06/08/2024

Lecture 54. Vietnam: FDI, Trade

and Policy

Outline

1. FDI Developments
2. Impact of FDI
3. Source Countries and Case Studies
4. FDI Policies

1
 China's advantages
 Access to raw materials: motst attrcitve market in the world,
Vietnam's manufacturing industry heavily depeds on importing raw 06/08/2024
materials
 experienced and skilled laborers: millions of skilled workers,
vietnam's labor productivity among the lowest
 infrastructure: among the best in the world, such as big ports, railway system is
efficient -> effiency and cost reduction. Vietnam's is inadquate
 market size and economiis of scale: china sold more, China: many factories are willing to work with
small, medium and larg business 1. FDI Developments

Vietnam FDI--IMF Video

YouTube Video FiinGroup

Vietnam's advantages
 lower labor cost than China as little as one- third of China's
 dynamic workforce: much younger, China is aging very
fast, big population expects a potential generation gap in the
workforce
 stable political environment: friendly goverment attract
more, provieds many adantages for MNE,mostly for
companies in labor-ntensive3industries

3 free trade agreement

1. FDI Developments

MPI 30 Year of FDI in Vietnam.pdf

2
 06/08/2024

1. FDI Developments
large in terms of invetment, output
and input
• Over the last 30 years, FDI sector has been growing, becoming one
of the most dynamic sectors of the economy. By the end of August
2018, there were 26,646 operating FDI projects, with a total
registered capital of USD334 billion, of which about USD185.62
billion, equivalent to 55%, has been paid.
• The contribution of FDI to the economic growth has been rising. Its
share in GDP increased from 6.3% in 1995 to 19.6% in 2017.
• The sector also contributed significantly to the State’s budget, with
the contribution rising from USD 1.8 billion (1994 - 2000) to USD 14.2
billion (2001-2010). In the 2011-2015 period, the budget collected
from the FDI sector reached USD 23.7 billion, accounting for nearly
14% of the total budget; in 2017, nearly $ 8 billion to the State’s
budget, equivalent to 14.46%.

1. FDI Developments

Legal Framework
• 1987: Law on Foreign Investment in Vietnam
• 1990: Law on Companies and the Law on Private Enterprises
• 1994: Law on Domestic Investment Promotion

3
 06/08/2024

skip 1. FDI Developments

1. FDI Developments
skip

4
 06/08/2024

1. FDI Developments

skip

Investment in Vietnam -- MPI Presentation.pdf

9

FDI Developments

A. Why Vietnam
B. FDI in Vietnam

10

10

5
 06/08/2024

A. WHY VIETNAM

1. Stable Politics – Open Society

2. Strongly improved infrastructure

3. High and Stable Economic Growth

4. Competitive Production Cost

5. Abundant Human Resource -

Golden Population
6. Potential Market

7. Global Economic Integration

8. Strategic Location

11

11

MACROECONOMICS & GDP GROWTH

- GDP 2017 increased by 6.81%, highest rate in the last 5 years

GDP: 220 billion USD, GDP per capita: nearly 2,400 USD
Trade volume: 440 billion USD

12

12

6
 06/08/2024

STRATEGIC LOCATION & GLOBAL PARTNER

13

13

GLOBAL ECONOMIC INTEGRATION

RCEP
AFTA
Vietnam - Chile
ASEAN - China

ASEAN - Korea
10 Vietnam - Japan
Signed &
Effective
ASEAN - India
Vietnam - Korea
ASEAN - Japan
Vietnam – Eurasian
Economic Union
ASEAN – Australia/New Zealand
Vietnam - EFTA

14

14

7
 06/08/2024

HUMAN RESOURCES
young: more workers and more consumers
Population Pyramid

15

15

INVESTMENT COST COMPARISON

16
Source: JETRO
9

16

8
 06/08/2024

INVESTMENT COST COMPARISON

Standard Salary (USD)

Source: JETRO 17

17

CIT & VAT COMPARISON

Corporate Income Tax Value Added Tax

(CIT) (VAT)
Cambodia 20% 10%
Indonesia 22% 10%
Laos 24% 10%
Malaysia 24% Sales tax 10%
Myanmar 25%
Philippines 30% 12%
Singapore 17% 7%
Thailand 20% 7%
Vietnam 20% 10%

