Economists warn Vietnam to reduce reliance on FDI
One of the measurements of development in Vietnam, as in any country, is the level of foreign direct investment (FDI) say economists, because it represents a long-term commitment by foreign companies to the economy.
One of the measurements of development in Vietnam, as in any country, is the level of foreign direct investment (FDI) say economists, because it represents a long-termcommitment by foreign companies to the economy.
However, these same economists also caution there are negative effects of FDI and they specifically warn that in Vietnam FDI companies may become the dominant force in the national economy, at the expense of their domestic counterparts.
During calendar year 2015 they point out, the Foreign Investment Agency (FIA) reported registered FDI jumped 12.5% over the prior year to US$22.757 billion, which increase was primarily driven by Samsung and Malaysian based Janakuasa Sdn Bhd.
Samsung Display Vietnam, which initially registered FDI of US$1 billion in Bac Ninh Province, expanded it to US$3 billion, while Janakuasa Sdn Bhd registered a new US$2.4 billion thermal power FDI plant in Tra Vinh Province.
Meanwhile, the FIA noted FDI companies’ actual cash outlays for disbursements to construct their businesses in Vietnam surged upwards by 17.4% when compared to the prior year to US$14.5 billion.
FDI companies dominate the national economy
The increasingly dominate role played by FDI companies in Vietnam has raised many economists’ concerns that the national economy may become over reliant on FDI, outpacing and stunting development of the domestic economy.
Citing figures from the General Statistics Office (GSO), these economists note exports of FDI companies in calendar year 2015 were US$115.1 billion, representing 70.9% of the nation’s total annual exports.
Meanwhile, their imports tallied in at US$97.9 billion, making up 59.2% of the nation’s total imports for the year.
By simple mathematical extrapolation, (subtracting the imports from the exports) economists point out that translates to FDI companies contributing US$17.2 billion of trade surplus of the national economy.
A recent study performed by Pham Chi Lan, a nationally recognized economist, also evidenced that an increasingly higher proportion of the nation’s total trade is attributable to FDI companies.
The figure rose from 13.3% in 2000 to 18.2% in 2012.
Meanwhile, the proportion has declined for the state-owned economic sector as a direct result of the governments planned equitazation, from 38.5% to 32.6%.
The private economic sector made up 48.2% of the country’s GDP in 2000 and 49.2% in 2012.
US$9-10 billion flows out every year
Though FDI companies have been making big contributions to Vietnam’s economic growth in the short term economists say the nation is paying a higher price in the longer term as resources are being exhausted.
A research project by Dr Tran Tho Dat and To Trung Thanh from the Hanoi Economics University, shows the ratio of GNI/GDP (gross national income/gross domestic product) has been steadily decreasing.
Since 2006 the percentage has fallen from 97.9% to 95.1%.
The researchers estimate that roughly US$8.6 billion went abroad in 2013 and increased to US$9 billion in 2014 and a further US$4.2 billion during the first half of 2015.
Dr Dat strongly is quick to point out that these cash outflows will steadily grow in the future and suggests that Vietnam as a nation should adjust course and encourage the development of the domestic economy instead of relying too heavily on FDI.
Mergers and Acquisitions
In 2015, FDI from mergers and acquisitions also rose dramatically, according to statistics released by economists at Bloomberg.
According to Bloomberg, the number of reported M&A deals in 2015 was 40% higher than in 2014 with the total value placed at US$4.3 billion. The finance and consumer goods industries were the top market for M&A transactions.
John Ditty, head of Deal Advisory from KPMG, said the government’s recently issued Decree 60 that allowed a higher foreign ownership limit in listed companies, in large part contributed to the increase.
“The process of bank restructuring and non-core divestitures, along with the acceleration of the equitazation process of state-owned enterprises should open up yet more M&A in the next five years,” said Ditty.
The FDI figure from M&A is expected to be even higher in 2016, as new free trade agreements take effect and the government removes barriers to portfolio investments, according to Bloomberg.