April 12, 2014
A look at the role of foreign direct investment in Vietnam’s economic growth as viewed from the angle of quality.
The role of foreign investment sector and its contribution to Vietnam’s economic development are too discernible to ignore. This argument is particularly true in recent years when domestic capital sources plunged remarkably due partly to the Government’s budget constraints and tightened public spending, especially investment in State-owned enterprises (SOEs). In such a circumstance, since 2007, the growth in foreign direct investment (FDI) has significantly offset the nose-diving domestic investment.
FDI, plus domestic investment, and labor have played a crucial role in Vietnam’s gross domestic product (GDP) growth during the past decade. Theoretical principles teach us that in production, the three key factors impacting GDP growth pertain to labor (L), capital (K) and total factor productivity (TFP) – in other words all the elements relevant to management, technology and quality which cannot be factored in labor and fixed assets. Currently, Vietnam’s economy remains capital– and labor-intensive, while TFP deeply plunged during 2007 – 2012 (see table 1). A study by Nguyen Viet Phong and Bui Trinh on the efficacy of the export-led economic growth strategy indicates that TFP computed exclusively for the FDI sector during 2006 – 2011 was simply a negative figure (-53.99%). To put it differently, foreign investment was no longer be able to impinge upon the improvement of GDP quality, if not undermine it when capital was channeled into sectors which generated poor added value, for instance the garment and leather industries, and used obsolete equipment and technology.
Table 1: K, L and TFP Contributions to GDP (%)
| Capital (K) | Labor (L) | TFP | |
|---|---|---|---|
| 2000 – 2006 | 49.95 | 27.42 | 22.62 |
| 2007 – 2012 | 69.33 | 24.23 | 6.44 |
| 2000 – 2012 | 67.69 | 23.07 | 9.24 |
(Source: Bui Trinh – Autumn Economic Forum 2013)
On the other hand, trade deficit in Vietnam’s international trade balance during 1995 – 2012 was significantly offset by FDI inflows. However, we should have as well taken into account an apparent “vicious circle:” was it true that manufacturing activities by the FDI sector an overarching issue which spurred trade deficit? This point can be comprehensible because in most subcontracting industries, imported materials make a large proportion of product cost profile, especially in garments and electronics assembly.
The above point becomes more convincing as soon as the FDI sector’s import-export profile is scrutinized in comparison with the remaining economic sectors. Graph 1 shows that as of 2009, export conducted by the FDI sector began to gather pace dramatically and then prevailed over that of the domestic sector. However, graph 3 also shows that import of the FDI sector accelerated at the same pace at the same time.
By analyzing both graphs 1 and 2, one can arrive at some deductions. Theoretically speaking, export transactions would transfer asset ownerships to foreign investors who have the legal status as a resident in Vietnam. However, it is true that the higher the value of the FDI sector’s export is, the worse the local economy becomes because of transfer pricing conducted by multinationals through their jungle of affiliates and ghost companies around the globe? It is an absolute absurdity given the sheer amounts of exports earned by foreign-invested enterprises (FIEs) while they have paid no corporate income tax for decades. Likewise, the Vietnamese economy has to save every cent in foreign currencies to pay debt; and at the same time, trade deficit, as pointed out above, stems from a significant source – the FDI sector. Of the numerous materials and machinery brought in by FIEs, how many are there among them whose prices have been raised through transfer pricing so that FIEs have no profit and thus pay no taxes.
Similarly, obsolete equipment has been imported at prohibitive prices. This practice has on the one hand falsified the actual figures in FDI and on the other dramatically worsened the FDI sector’s TFP quality affecting GDP.
Graph 3 indicates that income earned from investment sent abroad has been increasingly higher, even to the point that it is able to considerably bridge the gap with FDI investment. In other words, the real FDI-related net money may be significantly lower that those in FDI reports prepared by ministries have claimed.
Table 2: Work force profile in economic sectors (%)
| 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012(est.) | |
|---|---|---|---|---|---|---|---|---|
| State | 11.6 | 11.2 | 11 | 10.9 | 10.6 | 10.4 | 10.4 | 10.4 |
| Non-state | 85.8 | 85.8 | 85.5 | 85.5 | 85.2 | 86.1 | 86.2 | 86.3 |
| FDI | 2.6 | 3 | 3.5 | 3.6 | 3.2 | 3.5 | 3.4 | 3.3 |
Table 3: Industrial production value in current prices in economic sectors (%)
| 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012(est.) | |
|---|---|---|---|---|---|---|---|---|
| State | 24.9 | 22.1 | 19.9 | 18.1 | 18.3 | 19.1 | 17.6 | 16.4 |
| Non-state | 31.3 | 33.5 | 35.4 | 37.3 | 38.5 | 38.9 | 37.8 | 37.3 |
| FDI | 43.8 | 44.4 | 44.7 | 44.6 | 43.2 | 42 | 44.6 | 46.3 |
Finally, what have FIEs assisted in creating job opportunities in Vietnam? From table 2, one can conclude that no remarkable changes have been made. The work force profile in the FDI sector has accounted for a modest proportion, around 3 – 3.5%, versus the remaining sectors.
How about the quality of the work force in FIEs? This is a much more challenging question to be answered. However, look at table 3 and you’ll be surprised to a certain extent that in current prices, the ratio of industrial production of the FDI sector has remained almost the same during the past decade. Linking this to the above analyses, we can come to a rather discouraging conclusion of the role FIEs have played in creating jobs and improving the quality and productivity of the work force serving them.
There remain many other crucial issues which are not tackled in this article, for instance, FDI contribution to human investment and intellectual and environmental issues. Yet, major aspects based on which the roles the FDI sector has played in the national economy are already discussed.
(By Assoc. Prof. Nguyen Quang Thong – The HCMC University of Economics)