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PRAGUE UNIVERSITY OF ECONOMICS AND BUSINESS

BACHELOR THESIS

2021

Thi Ngoc Huyen DO

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Prague University of Economics and Business International Business

Impact of Foreign Direct Investment in the Vietnam’s economy

Author: Thi Ngoc Huyen DO

Thesis instructor: doc. Ing. Ludmila Štěrbová, CSc.

Scholar year: 2020/2021

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Declaration:

I hereby declare that I am the sole author of the thesis entitled “Impact of Foreign Direct Investment in the Vietnam’s economy “. I duly marked out all quotations. The used literature and sources are stated in the attached list of references.

In Prague on ... Signature

Thi Ngoc Huyen DO

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Introduction

Abundant capital is very important to each country, it is used to invest and create new assets to develop the country's economy. Vietnam is a developing country, so it is crucial to have a large source of capital to boost its economy, and as the domestic capital is limited, attracting capital from outside, in particular foreign direct investment plays an essential role. One of the significant investments to Vietnam of which results are still visible were from France and the United States when they invaded the country, they brought modern knowledge and technology, invested in infrastructure and many of the economic fields which later then became the basement for further development of Vietnam. Nowadays, investments from different foreign countries continue to benefit to Vietnam economy, contribute to improve the position of Vietnam on the global economic rankings.

Since the implementation of the Law on Foreign Investment in 1987¹ that aimed to open the country and expand trade with foreign, Vietnam has gradually become one of the most attractive destinations for investors. With the effort to boost economic growth in various fields, FDI inflows into the Vietnamese market have continuously increased over the past 10 years, being one of the South East-Asian countries receiving the most investments. However, these strong inflows of FDI do not have only positive impacts on the economy, but also certain negative impacts, on the path of economic growth and sustainable development, there are still many problems and challenges for Vietnam. Therefore, in order to move towards long term development goals, Vietnam needs to identify the negative issues and come up with necessary solutions to optimize the use of FDI inflows into the country.

FDI inflows are forecasted to surge in the coming years as Vietnam is a dynamic economy with rapid growth speed and the investment environment is always focused to improve. In the complex context of the trade war between US and China² which benefit Vietnam, and thank to its quick recovery after the coronavirus outbreak, there has been a huge increased in foreign investors’ interest in Vietnam, the impacts on the economy are also more noticeable. That is the reason why this topic is interesting for me. The goal of this topic is to clarify the role and impact of FDI on the development of the Vietnam economy, thereby state the causes and discuss the methods to improve negative effects, predict the future perspective. Methodology used for this paper: comparison (compare the change of FDI inflows in the previous 10 years), analysis (analyze the impacts on the economy), synthesis (base on the collected data gives out the conclusion of the situation).

1 Law No. 04-HDNN8 of December 29, 1987, on foreign investment in Vietnam

2 Economic conflict between China and the United State started in 2018.

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There are 3 main chapters in this thesis. The first chapter gives an overview about the FDI inflows into Vietnam in the period of 10 recent years 2010-2019, the collected data compare the growth of FDI, based on the number of projects and its scale, as well as the origins and the distribution of the FDI inflows. The last subchapter of this chapter also explains the reasons why Vietnam becomes more famous and attractive to the investors.

The second chapter goes more into detail of the main issue, it includes 3 subchapters with the first two analyze the positive and negative impacts of FDI inflows. The third subchapter states the reasons that cause the negative effects and propose some solutions for those reasons.

The third chapter involves the period when this thesis is being made, the year 2020, with the special events that affect the inflows of FDI and then bring out the future perspective by the government policies, plans and forecasts from economist experts.

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1. Overview about the FDI inflows into Vietnam in the period of 10 years

“FDI is a category of cross-border investment in which an investor resident in one economy establishes a lasting interest in and a significant degree of influence over an enterprise resident in another economy” (OECDiLibrary). In the process of economic transformation towards industrialization and modernization, FDI plays an indispensable role, is one of the most important drivers of Vietnam's economic growth. The amended Constitution of Vietnam from 2001 has emphasized that FDI is an integral part of the country economy, and attracting FDI must be included in the development strategy of Vietnam (Le Dang Doanh, 2002). The role of FDI is clearly demonstrated by its contribution, from the economic aspects to the social aspects.

In recent years, Vietnam has achieved high economic growth and is known as a dynamic and innovative country, catching the attention of international investors. FDI has contributed to the development of Vietnam in various ways: enrich capital flow, technology transfer, improve unemployment rate, increase in export and accelerate international integration process. A recent article from South China Morning Post Daily (SCMP) stated that FDI inflows into Vietnam began to rise strongly since 2013 thanks to the implementation of appropriate investment policies, as well as an abundant supply of young labor. With a steady annual growth rate of 10.4% in the period from 2013 to 2019, SCMP has evaluated Vietnam as an important center to attract FDI in the world over the past decade, a good example for other countries in the region³.

According to the statistics of the Ministry of Planning and Investment, after over 30 years of opening up and attracting foreign investment, foreign investment activities in Vietnam have changed dramatically, reaped encouraging results, drawing 30872 valid projects from 130 countries and territories with a total registered capital mounted to 362.58 billion USD and implemented capital reached 211.78 billion USD. In the 2019 Annual Vietnam Business Forum, Minister of Planning and Investment Nguyen Chi Dung continued to affirm that the foreign investment sector remain as bright spot, with the total registered capital reached the highest level for the 10 consecutive years⁴.

3 Shireen Muhiudeen, (October 19, 2020); Asean governments need a change of mindset if they want to follow Vietnam’s lead in attracting foreign investment; Retrieved from:

https://www.scmp.com/week-asia/opinion/article/3106079/asean-governments-need-change-mindset-if-they- want-follow

4 Ministry of Planning and Investment, (January 6, 2020); Brief on foreign direct investment of 2019; Retrieved from:

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The strong growth of capital inflows led to its distribution in a wider range as well.

Previously, FDI mainly only went to big cities and certain industrial zones, but now FDI companies are present in all provinces and cities of Vietnam, with diversified industries.

