Experts see problems in FDI attraction

CA - Vietnam hopes foreign direct investment (FDI) will lead to technology updates in industries and agriculture, which will help modernize and industrialize the country. However, FDI capital has been flowing strongly to the service sector.

Over the last 20 years, FDI has helped increase investment capital and create jobs in the national economy, but it has not helped much in technology transfer, labor force quality upgrading and modernization, experts say.

Few enterprises pay tax

Chairman of the Vietnam Association of Foreign Invested Enterprises VAFIE, Dr. Nguyen Mai, in a recent conference, said he can see problems in FDI.

In the first 10 years since Vietnam began attracting FDI, foreign investors mainly made investments in Vietnam by setting up joint ventures in which they held 70 percent of capital. Meanwhile, 75 percent of FIEs in Vietnam now are 100 percent foreign-owned enterprises. No survey has been conducted to find out the consequences of the tendency, but according to Mai, it is an abnormal thing.

According to Pham Chi Lan, a renowned economist, many FIEs in Vietnam report losses and declare high input costs to make the “price transfer.” As a result, Vietnam cannot collect tax from the enterprises, while their parent groups in foreign countries enjoy fat profits. The most typical example about the price transfer can be seen in automobile manufacturers.

According to the HCM City Taxation Department, in 2009, 60 percent of FIEs reported loss. Prior to that, in 2007 and 2008, the percentages of FIEs reporting loss were 70 percent and 61.3 percent, respectively.

The problem in FDI structure

Over the last many years, the Government has offered special preferences in order to attract more investors into the agriculture, forestry, aquaculture and seafood processing. However, it seems that the efforts still cannot help persuade foreign investors to pour capital into the fields.

While the FDI has been declining in agriculture, Vietnam is witnessing the boom in the investment in the service sector. From 2006 to 2007, the number of investment projects in the field increased by 2.59 percent, while the volume of registered capital increased by 2.56 percent.

FDI capital has been flowing strongly into the real estate sector, which can be seen in the scale of real estate projects registered recently. While the number of projects decreased by 0.9 percent, the volume of investment capital increased by 3.32 percent.

Especially, considerable changes in the FDI structure were seen in 2008, when 18 percent of FDI capital went to the oil and gas sector, 32 percent to heavy industries, three percent to light industries, while 24 percent of capital flowed to the real estate sector.

It is clear that FDI has not helped too much in renovating production technologies. By 2009, 10 percent of enterprises still had used 1980s-decade technology, and 50 percent had used 1990s-decade technology.

Dr. Nguyen Dinh Cung, Deputy Head of the Central Institute for Economic Management CIEM, pointed out that Vietnam fails to obtain technology updates, despite spending the last 20 years of attracting FDI.

FDI capital also cannot create the foreign currency supply as expected, because the import value of FIEs is too big in comparison with the export value. According to the Ministry of Planning and Investment, in the last seven months of the year, FIEs exported more than imported by $1.221 billion. If not counting on crude oil exports, FIEs would see the trade deficit of $1.7 billion.

Quality first

According to Mai, Vietnam now needs to have a new way of thinking in attracting FDI. He stressed that in the modern times, quality of FDI projects, not the number of projects, should be the top priority