There are some similarities between the peak in foreign direct investment (FDI) of $8.9 billion in 1996 and the new high of $10.2 billion in 2006. According to foreign think-tanks, the 1996 peak gradually came from the introduction of the Law on Foreign Investment in 1987 before falling victim to the Asian Economic Crisis in 1997. It began showing signs of recovery in 2000 and then reached the $10.2 billion high in 2006. “We understand the surge of FDI in the two periods was driven by expectations of an improved business environment and the positive economic outlook,” said Mr Ayumi Konishi, Country Director of the Vietnam Resident Mission at the Asian Development Bank.

Membership of the World Trade Organisation (WTO), continued structural reforms to improve the business environment and the positive economic outlook all support further increase in investment. According to Ministry of Planning and Investment figures, newly pledged and additional FDI in the first four months of this year totalled $3.5 billion, representing growth of 54.7 per cent year-on-year. Many major projects are now awaiting approval, almost guaranteeing that last year’s record will be broken. “It is estimated that FDI is likely to be more than $15 billion this year,” according to Mr Konishi.

Disbursement of FDI, however, is lower. According to ADB, the disbursement rate in 2006 stood at 40.2 per cent, significantly less than the average of 68 per cent seen in the 2001-2005 period.

FDI disbursement during 1995-1997 was $2.5-3 billion. “For an economy of $20-25 billion, these inflows represented more than 10 per cent of GDP,” said Mr Il Houng Lee, Senior Resident Representative in Vietnam at the International Monetary Fund. “In this respect, the recent pick up in FDI is much smaller relative to GDP than it was in the mid-1990s.”

At $1.4 billion in the first four months of this year, disbursement is looking healthier and has increased 24 per cent over the same period last year. According to Mr Lee, the main targets of FDI remain heavy and light industries, but increasingly the tourism sector and property development have attracted attention.

In terms of exports, foreign invested enterprises (FIEs) contributed just 15 per cent of all non-oil exports in the mid 1990s. “This was partly because a quarter of FDI went to the oil and gas sector, and also, on a cumulative basis, FIEs accounted for a smaller share of the economy,” said Mr Lee.

The sharp increase in FDI commitments and the recent acceleration of disbursements augur well for continued strong export-led growth. In 2006, FIEs accounted for some 47 per cent of total non-oil exports. “With the recent acceleration of inflows, it is likely that FIEs will account for more than half of total non-oil exports in 2007 and increase further over the next few years,” Mr Lee said.

As to the destination of FDI, there is a tendency towards capital and technology intensive projects, according to Mr Konishi. Average project size increased from $3.1 million in 2004 and $4.6 million in 2005 to $9.4 million in 2006. However, the average size of approved projects has declined from $15 million in the mid 1990s to about $10 million in 2007. “This is because of the concentration of large, yet few, projects in the oil and gas sector, new city developments, and hotels, which together accounted for a much larger share of total FDI in the mid-1990s,” said Mr Lee. In heavy industry, however, the average size has increased from $12 million in the 1990s to more than $17 million in 2007. “We also find it encouraging that Vietnam is moving up in the value chain, with more investment in hi-technology such as $1 billion from Intel Corporation for a semiconductor assembly plant and the large investment by Nidec,” Mr Konishi said.

Mr Shinya Abe, General Director at Panasonic Vietnam Co., Ltd, is of the same mind. “There are some signs of increasing FDI in the services sector, which is a reflection of the economic environment being more open and that living standards and purchasing power in the domestic market are also increasing,” he said. “Hi-tech projects have been coming to Vietnam, which leads to increased FDI in the IT field.” In April 2007, Panasonic Vietnam opened two new manufacturing operations to make high-tech electrical and electronic products and electronic components with a commitment to continued development of its operations in the country since the first Panasonic AVC Networks Vietnam Co., Ltd was established in Ho Chi Minh City in 1996 to manufacture and sell audio visual products such as colour TVs.

MPI reports 38 major foreign investment projects worth $35 billion are attracting the attention of foreign investors. Taiwan’s Foxconn Group has unveiled a plan to invest $5 billion in a project to produce high tech products and set up a joint venture with the Kinh Bac City Group to build new towns with trade and recreational centres, schools and hospitals in northern Bac Ninh and Bac Giang provinces.

Another major project is a $3.6 billion Van Phong coal-fuelled power plant in south-central Khanh Hoa province being considered by Japan’s Sumitomo. Meanwhile, a $3.75 billion project to build a steel factory with a capacity of 4.5 million tons a year and exploit iron from the Thach Khe mine in Ha Tinh province has also attracted many foreign investors, including Posco from South Korea, Sunsteel from Taiwan and TaTa steel and Essar from India. Minister of Planning and Investment Vo Hong Phuc said that if just one-third of those projects become reality then the country’s goal of attracting $12 billion in FDI this year will be reached.

“Movements in capital and employment into higher productivity production, the pace of technological transformation and developing patterns of specialisation and diversification supported by the evolution in the value chain are some of the distinctive characteristics of the current flow of FDI,” said Mr Konishi. In addition, not only Ho Chi Minh City, Binh Duong, Vung Tau and Hanoi but also other smaller provinces are successfully attracting FDI now, such as Ha Tay, Hai Duong and Vinh Phuc.

Another difference between the previous boom and now, according to IMF, is the type of foreign investment. In the mid 1990s, joint ventures (mostly with state owned enterprises) accounted for 66 per cent of all FDI commitments, followed by 21 per cent fully foreign owned enterprises. “During the first four months of 2007, these ratios have changed to 12 per cent and 83 per cent, respectively,” said Mr Lee. “In other words, 83 per cent of new FDI is now accounted for by fully foreign owned enterprises.”

The recent progress is promising but more is needed to address a variety of constraints on further improving the business environment. According to ADB, sustained efforts to increase national competitiveness to attract FDI require the following: accelerating infrastructure development to both overcome existing weaknesses and to respond to rapidly growing demand for new infrastructure; addressing remaining policy, institutional and structural bottlenecks to increase private investment; improving financial intermediation; and promoting sustainable rural livelihoods.

The government is well aware of these issues, Minister Phuc told foreign investors at the Vietnam Economic Forum in late April. Besides efforts to improve administrative procedures and the legal system, he said, Vietnam sees investment in infrastructure and human resources as its most important priorities. It will concentrate investment on developing highways, seaports and electricity generation to better meet the needs of foreign investors and facilitate their operations. “Vietnam can attract more FDI if it has good infrastructure and human resources,” the Minister said. In particular, he added, environmental protection will receive special attention. “The environment must be protected to ensure sustainable development.” 

Thu Trang reports.