BERLIN SCHOOL OF ECONOMICS AND LAW. Institute of Management Berlin (IMB) Title: THE ROLE OF FDI (FOREIGN DIRECT INVESTMENT) IN

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1 BERLIN SCHOOL OF ECONOMICS AND LAW Institute of Management Berlin (IMB) Title: THE ROLE OF FDI (FOREIGN DIRECT INVESTMENT) IN ECONOMIC DEVELOPMENT: THE CASE OF VIETNAM Name of Student: NGUYEN THI MINH HONG Matr. No.: Master s Thesis Supervisor 1: Prof. Dr. Myriam Hadnes Supervisor 2: Prof Dr. Rainer Stachuletz Date: April 14 th, 2014

2 ACKNOWLEDGEMENTS I would like to thank Prof. Dr Myriam Hadnes and Prof.Dr Rainer Stachuletz who accept to become my supervisors for this thesis. Especially, I must express my gratitude to Dr. Myriam for her whole-hearted, patient guidance, advice and encouragement that she has provided through my thesis. I have been so lucky to have a supervisor as her. I would also like to thank all member of FAMA 1, especially Ms Thao, my monitor, who had let me know many information to catch up with the thesis schedule during my maternity period. Finally, I deeply thank my husband who has taken care of my daughter for me to finish this thesis on time.

3 TABLE OF CONTENTS INTRODUCTION...1 CHAPTER 1: METHODOLOGY OF FDI 1. General FDI The definition of FDI Type of FDI Characteristic of FDI Form and essence of FDI Joint Venture Enterprise Enterprise with one hundred (100) per cent foreign owned capital (100% Foreign- Invested Enterprise) Business Co-operation Contract The BOT, BTO and BT contract M&A (Mergers and Acquisitions) Role of FDI for development of an economy The creation job of FDI helps increase income for employees and human resources FDI is the most important capital to compensate the shortage of capital to increase investment FDI helps enhance and innovate the technology FDI promote the changing market structure FDI promotes the integration in the global economy CHAPTER 2: THE CASE OF VIET NAM 1 Political system General... 17

4 2.1 The FDI attraction The scale of FDI Industry and building branch Service branch Agricultural, forestry and fishery branch Local of FDI Foreign Investor of FDI Form of investment Evaluation of FDI in Vietnam The achievement of FDI in Vietnam FDI is an important capital to supply the demand of investment to rise the Vietnam economy FDI promotes the changing market structure, enhance the power of manufacture FDI promotes to transfer the technology FDI has positive affect to other components in the economy FDI has the significant contribution in the state budget FDI helps Vietnam integrate in the global economy FDI helps create job, rise the labor productivity and improve the human resources FDI helps Vietnam to expand the external economic relations, intergrate in the neighbour contries and international s economy The impact of FDI in environment of Vietnam The Shortcomings of FDI in Vietnam The unbalanced between industries zones and regions in Vietnam The conflict between FDI companies and labor haven t been solved The investors transfer outdated technology to Vietnam... 32

5 3.2.4 The add-value and transfer pricing problems Reason of shortcoming of FDI In Vietnam The shortcoming of management services The law system of Vietnam is unsound The priority policy for foreign investor has been exploit The shortcoming of Vietnam economy The Vietnam investment procedure is prolix The Vietnam infrastructure is inferior The support industries is underdeveloped The skill of labor is low CHAPTER 3: ORIENTATION AND SOLUTION CONCLUSION REFERENCES List of Tables Table 1: Top 10 province attracted FDI up to Table 2: The region of FDI in Vietnam up to Table 3: Top 10 countries invest in Vietnam up to Table 4: Form of investment of FDI up to

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7 INTRODUCTION Nowadays, goods, technology, and capital are easily transferred in the global economy, especially from developed countries to less developed countries. Foreign direct investment (FDI) is a mean which helps the investors in developed countries to transfer them to less developed countries so FDI plays a very important role in the economic development. In a developing country, FDI contributes a lot to the development of an economy such as receiving modern technology from investors, job creation for employees, improving labor skills. Besides, FDI helps the government to increase tax revenue, invest capital and integrate in the international economy to raise the GDP and improve the economic environment that. indirectly help to reduce poverty by the government supplies community welfare to citizens to enhance the living standard. Because of the above benefits, every country recognizes that FDI plays an important role in the economic development, so they have many positive policy to increase the FDI investor and get the highest effect from FDI. Besides, the direct benefit of FDI in poverty reduction is job creation through investments that helps employees to increase income and overcome poverty. Vietnam is a developing country which targets industrialization in Since FDI is the necessary capital for this country the government issued the Foreign Investment Law in 1987, Vietnam has been successful in attracting FDI for the development of economy. According to the report of the Ministry of Planning and Investment from December 26 th 2013 on the FDI situation, in Vietnam from 1987 to the end of 2013, this country has attracted projects with USD 230 billion in terms of commitments, the actual inflows being 78.5 billion USD. This FDI capital is a significant factor which helped the Vietnamese economy in terms of poverty reduction. According to the website of the World Bank 1