Source: World Bank and KPMG

18

18

9
 06/08/2024

INDUSTRIAL PARKS, ECONOMIC ZONES

Ø 324 Industrial parks (220 existing Industrial Parks; 43 FDI Industrial Parks)
* VSIP has 8 IZ in Vietnam, attracted 7 bil USD of FDI from 22 nations
Ø 17 Coastal Economic zones
Ø 03 High Tech Park (06 High Tech Parks by 2030)
Ø 03 Special Administrative Economic zones (Van Don, Cam Ranh, Phu Quoc)

19 16

19

Vietnam and China

Vietnam and China: YouTube

20

20

10
 06/08/2024

B. FDI in Vietnam

• FDI Developments
• FDI by industry
• FDI by region
• FDI by source country

• FDI Data GSO, Vietnam

• Vietnam-FDI-Report-2016-2021_SK.pdf
• ASEAN Investment Report 2023

21

21

B. FDI in Vietnam

• Total cumulative registered capital as Dec 31, 2022: 440.5 billion USD
• Cumulative number of projects as of Dec 31, 2022: 36,345

22

22

11
 06/08/2024

B. FDI in Vietnam

23

23

B. FDI in Vietnam

24

24

12
 06/08/2024

B. FDI in Vietnam

25

25

Questions?

26

26

13
 06/08/2024

2. Impact of FDI

Foreign_direct_investment_an
d_economic_growth_in_Vietn
am.pdf

27

27

2. Impact of FDI

• Anwar, S. and L. P. Nguyen (2010), Foreign direct investment and

economic growth in Vietnam, Asia and Pacific Review.

28

28

14
 06/08/2024

2. Impact of FDI

• Sample: Panel data of 61 provinces

• Sample period: 1996-2005
• Sources: GSO, MPI, MOLISA and MOI
• Hypotheses: H1-H6
– H1: A mutually reinforcing two-way linkage between FDI and economic growth
exists in Vietnam.
– H2: A mutually reinforcing two-way linkage between FDI and economic growth
exists in all seven regions of Vietnam.
– H3: Regions with better infrastructure, more skilled labor and larger market
size are relatively more attractive to foreign investors.
– H4: FDI significantly affects Vietnam’s economic growth through its absorptive
capacity.
– H5: Education and training enhances the impact of FDI on economic growth in
Vietnam.
– H6: A smaller technology gap between the foreign and local firms enhances
the impact of FDI on economic growth in Vietnam.
29

29

2. Impact of FDI

• Determinants of economic growth • Determinants of FDI

– Human capital – Market size
– Learning by doing – Infrastructure development
– Exports – Labor market conditions
– Macroeconomic stability – Openness
– Level of financial development – Other determinants
– Public investment • GDP growth rate
• Macroeconomic stability
– Other determinants
• Domestic investment
• Geography
• Endowments
• Labor force growth
• FDI

30

30

15
 06/08/2024

2. Impact of FDI

• Empirical
specification

• Variable definitions
and sources

31

31

2. Impact of FDI

• Expected coefficient
signs

• Estimation
methodology
– SEM
– GMM
ü With regional
dummies
ü Without regional
dummies

32

32

16
 06/08/2024

2. Impact of FDI

• Estimated equations

33

33

2. Impact of FDI

Results and Interpretation

• Equation 3
• FDI is an important determinant of the provincial economic growth.
• Other things remaining constant, a 1000 VND increase in FDI would
contribute to an approximate 0.000054% increase in economic growth.
• Other important determinants of economic growth in Vietnam are exports,
government expenditure, the level of financial market development, the
growth of labor force, learning by doing, human capital and the real
exchange rate.
• Equation 4
• Economic growth has a significant positive effect on FDI. Other things
remaining constant, a 1% increase in economic growth would lead to an
increase in the stock of FDI per capita by approximately VND993,000.
Higher economic growth in Vietnam does send positive signals to
prospective foreign investors. It also shows an increasingly larger market
size for investment.
• GDP per capita, which is used as a measure of market size, has a positive
and significant effect on FDI.
34