Although the processing and manufacturing industries are still largely dominated by investors due to Vietnam's abundant and cheap labor is still in favor, there has been a change in proportion with a decreasing trend and increasing contribution of other industries.

1.1 FDI inflows in the past 10 years

The growth of FDI during the development process has raised confidence and affirmed Vietnam's position in the eyes of investors. In the period 2010-2019, according to the firgure below from the Ministry of Planning and Investment, total registered investment capital in the 10 years period amounted to 244 billion USD, while disbursed FDI capital reached 143 billion USD. It can be seen that FDI disbursement have followed increasing trend continuously, each year is a new record compared to the previous year, despite the level of the growth has not been exceedingly high, but still increases steadily each year. However, 2012 was an exception, it was the only year in this period FDI disbursement faced a slight downward, with 10.5 billion USD, 0.5 billion down compare to the year 2011. The highest level was 20.4 billion in 2019, has almost doubled from the amount 10 years ago in 2010.

FDI attraction fluctuated more complicatedly, from 2010 to 2012, the chart showed a gradual decline from 18,59 to 13 billion USD. Then in the period 2013-2016, Vietnam regained its form before declining with a range of 20 to 25 billion USD. This growth was not so prominent because of the decline of the global economy during this period. Moreover, for Vietnam, inflation and increased input costs, difficulties in land clearance process,... were also the causes of negative impact on FDI attraction in this period. In the period of 2017 to 2019, with the influence of the US China trade war, the country witnessed a breakthrough, FDI attraction fluctuated between 35 to 38 billion USD, with the highest level being in 2019 with 38 billion USD. In spite of its complex movements, Vietnam in the period 2012-2013 asserted its position with its presence in the top 10 recipients of FDI flows in developing Asia, according to UNCTAD statistics, in World Investment Report 2014⁵. In the following years, Vietnam’s success continued to be recognized, it was in the top 3 of the largest foreign investment countries in ASEAN, according to the statistics Foreign direct investment net

http://www.mpi.gov.vn/en/Pages/tinbai.aspx?idTin=45020

5 UNCTAD, (2014); Asia tops the world in foreign direct investment, according to new UNCTAD report;

Retrieved from:

https://unctad.org/press-material/asia-tops-world-foreign-direct-investment-according-new-unctad-report

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inflows in the ASEAN region in 2018⁶. Moreover, in 2020 with the outbreak of coronavirus, Vietnam has laid stress on it reputation as one of the few countries that keep attracting foreign capital strongly in the context of the overall slowdown of world economy.

Figure 1 FDI attraction and disbursement in 2010-2019

Source 1 Ministry of Planning and Investment (2020)

1.2 Data analysis

1.2.1 Growth in the period 2010-2020

GDP is one of the most important economic indicators that can provide a snapshot of the country's economic health. It is given to evaluate the overall growth rate of the economy as well as the level of development of a region or a country. Hence, one of the ways to measure an industry's presence and how much influence it has on the economy is its percentage in GDP. In the graph below is the data collected from World Bank, FDI inflow as percentage of GDP shows the contribution of FDI in the Vietnamese economy and the change in these contributions over the years.

6 Statista Research Department, (March 19, 2021); Foreign direct investment net inflows in the ASEAN region in 2018, by country; Retrieved from:

https://www.statista.com/statistics/607222/southeast-asia-foreign-direct-investment-net-inflows-by-country/

18.59 14.7

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The graph does not show so big changes of FDI contribution in GDP, between 2010 and 2019, the fluctuation was in the range of 5 to 7%, the lowest was in 2014 with 4.94% and the highest level was in 2010 with 6.9%. It is visible that the values did not go up continuously but tended to fall gradually from 2010 to 2014 at the lowest level, then from 2015 there is an upward trend with a steady growth of more than 6% during the following years to 2019.

Besides, for comparison, the world average value is only about 1.5 - 3%, and in 2019 the value was 1.77 %, while for Vietnam in the same year, FDI accounted for 6.15 % of GDP, which shows a significant difference. It can be concluded that the role of FDI in Vietnam economy is significantly more important than the role it plays internationally.

Figure 2 Foreign Direct Investment, Net inflows (% of GDP) 2010-2019

Source 2 World Bank Data (2019)

There were many great achievements in the past years, Vietnam's position on the global economic map becomes more and more apparent, the level of trust and recognition of the world towards Vietnam is also progressively positive. When compared with other Asian countries, the prejudice that the Vietnamese economy is still weak and lags behind neighboring countries is no longer true. Vietnam in the period 2013-2019 has attracted disbursement capital worth 92.48 billion USD, outperforming other prominent economies in Asia such as Malaysia (61.51 billion USD), Thailand (60.21 billion USD), Philippines (51.45 billion USD). Although losing to India (218.74 billion USD), Indonesia (126.93 billion USD),

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FDI, net inflows (% of GDP)

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but the proportion of foreign investment compared to the economic scale, Vietnam is 3.7 to 5.7 times higher (Nguyen Duc, 2020).

1.2.2 The number and scale of investment projects

In terms of origin of foreign investment, Vietnam's main partners are still investors from Asia.

Most of long-term investments in Vietnam are made by South Korea, Hong Kong, Singapore, Japan, China. In 2019, South Korea accounted for the highest proportion of FDI inflow to Vietnam with 20.8% of total investment, worthed 7.92 billion USD, Hong Kong took the second position with total registered investment capital of 7.87 billion USD, Singapore followed as the third biggest investor with a total registered investment capital of 4.5 billion USD, which meant 11.8% of total investment capital, followed by investors from by Japan, China, etc.

In recent years, investment flow from Hong Kong and China has seen remarkable growth, due to the impact of the trade war between US and China, companies in China are concerned about US trade sanctions and want to leave to avoid US tariffs. Consequently, there has been a significant shift of FDI inflows into other Asian countries, for which Vietnam is a perfect alternative, thank to its advantages and geographical location. Compare to the same period in 2018, investment from China multiplied by nearly 1.65 times, from Hong Kong by 2.4 times.

The paradox is that Europe and the US, which are the main export markets with rapid growth in recent years, are far from ranking first in terms of investment in Vietnam. In 2019, there are 125 countries and territories invested into Vietnam, with additional investor presence from Honduras, Iceland and Lithuania, bringing the total number of countries and territories having investment projects in effect to 135.