8 (2013), the percentage of people in Vietnam who live below the poverty line (equal to USD 2.25/person/day) decreased from nearly 60% in 1993 to 20.7% in In this thesis I am going to show some concepts about FDI and the role of FDI in developing countries. I also use Vietnam to illustrate the role of FDI in developing country. Finally, I derive some ideas how Vietnam can attract more FDI in the future. The main objective of this thesis is to concentrate on the FDI attraction and operation in Vietnam to This thesis is researched by collecting figures from the General Statistics Office, Ministry of Planning and Investment, World Bank, then I analyze, synthesis, statistic and compare The remaining thesis is structured as follows: Chapter I introduces the methodology of FDI, it includes some concepts of FDI which help the reader gaining an overview about FDI and the role of FDI for the development of an economy. Chapter II analyzes the case of Vietnam in FDI attraction. It includes the political system, some general situation such as FDI attraction, scale of FDI, local of FDI, foreign investor and form of investment and the evaluation of FDI in Vietnam. Chapter III shows the orientation and solution of Vietnam to attract and use FDI to achieve the highest effects. 1 ( 2

9 CHAPTER I: METHODOLOGY OF FDI 1. General FDI 1.1. Definition of FDI: Foreign Direct Investment (FDI) is the process whereby resident of one country (the source country) acquires ownership of assets for the purpose of controlling the production, distribution and other activities of a firm in another country (the host country).(imad A. Moosa-2002-p1). The international Monetary Fund s Balance of Payments Manual defines FDI as an investment that is made to acquire a lasting interest in an enterprise operating in an economy other than that of the investor, the investor s purpose being to have an effective voice in the management of the enterprise. (Imad A. Moosa-2002-p1). Or Foreign direct investment are the net inflows of investment to acquire a lasting management interest in an enterprise operating in an economy other than that of the investor. In general, investment which includes at least a 10 percent ownership of an enterprise is consider as FDI 2 Or in the website of the United Nations Conference on Trade and Development wrote that the Organization for Economic Cooperation and Development (OECD) defines a direct investment enterprise as an incorporated or unincorporated enterprise in which a single foreign investor either owns 10 percent or more of the ordinary shares or voting power of an enterprise (unless it can be proven that the 10 percent ownership does not allow the investor an effective voice in the management) or own less than 10 percent of the ordinary shares or voting power of an enterprise, yet still maintains an effective voice management. An effective voice in management only implies that direct investors are able to influence the 2 ( 3

10 management of an enterprise and does not imply that they have absolute control. 3 ). So there are 3 components of FDI: equity capital, reinvested earnings and other capital (mainly intracompany loan). The equity capital are explained the foreign investor buy capital directly from the firm in host country while reinvested earnings means the share dividend s is not pay for foreign investor but detained to reinvestment and intra-company loan means the short term and long term loan between holding company and member firm. According to above definitions of FDI, we can understand that FDI is the investor in a country distributes capital (money, machine, equipment, technology, real state, human capital, ) in a company in other country in order to have the right to manage, own or control for the maximization of profit Type of FDI FDI can be distinguished by the perspective of source country or host country. The sources country will divide FDI in horizontal FDI, vertical FDI and conglomerate FDI. First, the horizontal FDI means when the source country wants to enlarge the same or similar kind of good abroad as in their country. Second, the vertical FDI means when the source country wants to exploit the raw material or market their product in the host country. For example: the US car manufacturers realize that it is difficult to sell the car to Japan market because the Japanese like to use Japan car makers. To overcome this situation, the US car manufacturer establish their dealership in Japan to market their product. Finally, the conglomerate FDI involves horizontal and vertical FDI. (Imad A. Moosa-2002) The host country will divide FDI in import-substituting FDI, export-increasing FDI and government initiated FDI. First, the import-substituting FDI is the strategy to decline the import by the host country and the export by the sources country. Then, the export

11 increasing FDI is the strategy to seek new sources of input such as raw material and intermediate goods. It means that the host country will increase the export material and intermediate goods to the investing country and the government initiated FDI (Imad A. Moosa-2002) Characteristic of FDI According to the FDI laws, we can recognize that besides some characteristics of investment operation laws, FDI has more than 6 private characteristics. First, foreign private investors or organizations decide to invest, operate and take charge of their operation by them-self in another country. Second, moreover of circulating capital, technology is transferred between the source country and the host country. Third, foreign investors have to contribute an enough capital to have right to join in manage the operation of business. An enough capital depends on the regulation of each country. Forth, the control right of foreign investors in FDI depends on the rate of their equity capital. Fifth, dividend depends on the operation and the rate of equity capital. So, income of foreign investor in FDI is unstable. Finally, FDI has high risk in investment and be difficult in withdraw back capital because almost capital of investor is in the machine in host country Form and essence of FDI: According to Chapter 2 of the Foreign Investment Law of Viet Nam, foreign investors may invest in Vietnam in any of the following forms: Joint Venture Enterprise: Joint Venture Enterprise is defined as an enterprise which is cooperated in Viet Nam by two or more business entities based on joint venture contract or the agreement signed between the government of Viet Nam and other country or the foreign direct investment enterprise co-operate with Viet Nam enterprise. The operation of Joint Venture Enterprise base on the capital contribution of business entities; 5

