Information about Asia and the Pacific Asia y el Pacífico
Chapter

IV Foreign Direct Investment

Author(s):
Krishna Srinivasan, Erich Spitäller, M. Braulke, Christian Mulder, Hisanobu Shishido, Kenneth M. Miranda, John Dodsworth, and Keon Lee
Published Date:
March 1996
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Information about Asia and the Pacific Asia y el Pacífico
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From the start of the transition, foreign direct investment (FDI) was expected to play a key role in upgrading the country’s infrastructure and productive capacity. It has indeed played that role. Disbursements, which have grown rapidly in the last few years, are projected at $1.4 billion in 1995 (almost 7 percent of GDP), and a large stock of committed capital remains to be disbursed. The Foreign Investment Law of December 9, 1987, while enacted somewhat later than comparable legislation in most other countries in the region, was one of Vietnam’s first major reform measures. It came at a time when virtually no supporting legal framework was in place and numerous elements of a centrally planned system still pervaded the economy. The original law was liberal by international standards; after several amendments, the juridical regime for FDI compares favorably with corresponding regimes elsewhere in terms of tax incentives, import privileges, access to economic sectors, and admissible ownership forms. Indeed, the law offers generous tax concessions and duty exemptions, welcomes foreign investment in all economic sectors with the exception of defense industries, imposes no minimum capital requirement, permits 100 percent foreign ownership, and guarantees the unrestricted repatriation of capital and profits.

At an early stage, in a move to simplify the approval process, the government designated the State Committee for Cooperation and Investment1 as the sole agency to decide on investment applications. The licensing process, however, remained complicated and lengthy because most projects required additional approval from other agencies, including local authorities. According to a survey conducted in early 1994,2 the licensing of joint ventures took on average about one year and that of wholly foreign-owned enterprises took twice as long. Coping with excessive bureaucracy has widely been regarded as the greatest challenge facing potential investors.

In response to complaints about burdensome procedures, the government took measures in 1994 to streamline the administrative process. Strict time limits have been set for the authorities to raise any objections to investment applications, and the responsibility for larger foreign investment projects has been transferred to the prime minister’s office. There are signs that this has helped spur the disbursement of investment commitments.

Commitments

The distribution of FDI commitments by region, economic sector, and country of origin has undergone marked structural change.

As regards regional distribution, foreign investment was initially concentrated exclusively in the south (Table 4.1). The north caught up quickly, however, and now attracts over one-third of new commitments. The bulk of all investment has gone to the industrial centers of Ho Chi Minh City and Hanoi/ Haiphong. Barely 20 percent of commitments went to the countryside, where over 80 percent of the population lives. As a result, the immediate impact of foreign investment has been to intensify income and regional development disparities.

Table 4.1.Distribution of Licensed Foreign Direct Investment Commitments by Region

(In percent)1

Region1988198919901991199219931994199521988-953
North1.429.355.516.744.634.840.431.835.2
Hanoi/Haiphong0.827.550.414.039.731.132.419.428.0
Northern Mountains0.51.80.62.51.62.32.73.82.6
Red River Delta0.13.90.10.81.13.10.21.3
North central coast0.60.12.50.32.28.43.2
South98.670.744.583.355.465.259.668.264.8
South central coast50.31.14.24.17.32.55.58.36.2
Central highlands0.53.80.51.60.40.60.9
Ho Chi Minh City and environs44.068.438.770.544.459.443.758.653.7
Mekong Delta4.31.21.14.93.21.610.10.73.9
Total100.0100.0100.0100.0100.0100.0100.0100.0100.0
Source: State Committee for Cooperation and Investment; and General Statistical Office.

Data exclude offshore investment in oil and gas.

January-June.

Total gross commitments of foreign direct investment for 1988 through the end of June 1995.

Source: State Committee for Cooperation and Investment; and General Statistical Office.

Data exclude offshore investment in oil and gas.

January-June.

Total gross commitments of foreign direct investment for 1988 through the end of June 1995.

