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TERM PAPER:

FDI in Vietnam: Current Issues and Future Prospects

Student: Nhan T. TranEmail:[email protected]

Professor: Dr. Syed Tariq Anwar

International Marketing Fall Semester
mailto:[email protected]:[email protected]:[email protected]:[email protected]


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CONTENTS

Abstract

Introduction

I. Theory and literature review about FDI

1. What is FDI?................................................................................................................................................ 6

2. Literature review .................................................................................................................................... 7

II. FDI in Vietnam............................................................................................................................................ 10

1. An overview of FDI in Vietnam...................................................................................................... 10

2. Achievements and challenges ....................................................................................................... 13

3. Prospects and Reforms: Implication for International Marketing ............................ 16

III. Conclusion................................................................................................................................................ 21

IV. References................................................................................................................................................ 22

V. Table/charts................................................................................................................................................ 24


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Abstract

The purpose of this paper is to overview and find out the current status of FDI in Vietnam.

First of all, the paper will give you an overview of FDI from starting opening the market to

now and how FDI effect to Vietnams economy. As FDI plays an important role to the

development of any developing country. It not only supply capital, but also brings newtechnology, management skills, which are necessary for the economic growth.

From the findings of FDIs impacts to Vietnam, the paper will point out what existing

problems or weaknesses in the policy framework, which reduce Vietnams attractiveness in

drawing FDI. Then, the research suggests some policies, which may help Vietnam in

attracting greater FDI in the future. Also, some suggestions for foreign investors is

mentioned here in order to help them to be successful when investing in Vietnam.


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Introduction

FDI plays a crucial role and contributes significantly to development of developing

countries. It not only supplies capital for economy, but also facilitates technology transfer

which are the important factors enhancing economic growth.

Vietnam introduced the reform economic policy called Doi Moi (Renovation) in 1986, which

marked the beginning of economic growth. This reform process has resulted remarkable

achievements in increasing gross domestic product (GDP) and reducing poverty. Real GDP

growth has been constantly high, averaging nearly 7.1 per cent per annum in the 1990-2010

period, and has led to a sharp fall in poverty, from 58.0 per cent in 1990 to 10.6 per cent in

2010. GDP per capita, measured in current prices, exceeded USD 1,000 in 2010, allowing

Viet Nam to reach lower middle-income status (VIIR, 2012 P.17).

The first Law on Foreign Investment in 1987 marked the starting of attracting foreign direct

investment (FDI) in Vietnam. A large amount of FDI has flown into Vietnam. By 2011, total

FDI registered capital was around USD$ 230 billion over 14,998 FDI projects. The total

implemented capital of these projects amounted to around USD$ 89 billion (GSO, 2012). And

FDI in general has upward trends over years. As calculated, from 1988 to 2010, the annual

growth rates of registered and implemented FDI came to an impressive number of 34.0 per

cent, greatly outweighing the growth rates of other developing country recipients of FDI.

It cannot deniable that FDI plays an important role in enhancing Vietnams impressive

economic growth. It not only brings capital to the Vietnam economy but can also bring

modern technology, managerial expertise and more industries, products and jobs. For

example, in 2010, the contribution of foreign invested sectors to GDP was estimated 20

percent, compared to proportion of 14.5 percent in the period 2001 to 2005. Foreign


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invested enterprises (FIEs) also contribute significantly to Vietnams export, jumping from

47 percent in 2005 to 57.2 percent in 2007 (VIIR, 2012 P.40). Besides, FDI helps to shift

economic restructure toward industry and service and improve industrial production

capacity. The share of the agricultural sector has reduced from 80 percent in 1988 to only

22 percent in 2011, while industry and services proportion has increased to 78 percent. Up

to now, FDI sector has created jobs for about 2 million workers directly and a large number

of indirect labor (VAFIE, 2012).

Because of being an important factor to the economic growth, it is useful to know what the

main determinants affects FDI inflow or what problems existing, which may reduce FDI into

Vietnam. From there, Vietnam can improve or adapt to attract more FDI flow. The purpose

of this research is to find out what problems challenging Vietnam in drawing FDI inflow. The

paper is divided into 3 main parts. The first one gives brief information on FDI development

in Vietnam since the late 1980s. Then, it shortly reviews impacts of FDI in Vietnam

economy. In the final section, the study identifies solutions, which Vietnams policy makers

may be looking for in order to improve its attractiveness to foreign investors. The change in

policies will help to improve the host country environment for FDI. Also, in the final part,

some recommendations for foreign investors are suggested with the purpose of helping

investors achieve more successful in Vietnams business environment.