12 The advantage of a Joint Venture Enterprise is that the host country will easy to overcome the lack of capital, help diversify the product, enhance technology, joint in new market, reduce jobless rate and study manager experience from foreigner while the source country will use up the host country s deliver system, save time and cost for joint in new market and create new relationship, share the cost of investment. The disadvantage of Joint Venture Enterprise is that the host country will spend a lot of time to joint in agreement of project, have many conflicts in manage the enterprise, the foreign partner usually priority the global benefit so the enterprise have to lost the interest because of other country s profit while the source country also will spend a lot of time to joint in agreement of project, do not take the initiative in manage the enterprise, be easy to lost the chance of business, have difficult in the custom and culture of the host country Enterprise with one hundred (100) per cent foreign owned capital (100% Foreign- Invested Enterprise): An enterprise with 100% Foreign-Invested Capital is defined as an enterprise which the foreigner invest 100% the capital in Viet Nam, owe, manage by foreigner and operate base on the law of host country. The advantage of the 100% Foreign-Invested Enterprise is that the host country will immediately receive the lease rent or the tax, solve the unemployment without invest capital, concentrate in attract capital and technology of encourage export sectors, easy to contact to foreign market while the source country will independent in operation, they don t have to share the profit so easy to transfer the capital. The disadvantage of the 100% Foreign-Invested Enterprise is that the host country will be difficult in study the high technology and manage skill to improve the domestic manager while the source country will bear all investment risks, spend lot of cost to reach new 6

13 market, difficult in joint in the high profit sector in host country and not have a good relationship with the host country government Business Co-operation Contract: A Business Co-operation Contract is defined as a cooperation agreement between foreign investors and at least one Vietnamese partner in order to investment, operation without establish any enterprise. This agreement will clarify the benefit and the obligation of each partner. The advantage of the a Business Co-operation Contract is that the host country will quickly solve the lack of capital, technology and join in the new market but still keep the national security and the right to manage the project while the source country will use up the delivery system of host country to joint in the restrict foreign sectors, do not spend time and cost to research new market and new relationship, share the cost and the risk. The disadvantage of the Business Co-operation Contract is that the host country will face difficulties in attracting investment, and only high profit sector. While the disadvantage of source country in the Business Co-operation Contract is not manage directly, the co-operation relationship with host country may be not stable The BOT, BTO and BT contract: BOT (Build-Operate-Transfer) contract is defined as a contract signed between a competent state agency and an investor to build and operate an infrastructure facility in a specified duration. Upon the expiration of this duration, the investor shall transfer without compensation such facility to the Vietnamese State. (Decree on investment No. 108/2009/ND-CP Date November 27 th, 2009) BTO (Build-Transfer-Operate) contract is defined as a contract signed between a competent state agency and an investor to build an infrastructure facility. After completely building this infrastructure facility, the investor shall transfer it to the Vietnamese State. The 7

14 Government will grant the investor right to operate that facility for a specified duration to recover investment capital and earn profits.(decree on investment No. 108/2009/ND-CP Date November 27 th, 2009) BT (Build - Transfer) contract is defined as a contract signed between a competent state agency and an investor to build an infrastructure facility. After completely building this infrastructure facility, the investor shall transfer it to the Vietnamese State. The government will create conditions for the investor to implement other projects for recovering investment capital and earning profit or shall make payments to the investor as agreed in the BT contract.(decree on investment No. 108/2009/ND-CP Date November 27 th, 2009) The advantage of BOT, BTO and BT contract is that the host country will attract the high investment capital that will reduce pressure for national budget but have a infrastructure quickly to attract more investment while the source country will be secure in manage their capital, absolute in manage to avoid the out of control risks. The disadvantage of BOT, BTO and BT contract is that the host country will face difficulties in studying the management experience and control the construction. Further, the government will bear risk which out of the control of investment while the source country will be difficult in negotiate the contract M&A (Mergers and Acquisitions) Mergers and Acquisitions are defined as the area of corporate finances, management and strategy dealing with purchasing and/or joining with other companies. In a merger, two organizations join forces to become a new business, usually with a new name. In an acquisition, one business buys a second and generally smaller company which may be absorbed into the parent organization or run as a subsidiary. A company under consideration by another organization for a merger or acquisition is sometimes referred to as the target (Ivy Wigmore-2013) 8

