Rethinking FDI: ALL ABOARD?

CA - As foreign capital inflows reach new records each year, Vietnam needs to reconsider its cost-benefit analysis in FDI policy.

In the first seven months of 2008, Vietnam has attracted $45.3 billion of foreign direct investment, almost four times the amount registered in the same period last year and more than double the $21.3 billion inflow recorded in the whole of 2007. In recent years, while remaining cautious of foreign capital, Vietnam has considered FDI an important leg of its development strategy. FDI is a long-term, stable source of finance, which helps to increase the economy’s production capacity. Foreign investors bring with them not only capital, but also know-how, technology and management expertise, which local businesses can emulate. Foreign invested companies bolster employment and pay taxes, helping to increase government revenue.

The continuous rise in the FDI inflow to Vietnam over the last decade (from $2.01 billion in 2000 to $21.3 billion in 2007 and $45.3 billion so far in 2008), is taken as an indicator of the government’s sound economic management and a measure of the country’s economic integration process.

Amid this year’s economic gloom, strong FDI inflow is even more important. It reaffirms international investor’s belief in the long-term prospects of the economy, boosting market sentiment and confidence in the government’s ability to manage macro- economic imbalances. FDI is also acknowledged as an important source of stable, longer-term capital, which helps to finance the widening trade deficit. After seven months, the deficit is $15 billion, ample FDI inflow reduce the risk of financial crisis, enabling the government to stabilize exchange rates.

Some…Not All

The FDI number is pleasing, but questions are being raised over the true costs and benefits of associated projects and how Vietnam could best exploit these sources of foreign capital to serve its development cause. With FDI inflow reaching new records each year, Vietnam’s policy emphasis should turn from attracting more FDI to selecting the right projects to fit its development strategy and absorption capacity. In July, two incidents involving foreign invested businesses were widely reported in the media, which brought FDI policy to center stage and made many rethink the current approach.

On July 11, Hyudai-Vinashin, a ship repairer, was caught dumping 60 tons (of 200 tons) of untreated industrial waste near a populated residential area. Hyundai-Vinashin was a joint venture established in Khanh Hoa in 1996 and has long held a reputation as a polluter. After a decade in operation, the company has accumulated over 600,000 tons of untreated copper powder (used to cleanse ship hull) and 245 tons of metal scrap piling up as “mountains of waste” directly affecting over 700 households living in the area. The copper powder is toxic as it contains 0.19 percent lead and can be easily carried by the wind. In 2007, the government fined Hyundai-Vinashin VND85 million for polluting and requested the firm clean up these waste-mountains by the end of 2007 (the deadline was later extended to 2010). The July

11 incident reaffirms Hyundai-Vinashin’s systematic abuse of the environment, but local authorities, based on the measly fine amount and extended clean-up deadline, are clearly willing to overlook its offenses.

Hyundai-Vinashin is not alone in these violations. Local authorities are tolerating foreign invested enterprises polluting the environment as part of “incentive packages” designed to attract FDI. Analysts believe such lax and poorly enforced environmental standards attract “dirty projects”, which implement outdated technology that is now shunned in other countries. In which case, the more FDI, the worse the long-term prospects of the economy. During a visit to Khanh Hoa province in the last week of July, Prime Minister Nguyen Tan Dung requested more attention be paid to environmental impact when approving major heavy-industry investment projects, especially those related to steel production, shipbuilding and repair, thermal electricity and oil refineries in the coastal provinces of the Central region.

The second incident involves Sony’s decision to shut down its factories in Vietnam as of September this year. Sony, like many other Japanese and Korean electronics firms, set up their production lines in Vietnam in the 90s to assemble electronic products under high tariff barriers– incentives the government offered to foreign firms, hoping their presence in Vietnam would help nurture the domestic electronic industry. But when the tariff incentives with the economic means to enjoy the sport.