Sectoral distribution shifted from a brief initial emphasis on the development of offshore oil and gas deposits to the construction of hotels and tourism facilities and, since 1991, to manufacturing. More recently, large investments have been committed to establishing production facilities within export-processing zones and industrial parks. (These investments are classified as “construction” in Table 4.2.) Overall, the industrial sector, including labor-intensive manufacturing, has attracted almost 40 percent of total commitments, followed by housing, tourism, and hotels with 24 percent. By contrast, very little foreign investment went to agriculture.

Table 4.2.Distribution of Licensed Foreign Direct Investment Commitments by Economic Sector
Average for 1988-94
198819891990199119921993199419951,2FDI3Share in GDPReal growth of sector
In percent4
Goods384.454.248.173.575.659.255.252.960.063.85.3
Industry7.316.614.245.342.537.942.644.239.320.37.1
Oil and gas42.517.022.28.627.75.51.9−4.47.6
Agriculture, forestry34.620.611.65.44.71.53.1−1.53.838.43.8
Of which: aquaculture34.61.03.32.90.70.30.61.5
Construction56.70.614.07.415.08.74.08.3
Other production0.17.40.30.2−0.40.61.19.7
Services15.645.851.926.524.440.844.847.140.036.210.4
Transportation and communication3.74.837.32.81.00.81.82.93.72.55.6
Banking and finance0.15.01.40.41.11.416.5
Housing, tourism, and hotels2.737.49.715.616.431.619.533.724.312.111.7
Other services9.23.54.98.21.97.023.110.510.920.217.1
Total100.0100.0100.0100.0100.0100.0100.0100.0100.0100.07.0
In millions of U.S. dollars
Memorandum items:
Commitments3475367841,3182,2903,1443,8433,985
Disbursements6100120220260300650
Sources: State Committee for Cooperation and Investment; General Statistical Office; and IMF staff estimates.

January-June.

The breakdown for this period is not fully comparable to that in previous years owing to a reclassification of projects.

Total gross commitments for the period 1988 through the end of June 1995.

Data include offshore investment in oil and gas.

Consists predominantly of investment in the infrastructure of export-processing zones and industrial parks.

Balance of payments data.

Sources: State Committee for Cooperation and Investment; General Statistical Office; and IMF staff estimates.

January-June.

The breakdown for this period is not fully comparable to that in previous years owing to a reclassification of projects.

Total gross commitments for the period 1988 through the end of June 1995.

Data include offshore investment in oil and gas.

Consists predominantly of investment in the infrastructure of export-processing zones and industrial parks.

Balance of payments data.

In line with Vietnam’s recent trade pattern, Asian neighbors dominate the distribution of foreign investment commitments by country of origin (Table 4.3 and Table A14). Taiwan Province of China leads the list, closely followed by Hong Kong. In 1994-95, two-thirds of total commitments were accounted for by Asia, including Japan, whose share, which was initially very small, has been rising rapidly since the lifting of the U.S. embargo in February 1994. The relative importance of Australia and France, which pioneered foreign investment with large projects when Vietnam opened up in 1988, has since declined.

Table 4.3.Distribution of Licensed Foreign Direct Investment Commitments by Country of Origin

(In percent)1

Shares in Total Trade
Average CommitmentVietnamWorld
1988198919901991199219931994199521988-95319931993
Industrial countries88.075.463.513.637.518.639.638.236.239.670.8
Australia33.91.237.04.55.34.91.14.93.11.2
France18.237.70.63.15.75.84.30.45.05.65.5
Japan15.50.41.56.54.111.019.39.720.08.0
United States0.10.30.10.00.10.06.97.43.50.114.2
Asia46.415.333.180.658.178.358.651.358.658.517.7
Hong Kong3.314.211.919.817.224.816.59.916.38.23.4
Singapore1.33.05.04.09.114.98.18.416.61.9
Taiwan Province of China0.214.437.823.512.712.016.916.58.22.2
Rest of the world5.69.33.45.84.43.11.810.55.31.911.5
Total100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0
Sources: State Committee for Cooperation and Investment; General Statistical Office; IMF International Financial Statistics and Direction of Trade Statistics.