It should be noted that this rising interest is also aroused by the very active approach of the government, which supports business forums and specifically initiates dialogues with entrepreneurs, mostly from Japan, Korea, Singapore, China, Hong Kong, Thailand, Taiwan, Germany, the Netherlands and India.

In 2019, the economy witnessed an uneven growth in the size and number of FDI projects, the whole Vietnam granted investment certificates to 3.883 new projects. Although the number of projects increased 27.5% from 3046 projects in 2018, the increase in total FDI in Vietnam was only about 7% from 35 to 38 billion USD. This happened due to the decrease in the size of average registered capital of projects, the value was 4.3 million USD compared to 5.9 million USD in 2018. FDI projects with great value in 2019 are in the processing and manufacturing sector. The biggest FDI project in 2019 came from Hongkong, it is the project

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of capital contribution and share purchase of Beerco Limited in Vietnam Beverage Company Limited that produces beer and malt for beer production in Hanoi, the total capital contribution is up to 3.85 billion USD. The second biggest project was also from Hong Kong to Techtronic Tools Co., Ltd. that worthed 650 million USD, the goal is to build a factory and a research and development center to manufacture accessories and portable electrical equipment in Ho Chi Minh City.

Some other notable projects are: The project in a small Southeastern province (Tay Ninh) to manufacture all-steel radian tires of ACTR with a total signed investment capital of 280 million USD comes from Chinese investors. Vinhtex project, with total registered investment capital of 200 million USD, was invested by Royal Pagoda Private Limited (Singapore) with the goal of producing fabric and dyeing knitted fabric in Nghe An. In addition to the processing and manufacturing sector, Vietnam also welcomed another highly anticipated FDI project in the real estate sector with the hippodrome multi-purpose entertainment complex, total registered capital of 420 million USD from Korean Group Charmvit, for building hippodrome entertainment complex, horse racing school, building and operating 3-star hotels and villas, and other civil works in Soc Son district, Hanoi (Ministry of Planning and Investment, Brief on foreign direct investment of 2019, 2020).

1.2.3 Distribution of FDI

In the field of investment, Vietnam's economic sectors are divided into groups, in which the level of investment attraction in each group is very different, foreign investors tend to focus on a few key industry groups such as processing and manufacturing, real estate, electricity production and distribution,…. In 2019, processing and manufacturing industries contributed biggest share, attracted 24.56 billion USD, accounting for 64.6% of the total registered investment capital. Real estate business attracted 3.88 billion USD, accounting for 10.2% of total registered investment capital, following by the wholesale and retail sector, scientific and professional activities, etc (Ministry of Planning and Investment, Brief on foreign direct investment of 2019, 2020).

Previously, investors in Vietnam mainly invested in big cities and provinces, with existing industrial zones in operation, and human resources were gathered in a few certain locations, nowadays, FDI companies have been present throughout the whole Vietnam. So far foreign investors have invested in all 63 provinces in Vietnam. Of which, in terms of total registered capital, Hanoi attracted the most with 8669.7 million USD, followed by Ho Chi Minh with 8338.2, Binh Duong ranked third with 3058.6 and Dong Nai took fourth place with US $

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2709.5 million. However, considering the number of new projects, Ho Chi Minh leads with 1365 projects, followed by Hanoi, Bac Ninh and Binh Duong with 919, 254 and 253 projects, respectively. It can be seen, although FDI is present in all provinces, but the distribution is still uneven among them, investors still prefer to focus on key economic zones such as Ho Chi Minh City, Binh. Duong, Dong Nai, Vung Tau in the South, or Hanoi, Bac Ninh, Hai Phong in the North, the central regions are still neglected and only attract a rather small proportion of FDI. Up to now, there are 20 low-developed provinces attracting less than 10 FDI projects / province and 4 remote provinces (Northwest, Central Highlands, and Mekong River Delta) that only attract one small FDI project.

Figure 3 Distribution of FDI by region, number of project and total registered capital, 2019

Province, City Number of Projects Total registered capital (million USD)

Ho Chi Minh 1365 8338.2

Ha Noi 919 8669.7

Bac Ninh 254 1695.2

Binh Duong 253 3508.6

Dong Nai 124 2178.8

Source 3 General Statistics Office (2019)

1.3 Attractive factors

Vietnam is considered a rising star in the Asian supply chain, according to the Economist Intelligence Unit (EIU) report, Vietnam surpassed China and India to become the most attractive destination for foreign direct investment in Asia⁷. Thanks to the socio-economic factors and favorable geographical position with, the trend of foreign investment into Vietnam has intensified in recent years.

From a social point of view, Vietnam is particularly attractive thank to the large and young population with almost 100 million people⁸, of which more than half is in the working age.

7The economist Intelligence Unit, Rising star: Vietnam’s role in Asia’s shifting supply chains; Retrieved from:

Vietnam’s role in Asia’s shifting supply chains - Economist Intelligence Unit (eiu.com)

8 Worldometers, (2021); Vietnam Population; Retrieved from:

https://www.worldometers.info/world-population/vietnam-population/

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This is both a large market for consuming goods and a market providing labor resources.

Vietnam has managed to upgrade the health care system significantly over the last decades, with an average age of 76⁹, making Vietnam one of the countries with the highest life expectancy in the Southeast Asian region. The only negative that such a successfully developing society brings with is the fact that the population is currently facing a trend of widespread aging. However, this is not a problem for current investments, but it may be a problem that the next generation will face. In addition, Vietnam has managed to reduce the number of people living below the poverty line by about ten times. Although this seems a negative effect on foreign investors, who usually look for locations with the lowest possible costs, this aspect also can be seen in a particularly positive way, as negative factors such as crime, theft, and fraud have stabilized, which means a safer business environment.

From a socio-economic point of view, it should be mentioned that Vietnam, despite the growth in recent decades, is still a location with a very low labor cost. Over the last 5 years, Vietnam has still held at about half the price per hour of work compared to its neighbor China. Although a constant growth of the nominal wage is evident, it can be attributed to the global trend, which is influenced, among other things, by inflation. In 2020, the wage per hour in Vietnam was less than 3 USD compared to China, where it is 6.5 USD. In the future, it will be possible to expect that nominal wages will continue to rise, partly due to the rise in incoming investments. This can be counterproductive in the long run, but again, it is still the problem of the very later future.