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I. Theory and literature review about FDI1. What is FDI?FDI can be defined in many ways depending on purposes and organizations. It is usually

considered as a channel through which for technology and capital is able to transfer from

developed counties to developing countries. Or other definition by Kotabe and Helsen, it is

understood that investment in manufacturing and services facilities in a foreign country

with an intention to engage actively in managing them (Global 5th edition P.36).

According to the IMF and OECD definitions, direct investment reflects the aim of obtaining a

lasting interest by a resident entity of one economy (direct investor) in an enterprise that is

resident in another economy (the direct investment enterprise). The lasting interest

implies the existence of a long-term relationship between the direct investor and the direct

investment enterprise and a significant degree of influence on the management of the latter

(Maitena D. & Banco D.E, 2003 P.2)

One other official definition of FDI concentrates in what level of equity a company must

have in a foreign entity to give control. According to the IMF, the landmark for making up

direct foreign ownership is "10% or more of the ordinary shares or voting power of the

entity in the host country". Most governments use the IMF definition as the basis on which

to measure flows of FDI in their balance of payments (FDI magazine, 2011). Similarly to

definition of IFM, EconomyWatch defined FDI as a type of investment that involves the

injection of foreign funds into an enterprise that operates in a different country of origin

from the investor. Investors are granted management and voting rights if the level of

ownership is greater than or equal to 10% of ordinary shares. Shares ownership amounting


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to less that the stated amount are termed portfolio investmentand is not categorized as FDI

(2010).

In general, FDI is defined as an investment involving a longterm relationship and reflecting

a lasting interest and control by a resident entity in one economy (foreign direct investor or

parent enterprise) in an enterprise resident in an economy other than that of the foreign

direct investor (FDI enterprise or affiliate enterprise or foreign affiliate). FDI implies that

the investor exerts a significant degree of influence on the management of the enterprise

resident in the other economy (World Investment Review, 2007 P.245).

2. Literature reviewa. Crucial factor for FDIFDI in one hand is one of crucial factors for the growth of country, especially developing

countries as it supports finance, technology, management method, which is special

important for development. For example, in the theoretical literature, FDI plays a role of a

carrier of foreign technology that can boost economic growth (Findlay (1978) and Romer

(1993)). Haddad and Harrsion (1993), Kokko et al. (1996), and Alfaro et al. (2004) point

out that FDI can increase the growth rate in the host economy through technology transfer

(cited in Economics bulletin, 2008). Multinational corporations (MNCs) that are a vehicle of

FDI can help to improve human capital in host countries, for example through training

courses offered to their subsidiaries local workers. The training course can be beneficial to

all employees ranging from less skilled to highly skill workers. Research and development

activities taken by MNCs also contribute to humean capital growth in hos countries and thus

enable their economies to grow in the long run (Balasubramanyam and Salisu

1991, Blomstrom and Kokko 2001)
http://www.economywatch.com/foreign-direct-investment/definition.htmlhttp://www.economywatch.com/foreign-direct-investment/definition.html


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In the other hand, economic growth is also an important determent for attracting

FDI. For instance, a research of Chakrabarti (2001) concludes thatcountries that are more

successful in attracting FDI are developed countries with a high degree of openness or in

other words, higher economic growth results in higher FDI inflow. Borensztein et al. (1998)

examine the effect of FDI on economic growth in 69 developing countries over the two

decades. They have utilized data on FDI flows from industrial countries and suggest that FDI

is an important mean for the transfer of technology, and contributing relatively more to

grow than domestic investment.

Because of its important role, it is necessary for the host country to know what

determent to draw FDI. As Faeth (2009) highlights, higher profitability in foreign markets

enjoying growth, lower labor costs and exchange risks are the factors that attract FDI.

b. Develop of FDIInternalization theory was first introduced by Buckley and Casson (1976). According to

them, the market of intermediate goods is highly imperfect with information asymmetry,

and contract enforcement and bargaining costs. A firm decides to internalize depends upon

industry-specific factors such as the product kind, the market structure, the economies of

scale, region-specific factors such as differences due to distance and culture, nation-specific

factors such as political and financial factors and firm-specific factors such as management

skills. MNCs that were high on research and development activities were high on the factor

of internalization. Caves (1971) emphasized on differentiation of products as monopolistic

advantage. According to him, in an imperfect market, MNEs engaged in product

differentiation and were induced in horizontal FDI. This is because FDI was preferred over

export or licensing when knowledge was employed in differentiation of products.


