The FDI-driven economy?

The FDI-driven economy?

“FDI-driven economy” is the phrase used by many economists at recent business forums, meaning that foreign direct investment (FDI) is the major motive power for the national economy.

FIEs leading in production and export

Samsung Electronics Vietnam, a South Korean-invested company, reportedly exported $23 billion worth of products in 2013, putting phone and phone accessories into the Number 1 position among the major export items.

A report of the General Department of Customs showed that foreign-invested enterprises (FIEs) year after year make up a higher value of xports than the domestic-invested enterprises. In 2013, the export revenue earned by FIEs accounted for 67 percent of total export revenue.

The report also pointed out that the export growth rate created by FIEs has been continually higher than domestic enterprises, 22.4 percent vs 3.5 percent in 2013.

While domestic enterprises cannot earn big money from exports, they spend much money to import materials for domestic production. This largely explains why Vietnam had a continual excess of imports over exports in past years. The trade surplus over the last two years has been realized only thanks to the big export volumes of FIEs.

Meanwhile, according to the General Statistics Office (GSO), in 2005-2012, FIEs were responsible for 44.2 percent of industrial production, while the private sector made up 36.2 percent. State-owned enterprises accounted for the remaining 19.6 percent.

The poor performance of domestic enterprises is evidenced in the fact that the number of the enterprises ceasing operation in 2013 alone was 15 times higher than in that of 2008-2009.

What does Vietnam expect from FDI?

When attracting FDI, Vietnam not only hopes to expand domestic production and create more jobs, but also wants the economic sector to have pervasive influences throughout tthe whole national economy through technology transfer and the development of supporting industries.

However, Vietnam has failed to reach that goal. While some giant manufacturers like Samsung or Intel have set up production bases in Vietnam, they have been using parts and equipment supplied by other FIEs instead of domestic enterprises.

As of yet, Vietnamese enterprises have not been able to produce the high-value products in the giant groups’ global supply chains because of weak competitiveness. FIEs are believed to have little motivation to develop production linkages with domestic enterprises.

Of the 60 “satellite enterprises” which provide phone parts and accessories to Samsung’s factory in the Yen Phong Industrial Zone in Bac Ninh Province, only five are Vietnamese, in charge of providing simple and low-added value items like packs or plastics.

There are two opposite viewpoints about what Vietnam should look for when seeking FDI. Some argue that the country should attract small and medium FIEs, which would allow Vietnamese businesses to be the recipients of technology transfer through cooperation with the foreign partners.

Others, however, believe that the country should focus on attracting giant global economic groups at any cost, which can rapidly help foster the local economies.

The latter is the path being followed by many localities in Vietnam. The FIEs which have set up production bases in the localities have created jobs and paid taxes to the state’s coffers. However, they do not help create the driving force to develop the private economic sector.

vietnamnet