9 Worldometers, (2021); Vietnam Demographics; Retrieved from:

https://www.worldometers.info/demographics/vietnam-demographics/

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Figure 4 Manufacturing labor costs per hour for China, Vietnam from 2016 to 2020, (in USD)

Source 4 Statista (2021)

From a global political point of view, Vietnam is in a period of increasingly strong integration, this is very necessary if Vietnam wants to shorten the gap with foreign countries and create a favorable environment between countries for investors to invest and do business.

Up to now, Vietnam has signed and implemented 12 free trade agreements, and is continuing to negotiate more agreements. The image of a Vietnam actively and actively integrating into the world has been continuously strengthened, it is now a strategic and comprehensive partner of 30 countries, with more than 70 countries and territories recognizing Vietnam as a market economy. Some major economic organizations to which Vietnam is a member are Association of Southeast Asian Nations (ASEAN), Asia-Pacific Economic Cooperation (APEC), World Trade Organization (WTO) (VASS, 2019).

It is also worth mentioning that the trade war between the US and China has had noticeable effects in the growth of foreign investment in Vietnam. With the imposition of a number of US tariffs on Chinese goods, Vietnam has become a substitute for investor considers leaving China, a country resembles China geographically and socially without being burdened by trade war restrictions. It can be expected that investors who have made great efforts to move production and possibly other business activities to Vietnam will no longer have much motivation to return to China after the end of this trade war. The reason is the already mentioned cheaper labor, which used to be an attraction for foreign investors investing in China, but now its price is no longer so favorable. Investors in China often stayed due to inertia, where the costs of relocation were not considered efficient, in addition to the risk that

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production or other activities of the business would not be successfully relocated to another cheaper location. However, once investors have been forced to take this step by external factors as the trade war is happening and does not seem to get better very soon, they will have no reason to return to China from Vietnam after the end of the sanctions.

From the point of view of the domestic political-economic situation, it is essential that Vietnam is a peaceful country that has a long-term stable government, which makes quite predictable steps, which is one of the key factors on which investors decide. Despite the fact that it is a socialist republic, we find here a completely open market environment, which is covered by a market-liberal legal system, where socialism has been reduced only to restrictions based on land ownership. In some cases, the land can only be owned by citizens of the country, in some cases such as beaches, city centers, etc, it cannot be owned at all and can only be rented, even for up to 100 years (Dieu Hoa, 2020). However, these restrictions do not discourage investors to a greater extent, as their goal is usually not land ownership, but the transfer of production capacity, or investment in projects with returns in the order of a maximum of few decades.

Given the current situation related to the Covid-19 pandemic in 2020, it is very important to note that Vietnam is one of the best countries that has successfully dealt with the pandemic in the world. This also shows that Vietnam is no longer a country where there would be a problem with the application of basic rules. Economic activities in Vietnam, after a few small waves of social isolation, are fully active again like never before. This is of course beneficial for investors, even though the world economic situation stagnates, they do not need to worry about whether their investment in Vietnam will also be stagnant. The second reason is that successful managing a pandemic is a sign of a quality social infrastructure that can attract investors on its own, as it implicitly proves that a country that has managed a pandemic in this way is likely to have a sufficient quality workforce.

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2. Impacts on the economy

Vietnam's economy was severely devastated by the war in the second half of the twentieth century, after the country was completely liberated, the Vietnamese government decided to start improving the economy and rebuilding the country. However, it is not easy to rebuild the economy when there is not enough initial base, and the one mentioned here is the initial capital investment. After the war, people even had difficulty meeting basic needs, and there was a serious shortage of domestic capital. Therefore, foreign capital inflows are the main pillar for the successful development of the economy. In the process of economic reform, Vietnam decided to open up trade, from which foreign capital inflows into Vietnam have been markedly improved.

Indeed, foreign investment projects bring with them a number of positive effects, they contribute to country’s development, support economic restructure and improve economic growth by positively affecting GDP, exports, enrich state budget. In addition, foreign investment is accelerating positive trends in the labor market, including pressure to train and educate employees, increasing labor productivity and at the same time new jobs are being created by several FDI enterprises. In terms of technology, the country receiving the investment is generally enriched, as investors usually bring together new technology in order to achieve better economic results.

On the other hand, together with positive impacts, it is necessary to mention that foreign investment can also have negative consequences. In the past, when the inflow of foreign investment into Vietnam was few and small in size, its effects on the economy were often overlooked and ignored. However, with thousands of projects amounting to billions of dollars, its impacts are much more evident and should be considered. For example, imported technologies may not always be the newest ones. Furthermore, the risk of economic dependence of the host country on the home country of investors should be considered, especially in developing countries, in the absence of appropriate regulations, foreign investment can lead to difficult environmental damage.

In order to develop sustainably with foreign investment, it is necessary for Vietnam to have a clear view of the problems that exist and to identify the regulations for improving the current situation and improving future capital flows. The following chapters are a more detailed analysis of the impact of foreign direct investments on the Vietnamese economy, both positively and negatively, giving reasons and proposing some solutions to improve quality and quantity.

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2.1 Positive impacts

2.1.1 Support for development

Foreign direct investment is one of the tools contributing to the overall development of the country. It not only increases the state budget of the host country, improves the trade balance and optimize resources, but also partly maintain the harmonized relationships with other countries.

State budget improvement is also a positive effect that FDI brings. Developing countries often have very limited revenues, this is due to lack of necessary knowledge, modern technology and laxity in the state regulations, which then lead to low economic performance, poor productivity. Vietnam is not an exception. In the development process, the state budget plays essential role, educating the young people, improving the healthcare system, building more infrastructure and investing in improving the economy, etc. Attracting foreign companies to Vietnam and collecting taxes from them is a significant source of budget growth. In some provinces, revenue from FDI enterprises accounts for most of the provincial budget, Vinh Phuc 93.5%, Bac Ninh 72%, Dong Nai 63%, Binh Duong 50%¹⁰. The chart below from Ministry of Finance shows the contribution of FDI companies to the state budget, with an ever-increasing trend in the period 2014-2018, from 111603 billion VND in 2014 to 222823 billion VND in 2018, double within only 5 years.

