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Is the FDI glass half full or empty?   2010-09-11 - VIR

Professor Nguyen Mai, vice chairman of the former State Committee for Cooperation and Investment (SCCI), now the Ministry of Planning and Investment, shares his views with VIR while looking at both sides of the coin.


Professor Nguyen Mai
Taiwanese-backed monosodium glutamate maker Vedan caught red-handed poisoning the Thi Vai River with untreated waste water was later found to be not an exception.


More than 100 golf course projects, many of which are foreign-owned, were licenced, depriving the nation of immense agricultural land. Concerns mount up over national defence importance of the localities where tens of thousands of hectares were allocated to foreign-invested forestation projects.


Steel-making projects with annual outputs of up to tens of millions of tonnes each en masse got off the ground in three or four provinces. Massive cement supplies have far outstripped domestic demand, while exports struggle to find destinations.


Many joint ventures turned into wholly foreign-owned operations after declaring losses which forced Vietnamese partners into divorces.


These media headline-grabbing stories have fueled a backlash at the ugly face of foreign direct investment (FDI), with calls for heightened caution over this investment channel.


The above problems reflected the dark side of the market economy, where profit is both a target and motive of all business activities.


Classical economics pointed its fingers at the ties between people’s greed and business people’s pursuit of maximum profit, resorting to all means like abusing legal loopholes or tax evasion. That is market defect and distortion. But that’s also why state management a necessity.


While the market place self-regulates with “the invisible hand”, a metaphor first coined by economist Adam Smith, it also needs being regulated by legislation and a state administrative regime.


Why couldn’t Thi Vai River’s serious pollution be uncovered for many years despite many environmental protection laws and regulations and the state environmental management systems, both at central and local levels?


How could excessive farming land be sacrificed for golf course projects in so many provinces before concerned ministries intervened given food security is a top national issue?


How could projects worth billions of US dollars investing in the national economy’s backbone sectors like steel, oil refinery and petrochemical be appraised by incapable provincial authorities without taking into account national interests and scientific criteria?


Those problems derived from state management errors, crippled legislation and poor capability of local governments in guiding, supervising, examining and inspecting the execution of laws and in tackling business malpractices.


Incidents are an acid test for the state apparatus’ capabilities. Local governments which day-to-day deal with business and investment activities play a critical role in detecting and tackling evils based on the laws, and preventing repetition of malpractices.


However, when analysing FDI, one should refer to the country’s legislation, policies as well as multilateral and bilateral investment agreements, and take a comprehensive approach to avoid scientifically groundless criticisms.


When Vietnam first opened its door to FDI, it cared about the amount of capital rather than its quality and socio-economic efficiency. Thus, many small-scale projects worth less than $1 million each were licenced. Due to the limited number of FDI projects then, allocation of land to those projects was easygoing. Though technical transfers were considered a way of capital contributions, it was limited to several contracts approved by the then Ministry of Science and Technology.


Nowadays, as the economy has made significant headway, the assessment of FDI should change. Quality and efficiency should be the most important measurers. Based on which, FDI has fallen short of our expectations. With around $50 billion in disbursement, FDI enterprises annually contribute less than $1.5 billion to the state coffers or 8 per cent of the budget collection, and 9 per cent of the gross domestic product (GDP).


Over the past two decades, the FDI sector has created only two million jobs, a tiny figure compared with the national demand of 1.3 million new jobs annually. Vietnam’s strength, thus, needs to shift from an abundance of labour and low salaries to a skilled and high-tech workforce to draw transnational corporations into high-tech and high-end service projects.


While land is becoming a rare resource, using land properly and efficiently becomes a big issue for FDI. It is a great pity that some provinces laid red carpets to invite foreign investors to hundreds or thousands of hectares without safeguarding national interests like food security.


Concerned ministries have yet to introduce guidelines on land allocation criteria for specific types of projects, such as the relation between investment capital and one unit of land to avoid arbitrary allocation of land.


Previously, when talking about technologies, state agencies often referred to brand new machinery and equipment or that used on a par with Vietnamese standards. Vietnam has yet to comprehensively research technologies used at FDI enterprises. It needs thorough research regarding the orientation of developing a low-carbon economy.


The research should unveil FDI enterprises’ greenhouse gas emissions over the past decades. FDI enterprises, for sure, are among those most responsible. Does the central government, ministries and provinces have any rules on technical transfers relating to low-carbon FDI?


While making an objective overview of FDI’s shortcomings, we must say FDI plays a significant role in the country’s international integration and materialising the socio-economic strategy targets. When Vietnam grappled with the global economic crisis, FDI helped brighten the national economic picture. In 2009 and 2010, FDI disbursements equaled the record high of 2008 while the country’s export turnover, a driving force of its GDP, saw a sharp drop in 2009 against 2008.


The Foreign Investment Law approved by the National Assembly in December 29, 1987 is the first law in line with the market mechanism. It is a landmark in the nation’s international integration in the context of international embargo, trading relations limited to socialist countries while the Russian ruble/US dollar were used in collecting and calculating statistics.


Initially, FDI was a necessary supplement to domestic investments. Later on, the Party and the state considered FDI as an integral part of the national economy. In 2005, the National Assembly approved the Enterprise and Investment laws which, for the first time ever, are commonly applied to both foreign and domestic enterprises. This is a big leap in authorities’ mindset on market economy and international economic integration.


In the last 20 years, FDI accounted for 25 per cent of the society’s annual aggregate development investment on average. In 2010, disbursement of FDI projects is about $12 billion, of which $10 billion is foreign capital, making up 45 per cent of the country’s industrial value and nearly 60 per cent of export turnover.


FDI has shaped many new business sectors in Vietnam like electronics, informatics, oil refineries, petrochemical with modern technologies. FDI has also helped build forces of tens of thousands of managers, engineers and highly-skilled workers.


Above all, FDI has contributed to fundamental changes in modes of production, distribution and consumption, and lifestyles of Vietnamese people, bringing them closer to the world’s standards. Those are the main colours of the FDI picture.

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