34

17
 06/08/2024

2. Impact of FDI

Results and Interpretation

• The estimated coefficient of domestic investment is positive and statistically
significant, implying that FDI and domestic investment in Vietnam are
complements. In other words, increase in domestic investment increases
FDI in Vietnam and vice versa.
• The coefficient of exports is consistent with expectations.
• The skill level of the labor force is an important determinant of FDI in
Vietnam. An increase in the proportion of the skilled labor force leads to a
significant increase in FDI.
• The negative coefficient of the labor cost suggests that an increase in the
cost of labor in Vietnam can reduce FDI.
• The impact of infrastructure development on FDI is positive and statistically
significant.
• Depreciation of the real exchange rate in Vietnam tends to raise FDI.

35

35

2. Impact of FDI

Results and Interpretation

• The regional dummy variable has a positive sign in both the
economic growth and FDI equations.
• In economic growth equation, it is not significant. In FDI
equation, the regional dummy variable is significant.
• The introduction of the dummy variable leads to a minor change
in the magnitude of the estimated coefficients without affecting
their significance level.
• The estimated results suggest that cities and provinces in the
key economic regions such as Red River Delta and South East
with better infrastructure, more skilled labor and larger market
size tend to attract more FDI.

36

36

18
 06/08/2024

2. Impact of FDI

The Impact of
Foreign Direct on
Income Inequality in
Vietnam

37

37

2. Impact of FDI

Le, Q.H., Do, Q. A., Pham, H.C. and Nguyen, T.H. (2021), The Impact of
Foreign Direct Investment on Income Inequality in Vietnam, Economies.

38

38

19
 06/08/2024

2. Impact of FDI

• The impact of FDI on income inequality may be a concern:

– Income inequality has a negative effect on economic growth (Cingano, 2014)
– Rise in income inequality may hamper the progress in poverty reduction
– Social preference for more equal society (Figini and Görg, 2011; Sylwester, 2005).
• If FDI increases income inequality, its positive effects on economic growth
may be replaced by a lower rate of growth as well as other socioeconomic
negative effects.
• In Vietnam:
ü Inequality in income distribution—reflected in the Gini coefficient ranged from 0.42 to 0.44 during
the period 2010–2018.
ü The Gini coefficient tends to increase in less developed regions, especially in the Central
Highlands.
ü Although the Gini coefficient is not high, the absolute income inequality is rising. The income per
capita of the top 20% of households in 2010 increased from 9.2 times the average income per
capita of the 20% lowest income households in 2010 to 9.8 times in 2016 (Hung 2019).

39

39

2. Impact of FDI

Analyze the impact of FDI on income inequality in Vietnam:

1. Theoretical model to describe the impact of FDI on income inequality.
2. Use Generalized Method of Moments (GMM) estimation method
3. Panel data for 63 provinces
4. Sample period: 2012–2018
5. Income inequality under linear and non-linearity relationships
A. FDI has a negative effect on inequality by increasing demand and wages for skilled
workers in poorer host countries—linearity
B. there are two stages of development in transferring new technology from MNEs to the
host country: in the first stage, FDI à higher inequality; second stage à lowers
inequality—non-linearity
6. Moderating effects of education and institutions?

40

40

20
 06/08/2024

2. Impact of FDI

41

41

2. Impact of FDI

• Empirical specifications • Control Variables (X)

– Trade openness (Trade/GDP)
– Economic development (GDP
per capita)
– Human capital (Education)
– Unemployment rate
– Inflation
– Urbanization
– Institutions (Provincial
Competitiveness Index)