10Binh Duong Department of Industry And Trade, (2021); FDI sector accounts for a large proportion of budget revenues in many provinces; Retrieved from:

Khối FDI chiếm tỉ trọng lớn thu ngân sách nhiều tỉnh - Xem chi tiết (binhduong.gov.vn)

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Figure 5 State Revenue from FDi enterprises (billion VND)

Source 5 Ministry of Finance (2017)

One common problem for developing countries is that they have abundant resources but do not know what to do, or do not have ability to exploit those resources. Therefore, it is necessary to have the support of other developed countries to help maximize the usage of its available resources. Vietnam is in such situation, labor is plentiful but unskilled, there are abundant of natural resources, but due to lack of capital and the unavailability of technology, it is very difficult for Vietnam to extract them efficiently. Then it is the right direction to attract foreign investors to come and help to optimize those abundant resources. With the entry of foreign investors, it is possible to help solving these shortcomings, especially by investing in staff training, investing in technologies, using their own existing business methods and procedures that developed before to get the best use of Vietnam’s resources.

The trade balance, that is the gap between exports and imports, is often negative in developing countries because these countries are often unable to produce enough for their own use, but have to import more from the stronger countries. Meanwhile, entrepreneurs want to exploit the advantages of developing countries in terms of resources, labor, prices, incentives, ... and thereby create certain additional values in their products then exported, this in turn also has a positive effect on the inflow of foreign currency into the country. Thanks to these foreign entrepreneurs, the trade of developing countries is more balanced, on the other hand, entrepreneurs also get more profit from these countries, this is a cooperation that both sides mutually beneficial. Looking at Vietnam's trade balance in recent years, along with the

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increasing trend of FDI flows, the trade balance is also continuously positive. In 2019, Vietnam's trade surplus amounted to around 10.37 billion USD, 1.5 times higher compare to 6.84 billion USD in 2018 (O'Neill, 2021).

Besides, expanding foreign relations and international integration are always a consistent and focused goal in Vietnam's foreign policy. Vietnam after the war always tries to keep its relationship in harmony with foreign countries. In the process of attracting and accepting FDI projects, Vietnam also indirectly improves relations with the ome country, facilitating reciprocal cooperation with those countries, for example increasing exports of Vietnamese products, with better and negotiable tariffs, possible to sign more free trade agreements,... In addition, Vietnam's membership in major economic organizations, as well as signed and implemented trade agreements make it easier for investors to enter Vietnam.

2.1.2 Promote economic growth

Companies from FDI sector play an important role in supporting Vietnam's economic growth.

The contribution of this sector to GDP is maintained at 6% on a permanent basis in the period 2015-2019, as mentioned in firgure 2. This 6% contribution stays stable even though Vietnam has experienced rapid GDP growth in recent years. Nevertheless, the fact that the it is stable does not mean the companies from FDI sector do not evolve. On the contrary, it means that they follow the rapid growth of Vietnam economy and keep the same contribution rate.

Exports also improved thanks to FDI companies. In recent years, Vietnam's exports have increased sharply and the country experience trade surplus for many consecutive years.

Companies in the FDI sector in Vietnam generally dominate in all of Vietnam's largest export commodity groups such as telephones, computers, textiles, footwear ... therefore they always achieve a large trade surplus. In 2019, FDI enterprises have export turnover (including crude oil) reaching 181.35 billion USD, up 4.2 % compared to the previous year and accounting for 68.8% of the country's export turnover.

The chart clearly shows that the share of foreign companies in exports is rising in the long run. The chart shows that while in 2006 the share of foreign enterprise in comparison with domestic enterprise was 38:62. In 2011 the ratio was almost balanced, at 49:51 still in favor of domestic investments, however, since 2012 there has been a predominance of foreign companies in a ratio of 56:44. In 2016, the situation was even 70:30 in favor of foreign enterprise.

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Figure 6 Share of FDI enterprise and Domestic enterprise in country's total export, 2006-2016

Source 6 Vietnam Custom (2017)

Another positive effect of the presence of foreign firms is the competitive pressure on domestic producers, motivating them to increase quality as well as optimize costs. Another advantage is the general pressure on innovation and comprehensive investment in technology, human resource and management, as well as efforts by domestic companies to build an image in the other export markets. In the long run, relying on exports of foreign companies is not the solution for Vietnam, but domestic companies must change and improve in order to control the export of the nation themselves.

2.1.3 Promote economic restructuring

The state economy is in itself a phenomenon that requires some flexibility and the ability to constantly adapt. Restructuring is a manifestation of such flexibility, which should increase the performance efficiency and competitiveness of the economy. The industrial growth rate of the foreign direct investment economic sector is often higher than the overall industrial growth rate of the whole country, so it can be said that FDI contributes significantly to support economic restructuring towards industrialization and modernization. High efficiency foreign-invested enterprises will basically pull the whole country up in the economy. In Vietnam, FDI has appeared in all sectors, but FDI is still most attracted to the industry sector, the industrial share to GDP is largely attributable to the FDI sector.

Foreign direct investment has a positive effect on the restructuring of the economy, as it brings innovation in technology, management, supports competitiveness among entities, etc.

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In the case of Vietnam, this effect is mainly reflected in manufacturing, where 58.2% of all foreign direct investments are concentrated. Companies from the FDI sector account for more than 50% of industrial production and thus contribute to the successful formation of other sectors of the economy, which are linked to industrial production in the supply chain. Those are the electronics industry, the steel processing industry, cement industry, etc.

Companies from the FDI sector thus significantly contributed to the change in the structure of exports, when the share of mining products, primary goods decreased and, conversely, the share of processed goods increased (such as the mentioned electronics and its components, plastic products, bicycles, etc.). For comparison, before 2003, oil accounted for almost 50% of the total value of FDI exports from Vietnam, later reduced to only 1% by the third quarter of 2020¹¹.