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Based on Kindlebergers theoretical models (1969) along with those of Hymer (1976) and

Caves (1971) (cited in Faeth, 2009), an alternative analytical framework emerges - a "new

theory of trade" - that combines the advantages of ownership (knowledge) and location

(market size and low transaction costs) with technology and the intrinsic characteristics of a

country (factor endowments).

c. Government policy of FDIGovernment policies that include tax breaks, subsidies and easy repatriation of capital

(Faeth, 2009) can thus influence the choice between exporting, FDI and licensing. This issue

has been examined by a number of authors, such as Bond and Samuelson (1986), Black and

Hoyt (1989) and Hubert and Pain (2002) (in Faeth, 2009), who have concluded that

financial and fiscal incentives, tariffs and lower corporate tax rates have positive effect on

attracting FDI (Faeth, 2009). Corruption is another, equally important, factor in firms'

decisions to opt for a particular place. Bnassy-Qur et al. (2007) and Cleeve (2008) are

among those authors who say that low levels of corruption are linked to greater prosperity

and have a considerable influence on the institutional quality of a country, and stimulate its

development.

The country investment conditions have a great impact on the foreign firm's

internationalization process. This legislative framework is then applied by shaping the

"provincial investment conditions" which imply also transaction costs (North, 1990) and

influence the foreign firm's choice of investment mode. Meyer and Nguyen (2005) observe

that foreign firm prefers the area where provincial institutions encourage their transactions.

Recently, Phan's study (2012) indicates clearly that foreign investors prefer great cities and

industrial zones in Vietnam. This preference could be explained by two major reasons. First,


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industrial zones are always encouraged by the local government's favorable legislations

(such as reductions and exemptions of taxes, of import-export duties). Second, areas having

a great number of FDI are usually more populated and more developed ones, not only

economically, with better qualified manpower but also with a better infrastructure.

All in all, the various theories on FDI set out a number of determinants that could explain

foreign direct investment flows, involving the micro (e.g., organizational aspects) and macro

(e.g., resource allocation) dimensions (Dunning and Lundan, 2008). Since this work aims to

identify the factors that have been found to best explain FDI flows to a particular location, it

concentrates on the macro dimension.

II. FDI in Vietnama. An overview of FDI in Vietnam

From the first law on Foreign Investment in the late 1987 that granted legal status for

FDI inflows, Vietnam has been greatly attracted attention from foreign investors. FDI inflow

into Vietnam increased every year during the 1990s and in the 2000s. From 1988 up to

December 2011, there were 14,998 FDI projects receiving investment licenses with total

registered capital amounting to US $229,913.7 million. Registered capital reached the

highest in 2008 with US$71,726 million and 1,557 projects. Then, the register capital fell

sharply to US$23,107.3 in the following year. However, the implementation capital just

reduced slightly from US$11,500.00 to US$10,000.00. Although the registered capital

decreased in 2010 to US$19,886.10, implementation capital increased to US$11,000 and

estimated the same in 2011 (GSO, 2012).

Table 1 shows the overall trend of FDI inflows in Vietnam. The opening of the

Vietnamese centrally planned economy moving forward market oriented economy in 1986


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and the first Law on Investment introduced in 1987, which liberalizes and facilitates the FDI

regime, together with the fast economic growth of the 1990s, led to a rapid increase in FDI

inflows in the first half of 1990s, peaked in 1996 at US$10,164.10 million and dropped

sharply after that. The 1997-1998 East Asian crises could be one of the reasons for the

downturn in FDI inflows as two third of FDI volume in Viet Nam came from these countries

in the early 1990s. Since 2004, FDI inflows into Vietnam increased rapidly again. This could

be attributed to the improved investment environment, and the Governments permission

for foreign investors to invest in some previously Government-monopolized industries, for

example, electric supply, insurance, banking, and communications (Anh, 2005). In

particular, WTO accession in 2007 enhanced Vietnams growth prospects, leading to faster

surge in FDI inflows. However, due to the 2008 global financial crisis, FDI into Vietnam since

2008 felt down again. In addition, some other limitations as the lack of transparency in

property and land rights, dispute resolution mechanisms, preferential treatment of local

firms and suppliers, corruption, and infrastructure constraints in Vietnam are the other

reasons of the decline in FDI flow (Schaumberg-Muller 2003, p.48).