42

42

21
 06/08/2024

2. Impact of FDI

Empirical results

43

43

2. Impact of FDI

• Policies affect the interface between FDI and income inequality

• Host country: human resource development and infrastructure, industrial policy, incentives
and other FDI policy
• Source country: outward investment missions, investment guarantees, bilateral investment
funds) and international policies (multilateral, regional and bilateral investment treaties).
• Host country
• FDI contributes to increasing income inequality but there is a moderating effect from the
provinces’ level of governance. Policies should focus on improving the quality of governance
and the administrative reform efforts of the government of the provinces and cities.
• Make further efforts to provide good quality and appropriate education and training.
• The government can encourage training in MNEs. When firms pay for training, the
employees do not capture all the benefits from training; in reality, firms capture some by
raising productivity more than wages.
• The negative impact of urbanization on income inequality implies that poor migrants in cities
need to receive more attention, especially in the early stages of migration.
• Ensuring social equity in general, minimizing income inequality in particular, plays an
important role in social stability towards sustainable development. Policies to attract and use
FDI should be linked with social security policies, reducing income inequality.

44

44

22
 06/08/2024

Questions?

45

45

3. Source Countries and Case Studies

46

46

23
 06/08/2024

3. Source Countries and Case Studies

Samsung has become instrumental to

Samsung in Vietnam Vietnam’s development, accounting for over
US$65 billion worth of exports from the
Province Region Factories
Southeast Asian nation in 2021.
Bac Giang North 2
Bac Ninh North 11
Late last year, Samsung inaugurated its biggest
Dong Nai South 1
Hanoi North 2
research and development center in Southeast
Ho Chi Minh City South 2 Asia. The new research facility was opened in
Hoa Binh North 2 Hanoi at an estimated cost of US$220 million.
Hung Yen Province North 1
Ninh Binh North 1
Phu Tho North 1 This is just the latest investment from the
Thai Nguyen North 2 South Korean electronics behemoth, which has
Vinh Phuc North 3
been manufacturing in Vietnam since 2008.
Since then, it’s estimated that Samsung has
invested upwards of US$18 billion, and is
expected to invest even more this year.

47

47

3. Source Countries and Case Studies

Name Province Region

Hosiden Corp. Bac Giang North
SI Flex Co., Ltd. Bac Giang North
AAC Technologies Holdings Inc. Bac Ninh North
List of Bujeon Electronics Co., Ltd. Bac Ninh North
Samsung Dreamtech Co., Ltd.
EM-Tech Co., Ltd.
Bac Ninh
Bac Ninh
North
North
suppliers in GoerTek Inc. Bac Ninh North
Samsung Display Co., Ltd. Bac Ninh North
Vietnam Samsung SDI Co., Ltd. Bac Ninh North
(incomplete) Sung Woo Electronics Co., Ltd.
UIL Co., Ltd.
Bac Ninh
Bac Ninh
North
North
WiSol Co., Ltd. Bac Ninh North
Intops Co., Ltd. Bac Ninh North
Inzi Display Co.,Ltd. Dong Nai South
Elentec co., Ltd. Hanoi North
Meiko Electronics Co., Ltd. Hanoi North
Daeyoung Electronics Co., Ltd. Ho Chi Minh City South
Intops Co., Ltd. Ho Chi Minh City South
Doosung Tech Hoa Binh North
HNT Electronics Co., Ltd. Hoa Binh North
Dongyang E&P Inc. Hung Yen Province North
Mcnex Co., Ltd. Ninh Binh North
Namuga Co., Ltd. Phu Tho North
Bujeon Electronics Co., Ltd. Thai Nguyen North
Samsung Electro-Mechanics Co., Ltd. Thai Nguyen North
CammSys Corp. Vinh Phuc North
Jahwa Electronics Co., Ltd. Vinh Phuc North
Powerlogics Co., Ltd. Vinh Phuc North
48

48

24
 06/08/2024

3. Source Countries and Case Studies

Why does Samsung manufacture in northern Vietnam?