In addition, foreign investment has affected other sectors of Vietnam, such as agriculture, forestry and fisheries, although they have only a limited amount of foreign direct investment.

They have contributed to the development of these fields with the help of modern technologies, which have made these areas more efficient and enable them to achieve better results and thus be much more competitive in the global market.

2.1.4 Employment and human resource improvement

Human resource development and job creation are important factors for economic growth.

Foreign direct investment plays an important role in the growth of the host country's labor productivity, in terms of their impact on the overall structure of the labor market, they help to move workers from the low productivity sector to the higher productivity sector.

In the initial period of raising foreign investment capital, Vietnam's workforce often focused on some labor-intensive manufacturing industries, such as textiles and footwear, but today, due to strong growth in the country's technological maturity, the workforce is moving to more skilled industries such as electronics, its components, etc. This shift to more skilled fields is linked to the fact that foreign direct investment brings with it education, the development of training and operating, together with the access to more modern technologies, workers acquire skills to work with these technologies, and thus the quality of the workforce is generally improved.

11 Ministry of Industry and Trade of the Socialist Republic of Vietnam, (2020); Results of import and export in recent years and the import and export management of the Ministry of Industry and Trade; Retrieved from:

www.moit.gov.vn/CmsView-EcoIT-portlet/html/print_cms.jsp?articleId=20696

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Improving human resources in host countries can be even more effective when people working in FDI firms switch to work for domestic companies or start new ones themselves.

These workers are trained and exposed to an international work environment with modern technological machines and equipment, good work discipline and can gradually replace workers migrating from abroad.

Labor productivity in Vietnam has changed positively thanks to the capital of the foreign investment sector. At current prices, labor productivity of enterprises with foreign direct investment in 2017 reached 330.8 million VND per employee, which is 3.5 times higher than the total labor productivity in the country¹².

According to a report by the Ministry of Planning and Investment, the foreign direct investment sector creates jobs for more than 3.6 million direct workers and approximately 5-6 million indirect workers. The definition of indirect workers includes those workers who do not work directly for FDI companies but work for employers in the supply chain that the FDI company creates (for example, Samsung creates additional jobs indirectly in the manufacture of electronics by the fact that it buys plastic components from local suppliers and they can then employ more workers)¹³.

2.1.5 Technology transfer

It is said that technology is a fundamental factor for the growth and development of all countries, for developing countries the role of technologies is even more important.

Improving technological capabilities is therefore always one of the main development priorities of any country, even thriving countries such as Russia, US, Germany and Japan always aim to be at the forefront of technology. However, achieving this goal requires not only a lot of capital, but also a certain level of technological development. This development is determined by the available technology level of domestic companies, as well as the ability of workers to work with these technologies.

Foreign direct investment is often seen as a resource for the development of the technological level, and the goal of Vietnam is to access advanced technologies of developed countries through technology transfer from quality FDI projects. This transfer has two main aspects:

The first aspect is the technology transfer itself, when FDI enterprises come to Vietnam they

12Lao Dong Newspaper, (2020); The labor market and the effects of the FDI wave; Retrieved from:

https://laodong.vn/xa-hoi/thi-truong-lao-dong-va-nhung-tac-dong-cua-lan-song-fdi-817699.ldo

13 Foreign Investment Department, (2019); Diễn đàn doanh nghiệp Việt Nam thường niên 2019: Vai trò của cộng đồng FDI trong phát triển nhanh và bền vững; Retrieved from:

https://dautunuocngoai.gov.vn/tinbai/6321/Dien-dan-doanh-nghiep-Viet-Nam-thuong-nien-2019-Vai-tro-cua- cong-dong-FDI-trong-phat-trien-nhanh-va-ben-vung

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bring their own modern machines and equipment then improve and develop accordingly to domestic socio-economic conditions. The second aspect is the development of application organization at the host country level. This application aspect involves increasing employee skills and the development of all other relevant application areas in the host country.

Indeed, FDI has greatly contributed to the process of improving the level of domestic production technology. Products made in Vietnam are increasingly recognized in the world, Vietnamese enterprises, thanks to the development of modern technology machines, have produced better quality products with more beautiful designs and cost savings, many new products that can be produced domestically and do not need import from abroad, even replace exports of the FDI sector. According to the latest information from Brand Finance, in the list of 100 most valuable national brands in the world in 2019, Vietnam National Brand is ranked 42nd is valued at 247 billion USD, up 12 billion USD, equivalent to 5.4% compared to 235 billion in 2018 (Trade Promotion Bureau, 2019). Furthermore, technology transfer also reduces the time and money from the state budget compared to a situation where all innovations would come only from own development. Instead, Vietnam can just directly skip steps and continue developing from existing technology from FDI sector.

2.2 Negative impacts

Together with the positive effects on the economy, foreign direct investments also have negative effects that Vietnam should recognize and try to overcome. Before when the scale and quantity of FDI projects were still small, negative issues were often ignored and avoided, but now the economic development of the country is more stable, it is time to look deeply into the issue and face challenges, in order to optimize and minimize negative impacts of inflows of foreign capital into Vietnam.

2.2.1 Economic dependence

Economic dependence is one of the negative factors of foreign investments. Although, on the one hand, the investing party enriches the host country with its resources and enables it to grow economically, on the other hand, the investing party strengthens its economic influence in the country. Unfortunately, economic influence goes hand in hand with political and social influence, so an enormous amount of foreign investment can subsequently limit a country's sovereignty, or rather its ability to function in the interests of its citizens and independently of the interests of foreign influences.

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In essence, economic dependence lies in over-reliance on foreign direct investment. This is especially the case when foreign investment has an unequal structure of investment received, most of which relies on a few key investing countries in which the investors originate. In addition, investments usually come mainly from multinational companies, and the economy of the host country, especially Vietnam, will have some degree of dependence on capital, technology and consumption under the control of these multinational companies. Among the specific negatives we can include the fact that foreign direct investment is a source of foreign capital, which is difficult to control and which can leave the investing country if, for example, a political event occurs.

