted for about 25 per cent of total gross domestic investment in theVietnamese economy. Foreign invested enterprises(FIEs) have begun to make a significantcontribution to employment generation and exportexpansion. The impressive economic outcome of FDI participation in the economy served tostrengthen government commitment to further bring in reforms to improve Vietnam’sattractiveness to foreign investors, particularly inexport-oriented manufacturing.The main objective of this paper is toinvestigate the roots of sudden increase in FDIinflow and patterns of FDI in Vietnam over thepast two decades of reform with emphasis oninvestment area/sectoral composition. The causesand possible impacts of the increase in FDI oninfrastructure development will also be carefullyexamined. This paper is based on data compiledfrom administrative records of Vietnam’s Ministryof Planning and Investment (MPI) and other

ASEAN Economic Bulletin59Vol. 26, No. 1, April 2009

important databases on FDI (UNCTAD, CEIC andASEAN FDI databases).The structure of this paper is as follows. SectionII reviews the impact of policy change on FDIinflows in Vietnam. This is followed by adiscussion on the changes in the form of investment and patterns of source country.Analysis of FDI by investment area will bepresented in section V. In addition, this paper assesses the geographical distribution of FDIin Vietnam with the premise of conventionalclassification of seven regions. Short conclusionson trends and patterns of FDI in Vietnam will bepresented in the last section.

II.Policy Change and Sudden Surge inFDI Inflows

A Law on Foreign Investment was approved bythe National Assembly just one year after thereform was launched in 1986. This law wasamended five times in 1990, 1992, 1996, 2000and 2003. The appearance and amendment of thislaw have contributed to the Reform (

Doi Moi

)policy of Vietnam. It was highly appreciated bythe international community as an open,attractive law and was in line with internationalnorms. Besides, over fifty bilateral andmultilateral agreements related to FDI were alsoapproved in order to encourage and protectforeign investors given the existing imperfectmarket mechanism in Vietnam.The most important change in FDI policy wasthe approval by the National Assembly of twonew laws — Investment Law and Law onEnterprises in December 2005. This reform aimedto create a consistent legal system as well as to setup a common playground for three main players:FIEs, state-owned enterprises (SOEs) anddomestic private enterprises (DPEs). The newInvestment Law has some main benchmarks. Thefirst is the new law replaces two separate laws — the FDI Law and the Law on Domestic InvestmentPromotion. Therefore, all kinds of investment aretreated in the same way. The second significantfeature is reduction of paperwork involved in FDIapproval/monitoring and the response time for issuing an investment certificate. The third oneinvolves strong decentralization on approving andlicensing FDI projects to the provincial peoplecommittee and the management committee of industrial zones/export processing zones (IZs/ EPZs). Lastly, all regulations related to FIEestablishment and operation were separated fromthe Investment Law. Alternatively, these firms willbe governed by the new Law on Enterprises asother firm types.The data on FDI inflows have beeninconsistently published among different censusorganizations. There is a significant differencebetween the data published by Vietnamesegovernment agencies and the data frominternational organizations. For example, Table 1compares FDI inflows from three differentsources: MPI, UNCTAD and the General StatisticsOffice of Vietnam (GSO). MPI is a legaladministrative body for managing FDI andOfficial Development Aid (ODA). The differenceamong data sources stems from the method of measuring FDI. MPI defines FDI as totalinvestment in FIEs and, therefore, includes sharesof capital from both domestic and foreign partners.A change in the FIE capital stock as a result of earnings invested is also regarded as a change inFDI. Meanwhile, most international organizations,like UNCTAD define FDI by two types of investment: Greenfield investment measured bythe actual capital inflows from multinationalenterprises (MNEs) and cross-border merger andacquisition (M&A) activity. This mostly explainswhy MPI figures on realized investment

1

are muchbigger than those in the UNCTAD source. Another reason for the difference originates from thecapability of the statistical agency in identifyingFDI. Until 2003, FDI data in Vietnam did notcover either reinvested earnings or M&A. Table 1also demonstrates some discrepancies in data fromtwo government agencies (MPI and GSO),especially for the initial stage of capital flows.There are two possible reasons for this: differencein the time of reporting data, and inconsistency indata compilation between government bodies.Investment of Vietnamese people who are citizensof overseas countries (

Viet kieu)

is generally

ASEAN Economic Bulletin60Vol. 26, No. 1, April 2009

TABLE 1Registered and Realized FDI Flows to Vietnam by Sources of Data(In US$ million)

FDI flows, MPI sourceFDI flows, GSO source Number ofRegisteredRealizedNo. ofRegisteredRealized licensedcapitalcapitallicensedcapitalCapital projects projects

198838322—838322— 198968526—468526— 1990108735—180108735— 19911511,2844283751511,29232919921972,0775754741972,20957519932742,8291,1189262743,3471,01819943674,2622,2411,9453674,5352,04119954087,9252,7921,7804087,6992,55619963659,4292,9231,8033879,7352,71419973485,8223,2182,5873586,0553,11519982754,7812,3751,7002854,8772,36719993112,1972,5371,4843112,2642,33520003792,4942,4201,2893892,6962,41420015503,2362,4301,3005503,2302,45120028022,8052,5911,2008022,9632,59120037723,1282,6501,4507483,1462,65020047234,2222,8601,6107234,2222,85220059226,3393,3002,020———

Total7,05864,41334,45822,1356,16459,85330,008

N

OTE

: — data not available.S

OURCE

: GSO website, MPI database (various source) and UNCTAD database on website.

Year Actual FDI flows,UNCTADsource

excluded from the official record on FDI becausemost of this investment is undertaken throughtheir relatives who are Vietnamese residents.Evidence from the ASEAN Secretariat andUNCTAD shows FDI inflows began before 1986 — the first year of reform initiated by the VICommunist Party Congress. However, mostforeign investment in the planned economy phasewas composed of official aid from governments of the former Soviet-bloc countries. Therefore, theentry of FDI was recognized as soon as a new lawon FDI was sanctioned and became effective in1987. Twenty years of attracting FDI can bedivided into several episodes. In the first four years (1988–91), FDI inflow was small andaffected by the internal instability of the economy(for instance, hyper-inflation and food shortages),and the collapse of the Soviet federation as well asthe socialist countries bloc. At this stage, manyrestrictions and consequences of the plannedeconomy prevented FDI inflows. A significantincrease in FDI had just occurred when many FDI-related policies changed in accordance withstabilizing macro economic problems by the endof 1991. The next period (1992–97) witnessedcontinuous massive FDI inflows reaching a peak

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