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FDI fails to meet quality target   2010-08-03 - Viet Nam News

Foreign direct investment (FDI) has undoubtedly played a major role in the country’s economic growth but it is a mixed blessing, according to economists.

In the early years, foreign investors mostly entered into joint ventures with local businesses, investing just 70-75 per cent of the capital. But now many of them are starting 100-per-cent-owned businesses.
In the early years, foreign investors mostly entered into joint ventures with local businesses, investing just 70-75 per cent of the capital. But now many of them are starting 100-per-cent-owned businesses.
It is the Government’s hope that FDI will help develop the industrial and agricultural sectors by bringing in modern technologies but foreign investors have chosen to focus on services.

At a recent review of 20 year of FDI flows, economists pointed out that while the money invested has risen sharply, the quality of investments – based on criteria like technology transfer, improving workers’ skills, and modernisation – has not made much progress.

Nguyen Mai, chairman of the Foreign Business Association, spoke about an unusual situation that is developing.

In the early years, foreign investors mostly entered into joint ventures with local businesses, investing just 70-75 per cent of the capital. But now many of them are starting 100-per-cent-owned businesses.

"Although the situation has not been studied enough to understand the consequences, I think it is high time to consider this," he said.

Pham Chi Lan, a senior economist, pointed out that many foreign companies falsely report losses to evade tax.

She cited the example of the automobile industry. Last year, during the global financial crisis, 60 per cent of foreign companies announced losses. The rates in 2007 and 2008 were 70 and 61.3 per cent, respectively.

Another economist, Bui Kien Thanh, said many FDI enterprises set up factories and hire workers at very low cost in Viet Nam, imported raw materials and produced goods for export at very competitive prices.

"For a pair of shoes, they cite a price of US$10-15 on the invoice and pay little or no tax claiming very low profitability. But when the shoe reaches a third nation, they sell it at a much higher price," he said.

Since 1996, the Government has provided incentives for foreign investment in agriculture, forestry, and aquaculture. In 2005, the Government conferred special status on these sectors.

But all this has failed to attract foreign investors. While investment in these sectors declined, investment in services skyrocketed.

In 2008, almost a quarter of FDI was in real estate.

"Cash flows into services significantly increased but it did not have much impact on technology transfer and labour skills," Phung Xuan Nha, a researcher said.

Around 10 per cent of businesses still use technology from the 1970s, 30 per cent from the 1980s, and 50 per cent from the 1990s, he said.

"Quality should be the first criterion for FDI in modernised economies," Mai said.

Tran Dinh Thien, head of the Viet Nam Economics Institute, said: "Viet Nam has for too long exported minerals. Foreign businesses are also allowed to do so. This must stop."

In the last three years, Da Nang has cancelled licences it issued for four FDI projects, including a golf course to be built at a cost of US$12 million.

The central province of Quang Nam is completing the formalities to cancel the licence issued for a gigantic tourism project with an investment of $10 billion by two US-based companies, TANO Capital and Global C&D, because they did not pay the deposits despite getting a licence as long ago as September.



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