15 The advantage of M& A is that M & A will help increasing the competition ability the name of produce ( Trade Mark) was known in the market and it helps reduce the R & D and delivery cost. The disadvantage of M & A is that M & A is not only create job but also increase the jobless for host country and it can affect to the security of host country because the host country asset will shift for foreigner. Moreover, the foreign investor can choose other forms to suit with their requirement such as: holding company, joint stock company and the branch of parent company abroad 2. Role of FDI for development of an economy: FDI has many important benefits which help to develop the economy that is the origin of direct and indirect poverty reduction. In this research, I will discuss in detail the role of FDI in reducing the poverty in a developing country. As it is commonly known, the direct factor of poverty reduction is the increase in income of employees, so the human resource and creation job is the easiest factor which help reduce the poverty. Besides, there are some factors which have an indirect impact on poverty reduction such as capital, technology, market structure and the integration in the international economy. In the following, I will discuss each factor in turn The creation job of FDI helps increase income for employees and human resources The development of human resources and creation job are the main factors of FDI to force the economic development. The maximization of profit is the purpose of any foreign investor. Hence, the cheap labor resource in developing countries is the important factor why the investor chooses to invest capital. So, the employees in developing country who are 9

16 working in foreign owned company increase day by day. Besides, the provision of service and processing industry for FDI projects also creates many jobs for host country. The investment will create jobs for host country so the employee will have income for their life and reduce the unemployment rate. So, the income per capita will increase lead to reduce the distance between the rich and poor that help the inequality will be reduced in that country. Besides, when the employees have higher incomes, this will improve their health, help them to invest more in their children s education and entertainment needs that contribute in enhance the healthy, living standard and education for themselves. Because the FDI companies have high technologies, the requirement of labor in foreign owned company is high to satisfy their technologies so FDI also has positive impact in the high human resources through training to serve for some projects. The employees who work in FDI company have chance to train to practice in high technology and manage. The improvement of human resources still has active impact when the employees who are trained in FDI company move to work in domestic company. Moreover, FDI has a significant role in the nutrition and healthy for the population of the host country through projects which invest in medical. The FDI capital in Vietnam increase year by year so the demand of labor is also significant increasing. In 2000, total employee in FDI is 358 thousands appropriate 1% in total labor in Vietnam economy and increase to more than 1 million or 2.6% total labor in Vietnam economy in 2005, from 2010 to 2012, the number of the employees in FDI sector is nearly 1.7 million or 3.5% total labor in all sectors (In the website of the General Statistic Office Statistical data/ population and employment)

17 2.2 FDI is the most important capital to compensate the shortage of capital to increase investment: In order to development to improve the life of population, a country needs to invest to get profit but capital is so important in investment. A country cannot invest without capital. FDI is one of important source to compensate the capital of host country, especially the leasing develop country. According to the book the impact of FDI in the receiving country s economy published by the National Economics University (2012), almost all less developed countries have a vicious circles of development. That is: Low income leads to low saving fund, so the investment capital will low lead inefficient manufacture, the result is low income. These countries have to overcome this difficult problem to integrate in global economy. Figure 1: a vicious circles of development Inefficient Investment Low Income Investment Low Accumulation Source: Author s illustration The most set -back of less developed countries is the lack of capital which is the origin to create job, renew technology and increase worker efficiency to increase income and accumulation for the development. However, in order to create capital for economy, if these countries only depend on the domestic capital, the economy will not catch up with the development of the global economy. 11

18 So, they need the foreign capital such as FDI capital, loan stock from foreign in order to exit the vicious circles. FDI capital is the important source to overcome the lacking of capital problem without running into debt for host country. Moreover, FDI capital has advantage because the limit time to pay loan stock capital is in the short in some projects. When a foreigner invests in a country, he needs to hire the employee from that country and help the employee have income which use to spend for their necessary demand. So, the problem of host country which cause by the unemployment will be reduced FDI is the necessary capital in total investment capital of Vietnam, the ratio of FDI in total capital which change sizable, is 30.4% in 1995 and decease gradually from 1996 to 2006 to 16% because of finance crisis then increase slowly to 23.3% in 2012 (in the report annual year in the website of the General Statistic Office) According to the Vice-Ministry of Planning and Investment Portal, FDI sector is the highest growing GDP rate of Vietnam economy. In 1995, GDP in FDI increase 14.98% while increased rate of GDP in over sector is 9.54%. In turn in 2000 is 11.44% and 6.79%, in 2005 is 13.22% and 8.44%, in 2010 is 8.12% and 6.78%. the rate of FDI in GDP increase gradually from 2% in 1992 to 12.7% in 2000, 1698 in 2006 and 18.97% in The impact of FDI in growing economy shows clearly on the subsidiary capital for investment, FDI sector has contributed billion USD, equivalent 24.32% total investment capital from 1991 to 2000 and billion USD, equivalent 22.75% from The rate of FDI increases 5.4% in 2000 to 2011 (the website of the Tan Binh Industrial Park date March 21 st, 2013) 2.3 FDI helps enhance and innovate the technology The FDI s important benefit is the modern technology, high skill labor which contribute in the host country. When a foreigner invests in a country, he is not only enter the money capital but also real capital such as machine, equipment, material or scientific 12