Approval of steel projects is also raising eyebrows. According to the Master plan for the development of the steel industry, Vietnam’s demand for steel in 2010 will be 10-11 million tons and 24-25 million tons by 2024. Suggest that Mr Pham Chi Cuong, Chairman of the Steel Association (VSA), in the next 10 years, Vietnam only needs 1-2 high capacity steel mills to meet domestic demand. Nevertheless after two big steel projects have been approved, namely the Tycoon-E.United project in Dung Quat (5 million tons/ year capacity) and Formosa-Sunco in Ha Tinh (15 million tons/ year), there are at least three additional major projects waiting for approval, including: a joint venture between Vietnam steel and Tata group (India) with capacity of 5 million tons/year (in Thach Khe), the Posco (Korea) project in Khanh Hoa with capacity of 4 million tons/year and the Lion Group (Malaysia) and Vinashin joint venture in Ninh Thuan with capacity of 4.5 million tons/year. If all these projects are carried out, Vietnam’s steel production will be tens of millions of tons a year in less than a decade. This is superfluous and will need massive amounts of energy, threatening dissolved as Vietnam honored its WTO commitments to create an imminent energy supply shortage in exchange for (tariffs are currently between 0-5 percent), Sony finds it more profitable to import finished products from Thailand and Malaysia than assembling the same products in Vietnam. Sony’s decision to leave Vietnam (which will soon be followed by other companies) has left the local electronic industry (still in its infancy after a decade) feeling betrayed; but this is inevitable as profit maximization is what motivates international corporations. Lessons are leant the hard way: FDI’s contribution to local industries, their technology and managerial spillover effects are not at all guaranteed after all the concessions and protections are offered. FDI is not a white knight; it is cold blooded and serves its true master – the investors, not the host, however hospitable that host may be. As the dream of developing a local electronics industry with foreign firms at the forefront is dashed, many were contemplating the fate of the automobile industries, which will also see preferential tariffs eliminated in coming years.

Overload

With the number of multi-billion dollar projects rising, economists are warning of their destabilizing effects, especially regarding their insatiable demand of energy and natural resources.

Notably, the booming number of golf course at the expense of farm land (amid the global food crisis) has been stirring up public concern. Currently there are 60 golf courses either in operation or under construction in Vietnam. According to a recent survey of 51/65 provinces submitted to the Ministry of Natural Resources and the Environment, there are another 123 other golf course projects that have already received in-principle approval (about half of these are FDI projects). This means a total area of 38,445 ha of land, of which 15,264ha is farm land, will be sacrificed. The number of golf course projects seems to be at odds with just 2,000 regular golf players in Vietnam and only about 100,000 people excess steel. The burden is twofold while energy prices are still being subsidized by the government – i.e. a significant portion of the state budget will go into supporting these giants depriving resources for other development needs.

Screening process

The dynamism of Vietnam’s economy is an important factor in attracting foreign investment, but the decentralization of FDI screening and approval, which is now done by provincial authorities

– as of 2006 – is the primary reason for the FDI boom in the last couple of years. Decentralization has streamlined procedures, cut red tape and sped up the approval process. However, it also allows provinces to cut corners to boost their foreign investment record, which improves the provinces’ rankings in terms of economic management and good business environment. Many provinces are also willing to make major concessions hoping that FDI enterprises can generate higher employment rates and revenue sources, even if it means severe environmental, and perhaps other, consequences.

Because national interests can diverge considerably from provincial interests, it is important to have effective coordination between local and central authorities in screening and approving FDI projects. The central government must assess the cost and benefit in approving large, particularly industrial, projects, which have long-term, wide-reaching effects or significant social and environmental ramifications. Provincial authorities must implement industrial strategies and a master plan as well as enforce laws and regulations regarding the operations of FDI enterprises under their jurisdiction. Decentralization of the FDI approval process has worked in terms of raising the inflow of foreign capital, what is necessary now is to raise the quality of these investment projects by applying the conditions of account- ability, forward-thinking and long-term sustainability.