The year 2006 yielded great results for Vietnam in the field of external economic relations in general and foreign investment in particular. Remarkable economic accomplishments have been reaped.
Optimistic predictions of foreign investment into the country have been realised. In 2006, the total registered capital was $10.2 billion, 57 per cent up from 2005 and the highest volume since the promulgation of Vietnam’s Foreign Investment Law in 1987. The previous high mark was $8.6 billion in 1996.
Of the registered capital in 2006, nearly $8 billion belongs to 800 new projects and more than $2.2 billion is from 440 applications for capital expansion of ongoing projects. In other words, both newly-registered and expanded capital increased greatly in comparison with 2005. The rise in newly-registered capital alone was 77 per cent.
The pace of disbursement of foreign investment capital rose, in a large part due to projects expanding production. The total realised capital was estimated at more than $4.1 billion, the highest rate in 20 years and 24.2 per cent up from 2005.

Quality of projects improved
In the list of foreign-invested projects licensed in 2006, many are large-scale ventures established by multinationals. Some noteworthy examples include the Intel project in Ho Chi Minh City, with a total investment capital (including expanded capital) of $1 billion; Posco corporation’s $1.126-billion steel production project in Ba Ria-Vung Tau province; Tycoons Worldwide Steel Vietnam, with $556 million to build a steel rolling plant in the Dung Quat Open Economic Zone; and a $4-billion project by Meiko Electronics.
The year also saw positive changes in the direction of investment flow, with more money being piped into the information technology sector and other high-tech areas. In addition to Intel’s project in Ho Chi Minh City, 2006 also saw leading Japanese corporation Terumo receive a license a venture to produce healthcare equipment; a project for producing fax machines and laser printers registered by Brothers Industries; and new capital expansion and plant construction for Canon, Panasonic Vietnam, and Ritech Vietnam.
The scale of foreign investment into the country also saw changes to the list of leading investors in Vietnam. The Posco steel production project saw South Korea jump from fourth to first in the list of largest investors in terms of registered capital, whilst the US moved into second place. Japan’s investment pledges saw it in third place, however it remains ranked number one in terms of realised capital.

Revenue and export value record fast growth
Production and business outcomes of the foreign-invested sector exceeded expectations. Last year, another 250 foreign-invested enterprises were put into operation, raising the sector’s production and export power to a new plane. Total revenue of businesses in this sector reached $29.4 billion, 31.3 per cent higher than in 2005. Total export revenue of foreign-invested firms, excluding crude oil products, was $14.5 billion, a 30.1 per cent increase. With crude oil included, this revenue tops $22.6 billion, making up 57 per cent of the country’s total export value.
Total industrial production of the sector grew 19.5 per cent, higher than the average growth of the national industrial sector. With the strong growths in production and export, the foreign-invested sector was a prime force behind the economy’s growth of more than 8.2 per cent in 2006.
The economic growth of the foreign-invested sector last year was rooted in many factors. Above all stands the consistent implementation of the policy of renovation and active international integration. The 10th congress of the Vietnamese Communist Party confirmed this policy and the latter half of the year witnessed three important events: Vietnam hosting the 14th APEC week in Hanoi, WTO accession, and the US approving the PNTR for Vietnam.
Second, Vietnam’s economy maintained fast growth and income and living standards continued to improve, expanding domestic market purchasing power. Together with the international economic integration, consumption markets have therefore been expanded for businesses, both local and foreign-invested.
Third, political and social stability and the maintaining of national security have led the international investor community to highly value Vietnam as a safe investment destination.
Fourth, the system of laws and policies on foreign investment have continued to see improvement, creating a sufficient, transparent, equal and more open legal framework for investment and business activities. Last year, the government issued decrees to guide the implementation of the Investment Law and the Procurement Law, and amended a number of policies concerning investment activity. The National Assembly also passed many new laws to make the legal framework more synchronic: the Securities Law, the Technology Transfer Law, the Intellectual Property Law, and an amended and adjusted Labour Code, which has new stipulations on strike issues.
Fifth, various forms of investment promotion initiatives were carried out at home and abroad, focusing on key areas and important projects. The organisation of investment conferences and forums timed around visits of high-ranking government leaders drew vast attention from large corporations around the world.
Lastly, the dialogue mechanism between the Vietnamese Government and investors was enhanced via various forums, particularly the Mid-term Vietnam Business Forum, which created more trust amongst investors toward the government, ministries and local authorities.
As a result of all these factors, the investment environment of Vietnam has seen great overall improvement. A survey by the Japan Bank for International Cooperation (JBIC) ranked Vietnam third in investment attractiveness, after China and India and before Thailand, which was ranked third the year before.