19 knowledge, manage expertise, the efficiency to contact with the market in the host country. Therefore, these are the basic benefits of host country. Besides, FDI usually promotes new industries which require high technology that creates high effect in the industrialization and modernization and changes the economic institution. Manage skill and high technology are applied in the host country through training programs and practice the complex production technology of investor so FDI will help the host country to be utilizable the domestic resources which host country can not exploit. Moreover, host country has to train the high skill employees who can work in FDI companies. So, the skill of employees will gradually to develop to suit with the modern technology. According to Cong Thuong Newspaper date 29 th 2013 Samsung Corporation has invested 830 millions USD to build the second manufacture which specialize in manufacture mobile phone and electronic component in 2012 and 1 billion USD in June 2013, The first and the second manufacture will become the Samsung Complex which has invest 2.5 billion USD in Vietnam, will establish a R & D center and attract engineers to work in FDI promotes the changing market structure The changing market structure is not only the requirement of domestic economy development but also the internationalize one in order to join in the development of global economy. In order to integrate in the global economy, every country has to change the domestic market structure to suit with the requirement of global and their actual resource that attracts FDI easily. On the contrary, FDI also helps the changing market structure because the foreigner investor can invest the new fields in the host country and FDI supplies the high 13

20 technology in many segments that help increase labor productivity to increase rate of these segments in the economy. Some segments can be stimulated to development by FDI but some segment can be canceled by FDI. In Vietnam, FDI contributed in changing the economic component to industrialization and modernization tendency, 58.4% in total FDI capital concentrates in industry and construction which has the higher technology than general plan in this country. The growing rate of industry and construction is 18% per year in average. In 2012, FDI contributed in 45% total industry branch that helped to create some main force one such as telecommunication, excavation, gas oil process, electron, information technology, steel, cement 2.5 FDI promotes the integration in the global economy. The integration in the global economy helps the domestic economy contacts with development economies to increase competition ability. The domestic economy has to improve it s technology for the skill of employees have to enhance to suit with it. Export is the important factor in growing economy because the advantage of host country will be compete with other ones through export. The developing countries can produce the product which can compete with other countries but it is difficult in joint in foreign markets so the FDI which concentrates in export is the priority in investment because the FDI will help the product of host country to contact with the global market. The government of Vietnam has introduced the innovation program (Doi Moi) in 1986 which moves from the system of centre government planning to the diversify economy which has the regulation of government. Since, the inflows of FDI starts to move in Vietnam and increase day by day. Vietnam has joined in some organization such an 14

21 ASEAN, APEC and WTO In these organizations, Vietnam has chance to compete with other countries and attract more investment from these countries. When the inflow of FDI moves in Vietnam, the economy of Vietnam has significant development so the living of population is improved. According to Ministry of Foreign Affairs, in 2001 to 2010, the growth of export turnover average is 17.42%, it s 2.42% higher than the target of growth export strategy. After join in WTO from 2007 to 2010, the Vietnam s export increases 14% per year. In 2011, the export turn-over is more than 96 USD billions that is 33.3% higher than The export structure has increased the processing industry and reduced the raw material. Besides, the number of export market has increased more than 140% within 10 years, from 160 foreign market to more than 230 ones. 15

22 CHAPTER 2: THE CASE OF VIET NAM 1. Political system In the actual situation of Vietnam, FDI is the effect corporation form with the foreign investor. In 1986, Vietnam was a backward agricultural country which is destroyed by the war, was a least developed economy, the Vietnam economy was in serious economic crisis. The inflation rate is 700%, the manufacture in the country was sluggish, the technology was outdated and the lack of capital is the big problem of Vietnam while the countries in East Asia were reforming the economy to become the dynamic sector of the world. According to above situation, Vietnam government decided to Doi Moi means renovation in order to recover and develop the Vietnam economy by change the economy from a system of central government planning to one which placed market forces centrally in the economy of Vietnam. The government had enhanced the investment charter in 1977 to Foreign Direct Investment Law in Vietnam that is the first important law to attract the inflows of FDI into Vietnam. The content of this law is follow the diversification and multilateral the external economic relations to promote the internal force and enhance the international cooperation. Since issued in 1987 up to now, Vietnam Foreign Direct Investment Law has modified and supplemented 4 times in 1990, 1992, 1996 and 2000 to suit with the actual situations that assessed an attraction and accommodation law. So, in the unfinished market, the foreigner still invests in Vietnam easily without different with the finished market countries. In order to have an equal in the business environment and be simple in investment procedure to attract and use the foreign capital efficiently. In 2005, Vietnam parliament has issued the investment law which was valid from the July 1 st 2006, substituted for foreign 16