In term of counterparts, up to the December 2010, Vietnam has attracted FDI capital

from many countries, in which Asia countries accounted for the most number both in

projects and registered capital. Table 2 shows that Japan is the biggest foreign investor in

term of commitment capital for the period 1988-2010 with US$ 24,381.7 million, accounted

for 12.2% of total FDI invested in Vietnam, followed by Korea, Taiwan, and Singapore. After

the signing of US Vietnam Bilateral Trade Agreement in July 2000, investment from United

States has been increasing. The United States now is the eighth biggest countries invested in

Vietnam with $10,431.6 million, accounted 5.24 percent of total registered capital.


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About the kind of business activities, Vietnams economy has been able to attract FDI in

all sectors. However, most of FDI projects in Vietnam have focused on manufacturing (US$

93 billion) and real estate activities (US$ 47 billion). Other areas, which also draw interest

from investors, are construction, accommodation and food service activities, electricity, gas,

stream and air conditioning supply, and information and communication (see table 3).

According to the Ministry of Planning and Investment, all 64 provinces and cities in 7

regions of Vietnam have attracted FDI, but foreign investors priority concentrate their

investments in key economic areas where they can take advantage of more developed

infrastructure. Table 4 shows the accumulation of projects until 31/12/2011, the Red River

Delta and the South East regions have accounted for average rate of 27.4 percent and 57.6

percent of total FDI commitment, respectively. Other five regions received only 14.97

percent of total committed FDI inflows at the same time. Ho Chi Minh City and Hanoi

accounted for 29.52 and 16.76 percent, respectively. The other southeast provinces such as

Phu Yen, Binh Duong Ba Ria-Vung tau, and Dong Nai absorbed another 33.17 percent of

total FDI, far more than the principal northern provinces of Hai Phong, Hai Duong and

Quang Ninh, which absorbed just 7.64 percent. The factors caused this spatial concentration

of investment is the infrastructure advantages such as volumes of roads, airports, freight,

postal services and telecommunications of Red River Delta region and the South East region.

FDI in Viet Nam is primarily green-field investment. This mostly because of enacting of

the Law on foreign investment, FDI could only set up under the form of green-field

investment. However, the mode of FDI has changed remarkably recently. In the period 1988

to 2001, the dominant form of foreign investment was joint-venture; wholly owned-foreign

enterprises played a much less important role. The accumulated FDI data shows that there


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was more than 60.0 per cent of implemented FDI flowing into Vietnam under the form of

joint-venture companies for the period 1988-2011, and it now shift to the form of wholly

owned-foreign enterprises. The changing relative importance of joint ventures and wholly-

owned foreign enterprises resulted from Viet Nams commitment upon joining the WTO

that the use of the joint venture form is no longer stipulated when foreign investors apply

for an investment license (VIIR, 2012)

In general, Vietnam is a good destination for foreign investors. FDI inflowing into

Vietnam is increasing over the years, especially capital from other Asia Country such as

Japan, Korea. Although all provinces and cities have FDI projects, but almost projects focus

in places where have better infrastructure or better transportation.

b. Achievements and challengesFrom the first Law on Foreign Investment in 1987, FDI did not have a significant impact

on the socio-economic situation the first three years 1988 - 1990. But from 1991 to 1997, it

took place the first wave of FDI capital with 2,130 projects and registered capital of US$ 33.4

billion, and implemented capital of US$ 12.4 billion. However, from 1998 to 2004, due to the

negative impact of the regional economic crisis, the capital for this period was US$ 24.38

billion, down 27 percent over the period 1991-1997 and majority in 3,968 new projects had

small-scale.

The year 2005 restarted the second wave of FDI into Vietnam, with registered capital of

US$ 6.839 billion and implemented capital of US$ 3.3 billion. Since 2006, Vietnam has

attracted large amounts of FDI. Disbursement figures also positive. The report of Ministry of

Planning and Investment show that the total registered capital of 13,496 FDI projects, which


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was still in period of validity, was $ 195.9 billion, implemented capital was $ 88.2 billion,

accounting for 43.2 percent of the registered capital in the period 1988 and 2011.