Shortcomings
Despite the positive outcomes, there were also a number of shortcomings related to foreign investment operations in Vietnam last year.
First, though the pace of investment disbursement was higher than that of 2005, the realised capital remained much lower than the registered capital. Various obstacles to progress meant many projects were slow to establish.
Second, foreign investment continues focusing on key economic regions which have existing advantages of infrastructure and consumption markets. Investment in mountainous and remote areas and in the agriculture-aquaculture-forestry sector was unremarkable.
Third, the linkage between the local and foreign economic sectors remains limited. Many supporting industries have yet to develop sufficiently and are failing to meet the demand for materials and spare parts of larger assemblers and manufacturers.
Fourth, the infrastructure system has not developed in line with economic growth and limits the country’s ability to absorb new investment capital.
Fifth, last year the strikes hitting Ho Chi Minh City and some Southern provinces caused a negative impact on the investment environment, bringing difficulties to businesses.

Prospects for 2007
Vietnam’s positive economic achievements in 2006, including high overall economic growth, an improved investment environment, WTO accession, the US approving PNTR for Vietnam, and higher international prestige, will inject immense momentum into investment inflow to Vietnam. However, to acquire these sources, it is important to ensure infrastructural balance, especially concerning electricity and water supply, telecoms and seaport services, environmental protection, and raising the quality of manpower, in order to maintain high and sustainable economic growth and promote a new investment wave to Vietnam.
The improvements in the investment environment made to date together with the overall potential of Vietnam indicate that if the issues of infrastructure, manpower quality, and administrative procedures are well addressed, foreign investment inflow will undoubtedly continue rising. Newly-registered capital in 2007 could equal or exceed that of 2006 and in particular, realised capital will likely surpass the $4.8 billion of 2006. The foreign-invested sector is expected to expand both turnover and export value, and contribute more to the state-budget.
To attract more and make better use of foreign investment sources, the investment environment needs improving further in the following areas:
The legal environment: continuing the enforcement of the Investment Law and the Enterprise Law; timely discovery and solution to problems as they arise; issuing needed guidance documents; ensuring the synchronisation and transparency of the legal system concerning business and investment.
Administrative procedures: perfecting the one-door mechanism of investment licensing and managing offices; empowering foreign investment management agencies; perfecting the coordination, supervision, and inspection mechanisms for investment activities; timely addressing of the procedures on land, tax, import and exports and customs.
Infrastructure: continuing mobilising of every resource, local and foreign; issuing a mechanism to encourage private businesses to invest in upgrading facilities of transport, seaport, telecoms service, water and electricity supply; striving to prevent shortage of power for production and business operations.
Labour force: improving manpower training, especially occupational training, with the participation of domestic and foreign organisations in order to better meet with technical labour demand of investors.
Investment promotion: building investment promotion centres in key localities; reforming investment methods to focus more on major projects and partners.
Government role: maintaining regular dialogue between the leaders of the government, ministries and sectors with investors so as to find out and tackle difficulties and obstacles to their on-going projects; ensuring the efficiency and operation pace of these projects. Issuing policies to encourage the development of supporting industries so as to better help provide materials, components and spare parts to the assemblers and manufacturers; paying attention to the linkage of the local and foreign economic sectors.
Finally, it is necessary to effectively implement the Vietnam-Japan Initiative phase two so as to raise Vietnam’s national competitiveness.

Source: Vietnam Investment Review