23 direct investment law and domestic encourage investment law that show the fair environment with foreign direct investment sector which is an important one of Vietnam economy. The investment law in 2006 confirmed the right for People s committee of each province and management team of industrial zone to certify the investment for some projects which are in government planning. 2 General 2.1 The FDI attraction: From 1988 to 1990, Vietnam attracted 214 FDI projects which registered 1.6 USD billion so the FDI didn t impacted in the Vietnam economy. From 1991 to 1995, the foreign direct investment has increased to projects which registered 18.3 USD billion that have an positive impact in the development of Vietnam economy. In 1991 to 1996, the foreign direct investment projects was bloomed in Vietnam with projects as USD 28.3 billion. The investment environment had attracted the foreign investors because of the cheap labor or new market so the foreign direct investment capital has increased quickly and has positive impact in other sector, play an important role in the economy development. In 1995, FDI capital is USD 6.6 billion in term of commitment that is more 5 times in 1991 as USD 1.2 billion. In 1996, FDI capital is USD 8.8 billion in term of commitment that is 45% increasing in In 1997 to 1999, FDI project is more than USD 13 billion in term of commitment but the capital in 1998 was 81.8% in 1997, in 1999 was 46.8% in 1998 that concentrate in small and medium projects. In this period, some projects which had registered before, had stopped in operation because of the lack of capital. In 2000, 391 projects had registered as USD 2.7 billion that is 21% higher than In 2001 to 2005, USD 20.8 billion in term of commitment was registered that was 73% higher than the target and the actual inflows were USD 14.3 billion as 30% higher 17

24 than the target. In this period, the FDI capital increased 59.5% per year gradually. However, almost project in this period is small and medium ones. In 2006 to 2007, the FDI inflow was significant increasing with the big size in the industrial sector such as steel manufacture, electronic, high technology produce and the service sector such as trading port, real estate, information technology, tourism activities. In 2006, the Vietnam FDI inflow was USD 10.2 billion as 5.7% higher than 2005 that was highest FDI inflow since In total USD 10.2 billion, nearly USD 8 billion was more 800 projects capital and more than USD 2.2 billion was the enlarge s 440 projects capital. In 2007, there are projects as USD 18.7 billion in term of commitment. Up to 2013, Vietnam has attracted projects with USD 230 billion in terms of commitments, the actual inflows is USD 78.5 billion.(figure from annual report date December 26 th, 2013 in Planning and Investment portal website) 2.2 The scale of FDI Industry and building branch: Since 1987, Vietnam has concentrated in industry and building branch but the encourage field of each period was different such as in 1990 stage, the government encouraged these projects which produce the import substitution products, the high rate export product or use the domestic resources but after join in WTO in 2006 Vietnam has abrogated above regulations. However, the orientation of FDI attraction s industry and building branch always encourage to produce the new materials, high technology product, information technology, manufacture the machinery and electronic component because Vietnam had competition advantage when attracted these projects. So, the FDI project which are above fields (produce the new materials, high technology product, information technology, manufacture the machinery and electronic component ) have an important role in the economic development, promote export, creation job as enhance the labor living. The 18

25 investment trend to be increate in high technology, oil filter and information technology of many multinational groups such as Samsung, Intel, Panasonic, Canon.. Almost projects used the high technology. To 2008, industry and building branch have largest scale with available projects as USD billion, make up 64.3% total FDI projects, 58.6% total in term of commitment capital and 68.5% actual inflows capital. Up to 2013, industry and building branch have available projects as USD 136 billion, make up 62% total FDI projects, 59% total in term of commitment capital and 64% actual inflows capital. (Figure from Planning and Investment portal) Service branch Since issued the foreign investment law in 1987 up to now, Vietnam had policies to encourage the services sector. So, the service sector has been positive movement to satisfy the demand of manufacture and consumption that contribute in the economic development. The post and telecommunication, finance, bank, insurance, air freight, sea transportation, tourism and real estate is risen quickly that help to create more job and promote the export. In 2007, the registered FDI capital of service branch was 47.7% total FDI in some projects such as port construction, real estate, amusement district building that up from 16.5 percent in In 2008, the service sector has 554 projects in force with registered capital as USD 27.4 billion. Up to 2013, there are 807 projects in services branch with nearly USD 17 billion registered capital and USD 5.3 billion actual inflow.(figure from annual report date December 26 th, 2013 in Planning and Investment portal website) 19

26 2.2.3 Agricultural, forestry and fishery branch: Since 1987 up to now, Vietnam had preferred for foreign investors who invest in agricultural, forestry and fishery branch. However, FDI capital was not concentrate in this sector because the risk in investment of this sector is higher than others. In 2000 to 2011, the FDI capital in agricultural is only 2.3 percent in total registered FDI that is a very low rate versus the Vietnam, a agricultural country. At the end of 2011, total agricultural project in force is 495 project as more than USD 3.2 billion, accounted 1.64 percent total registered capital in Vietnam. According to Foreign Investment Agency (Ministry of Planning and Investment), in 2012, total registered and added FDI is USD 13,013 billion but the agricultural is nearly USD 88 million as 0.6 percent total inflow FDI. Up to 2012, accumulation registered FDI in Vietnam is USD billion but USD billion is in agricultural sector as 1.5 percent total inflow FDI. 2.3 Local of FDI: Up to now, FDI has been invested in 64 provinces in Vietnam, However, inflow FDI is concentrate in main local which have complete constructions such as Ho Chi Minh, Ba Ria-Vung Tau, Ha Noi, Dong Nai and Binh Duong that contribute in the local economy s development and nearly provinces. 20