In general, FDI has contributed significantly to the implementation of Vietnam socio-

economic development objectives. First of all, FDI provides investment capital for

developing economy. The share of FDI in total investment of the whole society was 30

percent in period 1991 - 2000, 16 percent in period 2001-2005, and increased to 28 percent

in the period 2006-2011. FDI contribution to GDP in the period 2001 - 2005 was 14.5

percent, increasing to 20 percent in 2010. Besides, foreign invested enterprises also have a

positive impact on tax. It is suggested that income tax contributed to state budget in 2010

was US$ 3.1 billion, raising 26 percent comparing with earlier year, and accounting for

nearly 18.8 percent of total Government domestic revenue.

In addition, FDI has generated about 40 percent of industrial output value. Export

turnover of FDI companies has increased very fast. If during the period 2001 and 2005, it

was only US$ 57.8 billion, from 2006 to 2010, it increased sharply to US$ 154.9 billion,

representing 55 percent of total exports of Vietnam (including crude oil). Besides, one

important research by Thanh and Duong (2011) highlighted, in the short term, a 1%

increase in implemented FDI helps raise the exports of domestic firms by 0.25%. This short-

term impact is even larger than that for Vietnams total exports. One explanation of this is

that various EIFs in Vietnam mainly supply goods and services to the domestic market and

FDI is just a means for foreign enterprises to get over the import barriers in Vietnam. In the

longer term, the elasticity of domestic enterprises exports to implemented capital of FDI is

0.61, or roughly 2.5 times larger than the short-term impact.


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FDI also helps to shift economic restructure toward industry and service and

improve industrial production capacity. The share of the agricultural sector reduced from

80 percent in 1988 to only 22 percent in 2011, while industry and services proportion

increases to 78 percent (GSO 2012).

Moreover, FDI plays an important role in creating jobs, increasing labor productivity,

modernizing management and corporate governance, training and improving human

resources. Up to now, FDI sector has created jobs for about 2 million workers directly and a

large number of indirect labor (MPI 2012). Total employment in FIEs grew at an annual

compound rate of 26% compared to 9.1% growth in local firms (Athukorala & Tien, 2012).

In aspect of labors wages, FDI may have direct and indirect effects on average wages.

The direct effects operate through MNEs paying higher wage levels than those paid by

domestic firms operating in the same sector, hence raising average wages. The indirect

effects arise through the positive impact that the entry or the presence of MNEs may have

on wages in domestic firms. The empirical results from the research by Hoi and Richarch

(2010) show that wage levels in domestic private firms are higher in sectors where there is

a higher presence of foreign firms, and domestic private firms with backward linkages to

foreign firms can gain productivity spillovers and pay higher wages.

Last but not least, FDI has contributed to the development of Vietnam in many other

ways such as technology transfer, improving the balance of international payment,

increasing access to international markets and expending foreign affair, etc.

The decline of FDI in Vietnam is more pronounced, while its recovery is slow and not

steady if compared to other ASEAN economies. Especially, FDI flowing into Vietnam reduced

highest in 2011 comparing with other ASEAN countries. Among the economies of Asian


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Southeast Nations (ASEAN), fours countries including Brunei, Indonesia, Malaysia and

Singapore have had highest FDI capital inflow. While developing countries such as

Cambodia, Laos also recorded FDI flows relatively positive, FDI into Vietnam fell $ 570

million to $ 7.43 billion and is also the lowest in the past four years (WIR 2011 P.45).

Overall in East Asia, China leads in FDI inflows with UDS$ 124 billion, followed by

Hong Kong with $ 83 billion in 2011. China as a member of the WTO and a rapidly growing

economy is expected to attract an increasing amount of FDI, in period 2005-2007 FDI inflow

into China reached US$ 76 billion while the FDI inflow into ASEAN was US$ 64 billion (see

table 5). In 2008, due to global financial crisis, FDI in all ASEAN countries reduced sharply to

US$ 50 billion, but FDI in China still increased to amount of US$ 108 billion. From these

numbers, there are no doubts that China is a strong competitor for FDI not only for Vietnam

but also for all ASEAN-countries (WIR 2011 P.46).

The pattern of FDI in the world has changed in recent years. If in the past, the most of

investors or MNCs wanted to invest on "greenfield" projects, they now prefer merger and

acquisition (M&A), which help them to access the new market more quickly and

concurrently reduce costs and risks. Transnational companies have shifted to a strategy of

building component production and assembly within vertically integrated production

system so that investment in one country is closely coordinated with a chain of companies

in various other countries.

c. Prospects and Reforms: Implication for International MarketingAssessment of international organizations shows that Vietnam is still an attractive

investment destination for foreign investors. World Investment Prospects Survey (WIPS)

2010 2012 belong to the United Nations Conference on Trade and Development


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(UNCTAD) shows that Vietnam has promoted three ranks, ranking first in level of FDI

attractiveness in ASEAN and is one of the 10 most attractive economies for foreign

investors, especially for Japanese investors and other developing economies in Asia.

