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Vietnam needs new way of thinking about FDI   2010-11-25 - VNR 500

The Government of Vietnam once hoped that the foreign direct investment (FDI) in Vietnam will help improve the quality of the labour force and through technology transfer contribute to knowledge-building of Vietnamese enterprises. However, neither of the targets has been reached yet.

FDI – the bright part of the national economy

 

Statistics showed that by January 1, 2009, the number of foreign invested enterprises (FIEs) had reached 5625, accounting for only 2.7 percent of total number of enterprises in Vietnam. However, that sector has been making great contribution to the national economy.

Its ratio of contribution to GDP increased 2.5 times within 10 years, from 1995 to 2005 to 16 percent and even 18.33 percent in 2009.

The contribution of FIEs to the state budget also increased twofold within eight years, reaching 10.52 percent in 2008.

FIEs made a particularly large contribution toward the 1.5 times increase of the industrial production value in the whole national economy within 10 years, from 1996 to 2006. The sector has also created many jobs, accounting for 22.2 percent of total number of workers employed at enterprises.

The other side of the coin

The Government of Vietnam once hoped that the foreign direct investment (FDI) will help improve the quality of the labour force and through technology transfer contribute to knowledge-building of domestic enterprises. However, in both these areas, everything seems to go contrary to the expectations of policy makers

It is obvious that the majority of labour employed in the FDI sector are unskilled female workers. The number is overwhelming even the big FIEs, listed in VNR500 (the top 500 Vietnamese enterprises)
The average income of workers in the private sector remains modest. While the average income of workers in the state sector was 192 million dong per head in 2008, the figure was only 97.5 million dong for those in private sector.

Another big problem in the FIE labour force in is that the percentage of trained workers remains small. At a factory out of tens of thousands of workers, only tens workers would have attended training courses abroad. This said, these are usually only several weeks long.

It seems that foreign investors come to Vietnam to set up production bases, because they want to exploit the cheap and large labour force in the country, without seeing other advantages here

Regarding the technology transfer, it is obvious that the number of technology transfer cases remains very limited. A recent survey on the efficiency of the FDI sector showed that in 2004-2009, the TFP indexes (total factor productivity) of the state, private and FDI sectors were 8.6, 3.1 and (minus) -17.6, respectively.

The TFP index is higher in the state sector, which shows that though it requires a lot of capital, it is much more efficient in terms of technology transfer

Meanwhile, the index is minus 17.6 for FDI, which means that in this economic sector, the growth depends on other factors, such as cheap workforce, not technology. Many surveys conducted by different institutions show that many production lines and equipments imported to Vietnam are in fact backward/outdated technologies.

Besides, in many cases, the equipments and machines used by FIEs were found as causing environmental pollution. However, as Vietnam continues offering incentives and laying ‘red carpet’ to welcome foreign investors, many FIEs still keep defying the business ethics and even violate the law.

Vietnam needs new way of thinking about FDI

Experts say it is now the right time for Vietnam to become choosier in selecting foreign investors. The licensing must be based on the common interest of the economy, and Vietnam should prioritise the projects which can bring knowledge and technology transfer.

It is now the right time for Vietnam to set the sustainable development as the top priority when calling for FDI.

Policy makers should set up the requirements on FIEs relating to the development of the human resource. For example, Vietnam can encourage enterprises to implement the plans to recruit and develop local human resources right when foreign investors apply for investment licenses.

It is also the right time for Vietnam to say “no” to the projects which cannot meet the requirements set by Vietnam‘s strategy for long-term sustainable development.



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