1. Proximity to China: For electronics manufacturers like Samsung, Vietnam is an attractive
alternative to China. Vietnam’s north offers a number of advantages few other locations can
match. Chief among them is its proximity to China, which gives manufacturers the ability to
more seamlessly integrate the region into their existing supply chains.
2. Port system: Hai Phong, around 100 kilometers to the east of Hanoi, has the largest deep-
sea port in Northern Vietnam. There are also plans to expand this port even further to
accommodate vessels of 100,000 deadweight tonnage. Furthermore, the port is also linked
to the surrounding provinces by both road and rail. This has allowed Samsung to develop
suppliers in other parts of northern Vietnam.
3. Skilled labor: Vietnam also has an abundance of low-cost, yet relatively high-skilled labor.
Northern Vietnam, in particular, has been an electronics manufacturing hub for years and
this has allowed for workers to flourish in terms of skill development. Hanoi, Vietnam’s
capital, is also located in the north and is Vietnam’s second biggest population center. With
the full gamut of amenities of any metropolis in the world, workers can enjoy a high quality
of life within its borders while also commuting to factories beyond the city’s borders – many
companies bus their staff into and out of Hanoi.

49

49

3. Source Countries and Case Studies

Chinese FDI

50

50

25
 06/08/2024

3. Source Countries and Case Studies

• Chinese FDI in Vietnam since 2011 has witnessed an

improvement in source nation rankings, and increase in
geographical spread and fields of investment.
• While Chinese investments in Vietnam have brought
benefits, there have been complaints that such investments
are low in technological content, use outdated technology,
engaged in price transfer, and beset with numerous delays.
• There is room for Vietnam to improve the overall
environment for foreign investors including those from China.
• On its part, the Chinese government could do more to
address the negative perception and the lack of confidence
in Chinese investments in the eyes of the Vietnamese
public.

51

51

3. Source Countries and Case Studies

Chinese projects are spread all over Vietnam.

1. Vietnam-China Mining and Metallurgy project in Lao Cai (US$337.5 million)
2. Fabric plant in Quang Ninh province (US$300 million) belonging to Texhong Group
3. Tan Cao Tham rubber processing plant in Lao Cai (US$337.5 million)
4. Iron and steel plant extension (US$340 million) in Thai Nguyen
5. Cat Linh-Ha Dong urban railway (with an initial Chinese investment of US$419 million)
6. Da River water pipeline (US$450 million)
7. Steel refining and rolling factory (US$33 million) in Thai Binh
8. Real estate project (US$100 million) in Tien Giang
9. Footwear project in Dong Nai province (with US$60 million from Phuong Dong– China)
10. Nam Thanh Dong I urban area project; halal food production plant (US$20 million) in Hai Hung
11. Plastic injection molding and plastic product manufacturing (US$420 million)
12. Electronic component manufacturing (US$18 million) in Da Nang
13. MDF plywood project (with US$10 million from Glory Wing, China) in Long An
14. Vinh Tan 1 power plant (US$1.76 billion) in Binh Thuan
15. Viet Lan Tire Plant (US$400 million) in Tay Ninh
16. Hung Nghiep Formosa Dong Nai Textile Limited Company project (nearly US$1 billion) in Nhon Trach
Industrial Park.

52

52

26
 06/08/2024

3. Source Countries and Case Studies

Chinese FDI: Positive Effects

1. Job creation, labor restructuring and improve quality of human resources
2. Helped upgrade and industrialize the economy
3. Catalytic role in attracting investments from other countries
4. Targets some of Vietnam's border provinces which have generally been
overlooked by investment capital due to poor infrastructure and low levels
of economic development: Lao Cai (27 projects), Lang Son (20 projects),
Cao Bang (7 projects) and Lai Chau (2 projects). Has helped to speed up
urbanization and modernization of remote areas
5. Export-oriented à boosted Vietnam’s exports
6. Spillovers: Helped promote the growth of other related sectors such as the
hotel, and tourism services, currency exchanges, and consultancy
services.

53

53

3. Source Countries and Case Studies

Chinese FDI: Negative Effects

1. Reliance on foreign enterprises for exports exposes Vietnam to
transnational supply chains and the economy vulnerable to global
economic conditions.
2. Type and quality of the industry and technology brought—textiles,
footwear, fiber, thermal power and mining sectors—which are potentially
polluting industries. Serious incident of pollution involving Hung Nghiep
Formosa Ha Tinh Pte Ltd raised concerns about the environmental
consequences of FDI projects.
3. Transfer pricing (involves foreign enterprises overstating the value of their
investment at the outset that negatively impacts the host country as a
result of tax losses, reduced profit, and unfair competition): FDI projects
that use Chinese technology appear to have investment costs much higher
than similar domestic projects that rely on Japanese and European
technology. This difference leads to misleading assessments of FDI
effectiveness, thereby distorting the indicators of economic efficiency.