Besides, Vietnam is also an attractive country for investors from the United States and

EU countries. If in the past, investment inflows to Vietnam had been mainly from Asia such

as South Korea, Japan, Taiwan, Singapore, Malaysia, and Hong Kong, recently there has

been a new tendency. That is the investment inflows from the United States and EU

countries. Especially, the United States can potentially become a giant investor in various

areas in Vietnam. Also, investment inflows in the past were mainly in such industries as oil

and gas exploitation, automobile and motorbike assembling, components, spare parts, steel,

processing, and nowadays strongly focus on development of infrastructure, new urban

areas and services such as information technology, finance, banking, tourism, trade, hotel

construction, fishery, forestry, thus enabling these inherently-slowly-developed industries

to strongly develop in the coming time. If in the past, investors to Vietnam were small and

medium ones, making individual investment, at present a large number of giant and

transnational corporations from the United States, EU, South Korea, Japan, China, Germany,

Australia come to Vietnam for conducting surveys and planning to strongly invest in

Vietnam.

However, in order to draw more FDI and become more attractive to investors, it is

necessary for Vietnam to deepen the reform and improving the business environment. In

addition, the increasing international competition with China and other ASEAN-countries

categorically requests from Vietnam a more rapid and systemic reform, up-grading its

infrastructure if Vietnam wants to reverse the current obvious decline on FDI.


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As the biggest limitations in alluring FDI include infrastructure, human resource and

institutional incomplete, some suggestions for reforms that Vietnam need to do at this time

are as below:

Up-grading of infrastructure, especially in power supply is one of the top priorities. FDI

will record more success if the country focuses on the creation of infrastructure that can

grow and sustain the manufacturing sector (Komawar 2012). Also, the reform of public

administration must produce tangible results for the business community like reform of

regulations system as it has been initiated by the Enterprise Law. The establishment of a

sound legal framework is an essential step that can ensure a stable investment environment

and enhance investors confidence (Havard Law Review P.1995). All needs to be done in

order to keep the environment at a competitive level.

Training and re-training Vietnamese labor forces are on the agenda. As appreciation

from investors, the quality of human resource in Vietnam is quite low. Therefore, it is

necessary for Vietnam to increase the labor force quality in different ways like vocational

training, foreign languages, health and industrial discipline. In addition, modernizing

training facilities with professional teachers, including cooperating with foreign or

international training corporations wherever needed, is an essential duty in order to

provide an increasing pool of skilled workers which are nowadays a scarcity in contrast to a

huge untrained and unemployed labor forces in rural regions.

Other trade promotional measures include developing a system of investment

promotion, providing information abroad on the investment opportunities and investment

environment in Vietnam. Vietnam has to hold investment promotion program frequently in

order to introduce investment opportunities or supply information about investment in


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Vietnam. Hopefully the reforms could bring the rich potential of the Vietnam's economy into

play and attract FDI, reducing the gap between Vietnam and the regional economies.

Implications for International Marketing:

1. Setting up factoryIn general, Vietnam has a good environment, infrastructure is improving gradually, and

quality of labor force is also higher, while the cost price is competitive if comparing with

other countries as Thailand, China. The foreign companies, especially in manufacturing field

what require using many labors can invest in Vietnam to best use of cheap labors.

Therefore, they can save manufacturing cost and reduce product price. Or in other word, the

foreign company can apply cost leadership strategy here. It is easy for them to build a large-

scale factory in Vietnam because the Government encourages big projects that use a large

amount of workers. Usually, with these big projects, the local Government has preferential

tax policies in the first two years, that really support for the company in a new environment.

2. Understanding customersIn order to be successful, foreign investors should research carefully about culture, business

environment, and legal and political system in Vietnam. Although, Vietnam is a quite

traditional country, it also has the trend to modernize. In addition, income is higher, and

standard of living is improved gradually. As a result, consumers more and more pay

attention to quality product. In the mind of Vietnamese customers, they prefer products

importing from developed countries or products of MNCs which have a good reputation in

the market. However, if compared to other countries, income in Vietnam is still quite low,

therefore, Vietnamese customers is still quite sensitive with the price. It means that low

price with acceptable quality products will be easier to access Vietnamese consumers. The


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MNCs, therefore, can apply global marketing strategy here. The companies entry the market

by setting the wholly owned subsidiaries or exporting the same products as parent

countries, but deleting some of characters to reduce price.