Another strongly negative factor is the fact that in the event that problems occur on the part of investors (either by their will or due to force majeure), such problems may affect many parts of the economy, affect exports, market situation, labor market and ultimately to have a more significant impact on GDP. And in such situation Vietnam has very limited opportunities to exercise its influence over foreign investors, as it has no civic relationship with them.

At present, it can be seen that Vietnam is already in an awkward situation, as mentioned in figure 5, 70% of exports is produced by companies from the FDI sector. This is good for the present, as it bolsters the position of Vietnamese exports in the international market, but if in the long run only foreign companies dominate the market without development and growth of domestic companies. Then the development is not sustainable, not the development of Vietnam itself but only of those strong FDI companies, companies that the country can hardly control comprehensively.

As Vietnam serves as a source of cheap labor, it is very vulnerable to external shocks, for example a country with a young population and cheaper labor appears in the labor market. At such a moment, it is entirely in the hands of foreign companies whether they will leave or stay in Vietnam. For companies originating in Vietnam and managed directly from Vietnam, the government may in some way restrict their leaving the domestic market. However, for companies from the FDI sector, this possibility is considerably limited and thus essentially creates dependence on the management of companies, which often operates from abroad.

A specific example is the Vietnamese economy's dependence on Samsung, the corporation which accounts for 20% of the country's total export. According to the Asian Nikkei, Vietnam's GDP fluctuated significantly because of Samsung in 2017, when it fell to 5.1%

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between January and March, all due to global recall of Galaxy S7 model with the faulty batteries¹⁴.

2.2.2 The cost of attracting FDI

Host countries usually try to attract investors from abroad in the form of various investment incentives, such as tax cuts, long-term tax exemptions for certain projects, reduced land rents, simplification of factory building permits, etc. These benefits attract foreign investors on the one hand. However on the other hand they basically discriminate against local investors. In addition, these benefits for attracting foreign investment tend to be very costly, so that in extreme cases they can have such an impact that the state budget is ultimately loss-making on them. It is very difficult for the state to evaluate whether the given project will eventually become advantageous for the country as a whole.

Incentives for FDI enterprises are necessary to attract investment flows, however, if the incentives are too great, it will lead to an unfair environment for domestic enterprises. The percentage of preferential, exempt, and reduced corporate income tax amounts to the total corporate income tax payable at the common tax rate is 48% for FDI enterprises, while this rate for state enterprises is 4.6% and for non-state enterprises it is 14% (Xuan Yen, 2020).

In addition to the too high preferential tax rates, one remaining problem is that the preferential regulations are not clear. According to the current regulations, FDI companies with investment projects in some fields which are specially encouraged to develop, for example related to advanced technology, environmental protection, ... can enjoy tax exemption in the first four years and only 5% in the next 9 years (Bui Thi Yen, 2020). The Law on Corporate Income Tax stipulates the application of preferential taxes to "high technology such as electronics", but does not define a high technology, but only classified according to the category name, leading to the "electronic assembly" industry is also considered as the preferential beneficiary. Enterprises taking advantage of this ambiguity to reduce the tax burden, leading to a decline in the state budget (Xuan Yen, 2020).

This applies to Samsung, including its non-advanced technology subsidiaries. Due to tax incentives, in 2013, Samsung Vietnam exported an amount of 23 billion USD worth of goods (the first year of applying the 5% corporate tax rate) but only had to pay tax of 1,000 billion VND). In 2015, Samsung made a profit of more than 70,000 billion dong but only paid 1684

14 Nikkei Asia, (2017); Vietnam rides on Samsung's coattails; Retrieved from:

https://asia.nikkei.com/Economy/Vietnam-rides-on-Samsung-s-coattails

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billion dong in tax, while applying the normal tax rate, the corporate income tax that Samsung must pay is 13,000 billion dong (Ha My, 2019).

2.2.3 Technology transfer

Although the supply of new technologies is primarily considered positive, it is necessary to mention its negative effects on the market or the environment of the host country.

One problem is rather short-lived but the consequences are not really small. It consists of the fact that new entrants (companies from FDI sector) often compete with domestic companies that do not have the updated technologies, and this may weaken the original domestic production in the short term and distort its competitiveness. In many cases, large corporations entered Vietnam, weakening and then completely eliminating its domestic rivals, leading to the disappearance of many Vietnamese enterprises. This problem may gradually disappear over time, as the local companies start adapting to advanced foreign ones, the remaining ones then can enjoy many positive aspects that FDI brings. However, it is also impossible to neglect the fact that many Vietnamese small and medium-sized companies cannot survive this period.

A more serious problem is the issue of importing obsolete technologies, which are more cost- effective but have a number of negative externalities. Inadequate legislation in Vietnam, together with almost non-existent controls or easily being corrupted, can lead to the usage of machinery or chemical products that have already been banned or restricted in more developed countries. In such a situation, foreign investors essentially benefit from the country's inability to identify and effectively solve negative externalities. Vietnam thus partly becomes a kind of technological landfill, which consumes a large amount of energy, pollutes the environment, etc.

From a taxation point of view, FDI companies also often take advantage of technology transfer through artificially raising the prices of these technology equipments, resulting in fake losses to avoid taxes in Vietnam.

However, the main problem is that the most modern technologies are not imported into the country. According to Mr. Hoang Quang Phong, Vice-President of the Vietnam Chamber of Commerce and Industry, the number of high-tech FDI companies is only 5%, 80% use medium technology, the rest use outdated technology ¹⁵.

15 Ministry of Industry and trade, (2020); Technology transfer from FDI: Not as expected; Retrieved from:

https://www.moit.gov.vn/tin-chi-tiet/-/chi-tiet/chuyen-giao-cong-nghe-tu-fdi-chua-nhu-mong-%C4%91oi-19810- 3101.html

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According to the World Economic Forum (2016), the efficiency of technology transfer from companies in the FDI sector in Vietnam is surprisingly low and tends to be increasingly pushed out of other countries in the region. Specifically, in 2009, Vietnam ranked 57th globally in this criterion; But by 2014, Vietnam had fallen to 103rd place, down 46 places after five years, far less than regional countries like Malaysia in 13th place, Thailand in 36th place, Indonesia in 39th place, Cambodia in 44th place¹⁶.