27 Table 1: Top 10 province attracted FDI up to 2013 Order Province Number of Project Registered and added capital (USD million) 1 Ho Chi Minh 4, Ba Ria-Vung Tau Ha Noi Dong Nai Binh Duong Ha Tinh Thanh Hoa Hai Phong Phu Yen Hai Duong Taken from the report of the Planning and Investment portal dated December 26 th, 2013 In the end of 2013, the Northern region had projects in force as more than registered USD 63 billion and nearly USD 20 billion charter capital, appropriate 31 percent of total number projects, 28 percent of total registered capital and 25 percent of total charter capital. The highest in Northern is Hanoi with projects, nearly USD 23 billion registered capital and USD 8 billion charter capital as 54 percent of total projects, 40 percent of total registered capital and 40 percent of total charter capital in the Northern. The following rank in turn is Hai Phong with 396 projects as nearly USD 10 billion registered capital, Hai Duong with 290 projects as more than USD 6 billion registered capital, Bac Ninh 104 projects as USD 4.3 billion registered capital. In the end of 2013, the Central coastal region and Highland have projects in force as more than registered USD 51 billion and nearly USD 15 billion charter capital, appropriate 7 percent of total number projects, 22 percent of total registered capital and 19 percent of total charter capital. The highest in Central coastal region and Highland is Ha Tinh with 53 21

28 projects, more than USD 10.6 billion registered capital and USD 3.6 billion charter capital as 5 percent of total projects, 21 percent of total registered capital and 24 percent of total charter capital in the Central coastal region and Highland. The following rank in turn is Thanh Hoa with 47 projects as nearly USD 10 billion registered capital, Phu Yen with 57 projects as more than USD 6.5 billion registered capital, Quang Nam with 79 projects as nearly USD 5 billion registered capital. In the end of 2013, the Southern have projects in force as more than registered USD 112 billion and nearly USD 41 billion charter capital, appropriate 62 percent of total number projects, 49 percent of total registered capital and 52 percent of total charter capital. The highest in Southern Ho Chi Minh with projects, more than USD 34 billion registered capital and USD 12.6 billion charter capital as 49 percent of total projects, 30 percent of total registered capital and 31 percent of total charter capital in the Southern. The following rank in turn is Ba Ria- Vung Tau with 294 projects as more than USD 26.4 billion registered capital, Dong Nai with projects as more than USD 19 billion registered capital, Binh Duong with projects as more than USD 18.9 billion registered capital. Table 2: The region of FDI in Vietnam up to 2013 Region Project Registered numbe capital r Charter capital The Southern the Central coastal region and Highland The Southern Petroleum Total Taken from the report of the Planning and Investment portal dated December 26 th,

29 Although Vietnam has many special preferred for investor to invest in difficult region but the FDI capital invested in these sectors also very low. (Figure from Planning and Investment portal) 2.4 Foreign Investor of FDI At the end of 2013, there are more than 100 countries to invest in Vietnam with projects as total registered USD 230 billion and USD 78.5 billion charter capital. Japan is the highest countries which invest FDI in Vietnam with projects as USD 34.6 billion and USD 11.2 billion charter capital. The second is Singapore with projects as nearly USD 30 billion registered capital and USD 7.6 billion charter capital. Taiwan is the country has projects in Vietnam with registered capital is USD 27.9 billion, lower than Japan but the Taiwan charter capital is highest with USD 11.4 billion. Table 3: Top 10 countries invest in Vietnam up to 2013 Order Country Number of Registered Charter projects capital capital 1 Japan Singapore Korea Taiwan British Virgin Islands Hong Kong America Malaysia China Thailand Taken from the report of the Planning and Investment portal (December 26 th, 2013) 23

30 2.5 Form of investment Up to the end of 2013, most foreign enterprise are 100% Foreign-Invested Enterprise form with projects as more than USD 154 billion registered capital and over USD 50 billion charter capital or 80 percent of total project, 67 percent of total registered capital and 64 percent of total charter capital. The second of foreign enterprise in Vietnam is Joint Venture Enterprise form with projects as more than USD 58 billion registered capital and nearly USD 21 billion charter capital or 18 percent of total project, 25 percent of total registered capital and 27 percent of total charter capital. The third of foreign enterprise in Vietnam is Business Co-operation Contract form with 216 projects as more than USD 5 billion registered capital and nearly USD 4.3 billion charter capital or 1.4 percent of total project, 2.2 percent of total registered capital and 5.5 percent of total charter capital Table 4: Form of investment of FDI up to 2013 Total Total charter Order Form of investment Total project registered capital capital 100% Foreign-Invested Enterprise 2 Joint Venture Enterprise Business Co-operation Contract Other Total Taken from the report of the Planning and Investment portal dated December 26 th,