54

54

27
 06/08/2024

3. Source Countries and Case Studies

Starbucks in
Vietnam.pdf

55

55

4. FDI Policies

• Projects with high added value, using modern technology,

environmental friendly
• Large-scale projects with highly competitive products,
adding to the global value chain
• Industrial projects shifting from outsourcing to production

• Infrastructure development projects (PPP), training of high

quality human resource, R&D, modern services projects
• Projects of Information technology and biotechnology
supporting agriculture and modern agriculture

56

56

28
 06/08/2024

4. FDI Policies

• Implement concrete legal framework, enhance transparency,

policy implementation
• Develop skills supply and productivity

• Improve infrastructure, energy and logistics systems

• Facilitate supporting industry (part and materials)
• Modernize investment promotion

57

57

The World Bank Group’s report on a new approach in attracting FDI based on
Vietnam’s strategic assets, rather than simply its resources, market-growth and low
costs

Vietnam needs a new approach to

attract investment based on its
Vietnam has done an excellent skills, innovation, business and
job in attracting these natural environment
investors, with low labour and
Market- energy costs and generous
incentives
seeking Strategic
asset-
These investors will come seeking
anyway, without the need for
promotion or incentives,
Efficiency-
if the country has attractive seeking
resources and a large market

Natural
resource-
seeking
58

58

29
 06/08/2024

To avoid the “middle income trap” and achieve high-income status, it is clear
that Vietnam needs a next-generation FDI strategy

•The XI Party Congress adopted the Socio-Economic Development Strategy 2011-2020, with a
view to reforming the country’s growth model and ensuring sustainable and green economic
development and achievement of target economic growth rates.

• The new direction and priorities for FDI are:

• Promoting FDI in accordance with the master plan of industries, focusing on high-tech,
environment-friendly and less energy-consuming sectors.
• Developing FDI in a sustainable manner with an emphasis on quality and socio-economic
impact, ensuring national defense and security, strengthening linkages to domestic
enterprises
Specifically this implies that Vietnam needs to focus on attracting FDI in businesses which:
• Generate higher wages (through creating higher-value output per worker)
• Lead to increased local skills development, technology transfer and R&D
• Stimulate more efficient resource use (not just energy, but also land, water and raw materials)
• Create opportunities for local entrepreneurs and investors to work with international
companies as part of global value chains, and do not displace local investors and SMEs
• Increase the competitiveness of all businesses in Vietnam (e.g. by improving supply chains,
logistics, etc.)
59

59

World Bank Report ‘s recommendation on top priority sectors for proactive

promotion to attract higher-value FDI
Top priority sectors for proactive promotion - to attract higher-value FDI

Short-term Priorities
Immediate Priorities – narrow window to beat competition
– critical to local value-addition Manufacturing
and competitiveness
1. Automotive & Transport Equipment OEMs
Manufacturing and suppliers
1. High-grade metals/minerals/chemicals/ 2. Environmental technologies (equipment for
plastics & high-tech components wind, solar, water-conservation, etc.)
2. Industrial machinery & equipment
Services Medium-term Priorities – in parallel with sector
liberalisation and skill-development
1. Logistics & MRO
Manufacturing
Agriculture
1. Pharmaceuticals & medical devices
1. High-value innovative agricultural products
(specialty rice, arabica, marine farming, Services
hydroponics, etc.) 1. IT services and Knowledge services (KPO –
Tourism accounting, design, etc.)
1. High-value niche tourism services 2. Financial services / Fintech
3. Education & Healthcare services
60

60

30
 06/08/2024

Questions?

61

61

Next …

Activity:
• MNE selection and presentation
• Article selection and presentation
ü Search materials
ü Choose reading
ü Discuss with your group members
ü Prepare presentation

62

62

31
 06/08/2024

Thank you

63

63

32