2.2.4 Environment

There are opinions that the worst impact of foreign investment is a negative impact on the environment. According to a report by Yale school of the environment, the relation between the increased inflow of foreign direct investment and the devastation of forests, water resources and minerals in developing countries has been demonstrated¹⁷.

This is related both to the above-mentioned import of obsolete technologies and to the very difficult enforcement of monitoring and sanction measures. Although they exist to some extent in Vietnam, there is no way to enforce them effectively.

The paradox is that the very absence or low enforceability of such measures in itself attracts investors, as it represents a relief for them from the costly environmental regulations that prevail in developed countries. In the long run, however, it is absolutely undesirable to maintain this situation, as it is a typical example of development that is not sustainable and is taking place at the expense of the future. The impacts are both on the environment directly and on other sectors of the state indirectly such as: pollution brings higher health costs, loss of tourists in the tourism sector, damage to the fishing industry due to improper handling of industrial waste, etc.

Although the damaged environment is a necessary price to pay in industrialization process, it also needs to be mentioned and minimized for the future. Currently, the trend of green and sustainable development is spreading all over the world, but for businesses, the social responsibility to the environment is a "burden" in term of cost or just a way of marketing when they need to improve their image. The Vietnamese people have witnessed a lot of violations of environmental protection regulations from companies in the FDI sector. Here are a few FDI projects that have been found out among many that are causing serious consequences to the environment and on the lives of people near industrial zones. Vedan

16 World Economic forum, (2017); The Global Information Technology Report 2016;Retrieved from:

http://www3.weforum.org/docs/GITR2016/WEF_GITR_Full_Report.pdf

17 Yale school of the environment, (2018); Foreign direct investment in developing countries: A blessing or a curse?; Retrieved from:

https://environment-review.yale.edu/foreign-direct-investment-developing-countries-blessing-or-curse

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Vietnam Company discharged wastewater up to 5,000 m3 / day into Thi Vai River in 2008, Hyundai Vinashin buried 60 tons of toxic chemistry in 2008, Sonadezi discharges non- standard wastewater into the Dong Nai River in 2011, Formosa directly discharged Cyanide toxic waste, causing hundreds of tons of fish to die, devastating the marine environment in Central Vietnam in 2016¹⁸.

2.3 Causes and solutions

In the medium and long term, the attractiveness of foreign direct investment remains a key challenge for economic growth, compensating for the lack of capital in recipient countries, especially developing countries. But everything has two sides, foreign direct investment gives practical advantages, on the other hand there are also disadvantages that can harm the receiving country. For the disadvantages of foreign direct investment, with careful and adequate preparation and appropriate measures, Vietnam can minimize these negative effects and harmonize the relationship of foreign investors with national interests in order to create a positive overall benefit.

Although trade has been opened for more than 30 years, the results Vietnam obtained from abroad investments are still not entirely satisfactory, of which the quality and quantity of FDI projects can still be improved. In the context that global FDI flows continue to decline, other countries in the region, especially China, India, Indonesia,... are working hard to improve the investment environment with more preferential policies. Hence, Vietnam must also proactively identify the negative aspects of attracting foreign direct investments in the economy, politics and society, especially with regard to the environment, and then propose appropriate solutions and create concrete plans to overcome the shortcomings and challenges it faces. In order to attract quality projects and be ready to welcome the wave of foreign direct investments in the coming years, there are certain factors that Vietnam should focus such as quality of its infrastructure, allocation of FDI projects, laborforce standard and appropriate government policies.

18 Lưu Nguyên Sơn, (August 8, 2020); Doanh nghiệp FDI: Xuất lộ những "mảng tối" về môi trường; Retrieved from:

https://baotainguyenmoitruong.vn/doanh-nghiep-fdi-xuat-lo-nhung-mang-toi-ve-moi-truong-309691.html

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Lord Deighton, Commercial Secretary of the Treasury, said: Good infrastructure is the backbone of a strong modern economy¹⁹.

The fact is that a functioning infrastructure is a great attraction for foreign investors, as the infrastructure is followed by a number of related aspects that are necessary for business in addition to manpower and sufficient resources. There is a vicious circle that does not allow countries that do not have developed infrastructure to develop. The inflow of foreign investment largely allows the infrastructure to be built, but if it has not yet been built, it is very difficult to attract the investment itself. To break this dilemma, it is important that infrastructure is not spared from the outset and that the requirements of FDI investors are met.

The developed infrastructure must include, in particular, transport connections between cities, waterways, or air connections between more distant locations. It also must include sufficient storage capacity, sufficient electricity supply and an adapted energy network, water supply, communication network. In a broader context, this includes the system of waste management and the possibility for companies to connect to these systems.

Although Vietnam's infrastructure is still improving, there are still problems with energy stability, insufficient road transport, which includes serious traffic jams, and especially waste management problems. World Bank's 2019 Vietnam Development Report, “Connecting to Development and Shared Prosperity” shows the uneven development of transport infrastructure across the country with congestion at major border crossings as trade grows in Vietnam. The problem is, the outdated railway system, the maritime system does not have the necessary technologies, the aviation industry represents around one fourth of Vietnam's import and export value, but the infrastructure is still limited. Only 4 of Vietnam's 22 airports have their own cargo terminals, and this area should be improved in the near future, as it goes directly against the trend of distance shopping (by the internet), which uses air transport for fast delivery²⁰.

The general solution is sufficient planning for building infrastructure across all levels, i.e. at the national, regional and local levels. One of the successes in attracting large, high-quality foreign direct investment projects is Long An, which focuses on infrastructure investment.

Long An has completed many important plans for 2020 with a vision for 2050. Specifically,

19 Gov.UK, (2013); Infrastructure is the backbone of a strong economy', says Deighton; Retrieved from:

https://www.gov.uk/government/news/infrastructure-is-the-backbone-of-a-strong-economy-says-deighton

20 World Bank, (2020); Vietnam Development report, page 2; Retrieved from:

https://openknowledge.worldbank.org/bitstream/handle/10986/33139/Vietnam-Development-Report-2019- Connecting-Vietnam-for-Growth-and-Shared-Prosperity.pdf?sequence=1&isAllowed=y