3. Competing with Chinese goodsOne more thing, investors should know about Vietnamese customers is that they usually

consider Chinese products as low quality ones. In addition, some problems related to

products imported from China recently have caused more suspicion to the quality of

Chinese products. Vietnamese consumers feel not safety when using these products.

Besides, the conflict between Vietnam and China about sea boundary this time has led to the

boycott to Chinese products from a part of customers. This is a chance for MNCs to

penetrate into Vietnam market, where is used to be dominated by Chinese products.

4. M & ABeing affected by global financial crisis in 2008, many Vietnamese companies have to face

with difficulties or risks of going bankrupt. As FDI is a vehicle for MNCs to invest in foreign

countries. MNCs can take this opportunity to invest in Vietnam by acquiring Vietnamese

companies. This facilitates MNCs accessing the market more quickly. Also it helps the

company saving cost, which may be very huge if investing on greenfield projects.

5. Choosing field of investmentDuring the last time, most of projects concentrate in manufacturing areas which are

intensive labor use such as shoes, clothes. Also, as the data from GSO, projects and capital

flowing in real estate area stand number two. However, some of limitations and difficulties

happening in recent time show that this is not really a safety and stable for long-term


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investment. Vietnam is in period of modernizing, so MNCs can focus on sector, which

requires high technology like producing computer or electronic units, etc.

III.ConclusionIn conclusion, FDI is an important factor for Vietnams economic growth. According to Dr

Patrick Kormawa, the Regional Director and Country Representative of UNID, FDI will

enable the country to explore and develop their potential. It not only supports Vietnam in

capital, but also helps the country to increase GDP, export turnover and create employment

opportunities. However, FDI into Vietnam is reducing recently time. Of course, there are

some reasons from external factors as competing from China or other ASEAN countries or

affecting of global financial crisis. It also cannot deniable that there are some internal

reasons as poor infrastructure, unstable and non-transparency legal policies, and low

quality human resource. In order to improve the Countrys competiveness in attracting FDI,

it is necessary to upgrade infrastructure, complete legal system and increase the labors

skills.

As regard to foreign investors, to do business successful in Vietnam, they should research

carefully about culture, consuming habit, and business environment. As each country has

different culture and different consuming habit. What products are preferred in parent

countries may not gain the favor in the host countries. Moreover, business environment in

each country also has differences. It is necessary to make a depth research to take the best

advantage of the host country and reduce risks, which may happen when investing there.


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References

Athukorala, P. and Tien, T. Q. (2012). Foreign direct investment in industrial transition: theexperience of Vietnam.Journal of the Asia Pacific Economy. 17 (3), 446-463. DOI:10.1080/13547860.2012.694699.

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Tables

Table 1: Vietnam FDI registered and Implemented Capital

Number ofprojects

Total registered capital(Mill. USD)

Implementation capital(Mill. USD)

Total 14,998 22,9913.7 88,945.5

1988 37 341.71989 67 525.51990 107 735.01991 152 1,291.5 328.81992 196 2,208.5 574.91993 274 3,037.4 1,017.51994 372 4,188.4 2,040.6

1995 415 6,937.2 2,556.01996 372 10,164.1 2,714.01997 349 5,590.7 3,115.01998 285 5,099.9 2,367.41999 327 2,565.4 2,334.92000 391 2,838.9 2,413.52001 555 3,142.8 2,450.52002 808 2,998.8 2,591.02003 791 3,191.2 2,650.02004 811 4,547.6 2,852.5

2005 970 6,839.8 3,308.82006 987 12,004.0 4,100.12007 1,544 21,347.8 8,030.02008 1,557 71,726.0 11,500.02009 1,208 23,107.3 10,000.02010 1,237 19,886.1 11,000.02011 1,186 15,598.1 11,000.0Source: General Statistic Office of Vietnam (GSO 2012)


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Table 2: Top 10 FDI countries as of 31 December, 2011

Source Country Number of projectsTotal registered

capital (Mill. USD)