31 The pie of form of investment of FDI up to 2013 (figure in table above) 100% foreign- Invested Enterprise, 79.78% Others, 1.31 % Join venture Enterprise 17.53% Business Cooperation Contract, 1. 38% 3 Evaluation of FDI in Vietnam 3.1 The achievement of FDI in Vietnam: The FDI sector haa an important role in the development of Vietnam economy that is a highest development sector FDI is an important capital to supply the demand of investment to rise the Vietnam economy: The contribution of FDI capital in the total investment has many variances. The FDI capital rate in total investment is risen from 13.1 percent in 1990 to 32.3 percent in However, in 1996 to 2000, the FDI has been reduced because of the influences of financial crisis, in 2000 FDI is 18.6% total investment. From 2001 to 2007, FDI is nearly 16 percent total investment. The FDI capital has contributed in the development of Vietnam economy. Since 1991 to 2000, GDP is continuous rising at 7.56 average percent with the detail of each sector as the follow: 25

32 - GDP rise average 8.18 percent each year while Industry and building branch rise 11.3%, Service branch rise 7.2% and Agricultural, forestry and fishery branch rise 2.4% since 1991 to GDP rise average 6.94 percent each year while Industry and building branch rise 10.6%, Service branch rise 5.75% and Agricultural, forestry and fishery branch rise 4.3% since 1996 to 2000 So, up to 2000, total GDP increase twice as much GDP rise average 7.5 percent each year while Industry and building branch rise 10.2%, Service branch rise 7% and Agricultural, forestry and fishery branch rise 3.8% since 2001 to GDP rise 8.17 percent while Industry and building branch rise 10.37%, Service branch rise 8.29% and Agricultural, forestry and fishery branch rise 3.4% in GDP rise 8.48 percent while Industry and building branch rise 10.6%, Service branch rise 8.6% and Agricultural, forestry and fishery branch rise 3.4% in GDP rise 6.23 percent while Industry and building branch rise 6.33%, Service branch rise 7.2% and Agricultural, forestry and fishery branch rise 3.79% in FDI promotes the changing market structure, enhance the power of manufacture: Up to now, FDI has an important role in the development of Vietnam economy especially industrial production. Many large industrial production projects have finished and have been promoted the other projects such as electricity, petroleum, heavy industry and export-oriented industry. The rising rate of industrial sector in FDI is always higher than the rising rate of industrial sector in the Vietnam economy that helps changing the market structure to orient industrialization and modernization and rise the rate of industrial production in FDI from percent in 1991 to 40 percent in 2004, percent in 2005, percent in 2006, 26

33 41.58 percent in 2007 and percent in 2008 while the rising of industrial sector in Vietnam economy is 14.8 percent in 2002, 16.8 percent in 2003, 16.6 percent in 2004, 17.1 percent in 2005, 17 percent in 2006, 17.1 percent in 2007 and 4.6 percent in Since 2000 to 2005, total value of FDI industrial product appropriates 42.5 percent in total value of Vietnam industrial product that rise from 41.3 percent in 2000 to 43.7 percent in 2004 and FDI has had many new industrial branchs and increase the power of some industrial branchs such as petroleum, information technology, chemical, automobile, steel, electron, electricity, agro-industry and textile industry 100 percent of some industry products such as petroleum, computer equipment, washing machine and air conditioning, 60 percent of steel product, 33 percent of electron product, 76 percent of precision health instrument, 25 percent of textile product are FDI products. The number of each sector in total add-value number of labor in Vietnam from 1990 to 2008 ( ,9 thousands people) is: - 687,7 thousand people as 4,4 percent of total add value number is in the state sector; ,2 thousand people as 95,6 percent of total add value number is in the FDI and out of state sector. The rate of labor has changed to positive result. In total add-value number of labor in Vietnam from 1990 to 2008 ( ,9 thousands people) is: 2.148,7 thousands people as 13.8 percent total add-value number is in the agricultural, forestry and fishery branch; 6.079,8 thousands people as 38.9 percent total add-value number is in the Industry and building branch; 7.396,4 thousands people as 47.3 percent total add-value number is in the service branch; 27

34 The labor productivity in industrial and building branch and service branch is higher than in the agricultural, forestry and fishery branch so the moving labor from lower labor productivity to higher productivity helps enhance the living standard of labors and reduces the poor FDI promotes to transfer the technology: FDI contributes in the transfer the advanced technology in Vietnam that helps to develop some important industry branch such as telecommunication, petroleum, chemical, mechanic manufacture, computing and motor insurance After Intel group invested USD 1 billion in 2010 to manufacture the electronic component, multinational corporation has invested more high technology projects such as Canon, Panasonic, Ritech, SamSung In general, the technology of FDI sector is always higher or equal with the develope technology in Vietnam and these surrounding countries. Almost FDI company have the advanced manager method which be connected and influenced from modern manager system of holding company. FDI has created some new produces such as new seed and high productivity in the agricultural, forestry and fishery branch FDI has positive affect to other components in the economy: The operation of FDI sector is risen through the number of projects and enlarge the manufacture size. Besides, the rising of FDI has the impact to other components through the connection between FDI companies and domestic companies. The FDI companies is not only transfer the advanced technology and manager skill to domestic companies but also create the compete motive power of domestic company to suitable with the globalization FDI has the significant contribution in the state budget Together with the development of the FDI companies, the FDI s budget is increased day by day. From 1996 to 2000, the income which FDI contribute in the state budget is USD