Data include offshore investment in oil and gas.

January-June.

Total gross commitments for the period 1988 through the end of June 1995.

Excluding Japan.

Sources: State Committee for Cooperation and Investment; General Statistical Office; IMF International Financial Statistics and Direction of Trade Statistics.

Data include offshore investment in oil and gas.

January-June.

Total gross commitments for the period 1988 through the end of June 1995.

Excluding Japan.

Disbursements

Although sizable commitments were already being made in 1988 and new commitments rose rapidly in the following years (Chart 4.1), initial disbursement rates remained rather low, reflecting constraints on administrative capacity and related concerns of foreign investors. Since then, indications are that the pace of disbursement has quickened, most notably since the latter part of 1994.3

Chart 4.1.Licensed Foreign Direct Investment

(In millions of U.S. dollars)

Sources: State Committee for Cooperation and Investment; and IMF staff estimates.

Note: Amounts include offshore investment in oil and gas. Balance of payments data.

1Balance of payments data.

2January-June.

Balance of payments estimates suggest that actual FDI amounted to about 1 1/2 percent of GDP in 1988-90, rose to about 2 1/2 percent of GDP a year in 1991-93, and climbed further to 4 percent and 7 percent of GDP in 1994 and 1995, respectively.4 Vietnam thus has one of the highest inflows of direct investment relative to GDP. Although the impact of FDI on economic growth is difficult to gauge, on the basis of historical values of the incremental capital output ratios (ICOR) for total gross capital formation, FDI during 1988-94 may have accounted for a combined total of approximately 10 percentage points (one-fifth) of aggregate economic growth. Rough as this estimate is, it should be regarded as a lower bound because the specific ICORs for foreign-invested projects can be expected to have been even smaller than the low aggregate ICORs measured since the late 1980s.

The indirect economic benefits of FDI, in the form of technology transfer and exposure to modern organization and management techniques, may have been as significant as the direct benefits. The state enterprise sector benefited more from this process than the private sector. Owing to their relatively larger size, their established links with decision makers, and their access to land-user rights and services, state enterprises were typically a more attractive domestic partner in joint ventures.

Outlook

Rising commitments and recent improvements in public administration should allow the disbursement of FDI to remain high. New commitments during the first six months of 1995 have already attained levels exceeding the total recorded for 1994 as a whole. Some of this boom may be temporary and may wear off after the licensing of a backlog of commitments in connection with the streamlining of procedures mentioned earlier. Also, new investment commitments may fall below trend, at least temporarily, in the wake of measures recently taken by the government to dampen speculation in the real estate market and to ensure greater financial discipline.5

All told, the growth in FDI in Vietnam has been impressive, and the announcement in July 1995 that the United States would open diplomatic relations with Vietnam triggered further announcements of upcoming projects. These developments, together with prospects of further improving relations with the rest of the world and Vietnam’s entry into ASEAN, should help sustain a strong momentum of FDI over the medium term.

1At the end of 1995, this committee was merged with the State Planning Commission and became the Ministry of Planning and Investment.
2Reported in the Saigon Times, March 24-30, 1994.
3A survey of foreign-invested enterprises in 11 southern provinces conducted in early 1995 by the Project Monitoring Department of the State Committee for Cooperation and Investment in Ho Chi Minh City found that 30 percent of total accumulated commitments as of the end of 1994 had been disbursed.
4A reporting system is being developed to better record disbursements of foreign investment. However, at this stage, the figures included in the balance of payments are rough estimates based on partial data.
5In particular, the government has decreed that land controlled by enterprises should be valued not at market prices but at the cumulative value of the rent payable for its use. In addition, the decree has limited the scope of land-user rights as collateral for bank loans. This decree is likely to reduce the recorded value of commercial land and may also dampen foreign investment because the typically capital-short domestic partner (including state enterprises) in joint ventures often has little to contribute other than its land-user rights.

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