Japan 1,555.00 24,381.70

Korea 2,960.00 23,695.90

Taiwan 2,223.00 23,638.50

Singapore 1,008.00 22,960.20

British Virgin Islands 503.00 15,456.00

Hong Kong 658.00 11,311.10

Malaysia 398.00 11,074.70

United States 609.00 10,431.60

Cayman Islands 53.00 7,501.80

Thailand 274.00 5,853.30

Source: Vietnam GSO 2012


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Table 3:Foreign direct investment projects licensed by kinds of economic activity

SectorNumber of

valid projects

Total registered

capital (USD)

Manufacturing 7,987 93,053,036,629

Real estate activities 373 47,002,093,570

Construction 839 12,499,828,279

Accomodation and food service activities 314 11,830,450,512

Electricity, gas, stream and air conditioning supply 68 7,397,576,933

Information and communication 713 5,697,348,354

Art, entertainment and recreation 134 3,636,188,809

Transportation and storage 318 3,261,787,463Agricuture, forestry and fishing 469 3,218,267,739

Mining and quarrying 70 2,974,765,137

Wholesale and retail trade, repair of motor vehicles and

motorcycles669 2,066,900,735

Financial, banking and insurance activities 75 1,321,550,673

Human health and social work activities 73 1,015,496,074

Professional, scientific and technical activities 1,137 982,999,594

Other service activities 115 716,481,106

Water supply, sewerage, waste management and

remediation activities27 709,884,540

Education and training 152 354,721,448

Administrative and support service activities 104 187,693,821

Total 13,637 197,927,071,416



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Table 4: FDI structure by Cities/ Province as of 31/12/2011

Number

of

projects

%Total registered

capital (Mill. USD)%

WHOLE COUNTRY 13,440 100.00 199,078.90 100.00

Red River Delta 3,682 27.40 47,443.20 23.83

Northern midlands and mountainareas

345 2.57 2,856.50 1.43

North Central area and Centralcoastal area

809 6.02 41,458.00 20.82

Central Highlands 135 1.00 772.80 0.39

South East 7,746 57.63 93,694.20 47.06

Mekong River Delta 678 5.04 10,257.50 5.15

Petroleum & Gas 45 0.33 2,696.70 1.35

SOME OF CITIES/ PROVINCES

Hanoi 2,253 16.76 23,596.00 11.85

Quang Ninh 95 0.71 3,794.00 1.91

Hai Duong 253 1.88 5,286.10 2.66

Hai Phong 338 2.51 6,133.20 3.08

Thanh Hoa 42 0.31 7,121.70 3.58

Thu Thien Hue 64 0.48 1,916.80 0.96

Da Nang 210 1.56 3,463.10 1.74

Quang Nam 76 0.57 4,976.50 2.50

Quang Ngai 21 0.16 3,803.90 1.91

Phu Yen 54 0.40 6,480.70 3.26

Binh Duong 2,135 15.89 15,461.60 7.77

Dong Nai 1,075 8.00 18,200.40 9.14

Ba Ria-Vung Tau 274 2.04 25,891.10 13.01

Hochiminh 3,967 29.52 32,019.60 16.08



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Table5: FDI capital inflow and outflow into Vietnam and region period 2005-2011

FDI flowsPre-Crisis annual

average2005-2007 2008 2009 2010 2011

Vietnam

Inward (USD million) 3,685.00 11,500.00 10,000.00 11,000.00 11,000.00

Outward (USDmillion) 111.00 300.00 700.00 900.00 950.00

Memorandum

China

Inward 76,213.00 108,312.00 95,000.00 114,734.00 123,985.00

Outward 18,630.00 52,150.00 56,530.00 68,811.00 65,117.00Thailand

Inward 9,642.00 8,455.00 4,845.00 9,733.00 9,572.00

Outward 1,500.00 4,057.00 4,172.00 5,415.00 10,634.00

Southeast Asia

Inward 64,313.00 50,254.00 47,408.00 92,760.00 116,559.00

Outward 35,581.00 32,255.00 32,997.00 44,171.00 59,890.00Asia and Oceania

Inward 287,145.00 382,658.00 317,178.00 386,138.00 424,759.00

Outward 155,394.00 223,211.00 211,002.00 273,209.00 280,588.00Developingeconomies

Inward 442,915.00 650,017.00 519,225.00 616,661.00 684,399.00

Outward 229,567.00 328,121.00 268,476.00 400,144.00 383,754.00Source: UNCTAD 2011

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