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Heavy dependence on FDI – a threat to Vietnam’s economy

Heavy dependence on FDI – a threat to Vietnam’s economy

Friday 18, 09 2020
The fact that foreign direct invested companies contribute 67.8% to Vietnam’s export turnover is a threat to the country’s economy, especially when the Covid-19 pandemic break outs and the US-China trade war is changing the flow of global capital.

An FDI “hub”

Along with the Vietnam - EU Free Trade Agreement (EVFTA), the Vietnam - EU Investment Protection Agreement (EVIPA) has also come into effect. This will open up a great opportunity for European investors to enter the Vietnamese market.

In fact, since the “Doi Moi” policy was adopted and Vietnam was open to the world, the country has continuously attracted foreign direct investment (FDI) through the signing of bilateral investment agreements with more than 60 partners.

In addition, multilateral free trade agreements (FTAs), especially recently signed FTAs such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), Regional Comprehensive Economic Partnership (RCEP) and others, are also integrated with investment provisions.
Thanks to its efforts in promoting the implementation of programs to encourage foreign businesses as well as reforming and perfecting the administrative and legal institutions, Vietnam has become the most attractive destination for international investors in Asia - Pacific.

According to Mr. Le Hong Hiep, an expert from ISEAS, the expansion of commercial relations as well as FDI attraction is not only to modernize and restructure the economy but also to create a bond in terms of benefits with major countries, thereby ensuring security and enhancing the country's status.

However, the fact that FDI enterprises account for more than 20% of GDP and contribute nearly 70% to the total export turnover present a potential risk that makes Vietnam vulnerable to changes in the world economy.
An FDI “hub”(Billion USD)

Samsung, the largest foreign investor in Vietnam and a testament to the success of the FDI attraction process, can prove that fact. With an accumulated capital of more than 17 billion USD, Samsung's revenue reached 68.3 billion USD in 2019, accounting for 26% of GDP, of which 51.3 billion USD came from export activities.

Mr. Jacques Morisset, Chief Economist of the World Bank (WB) in Vietnam also said that one of the obstacles to the economic recovery of Vietnam is the excessive dependence on exports and foreign investment. Therefore, it needs to find new ways to boost the economy.
An FDI “hub”

Government policies

Mr. Hiep said that the Vietnamese Government has taken many measures to reduce the excessive dependence on the FDI sector. It has issued more policies to encourage and support domestic enterprises to strengthen their capacity, competitiveness. Following are some policies that have been promulgated.

First, the production and export capacity of domestic firms is expected to increase to make sure that the domestic business sector can play a larger role in the economy.

At the meeting with the delegation of the Central Executive Committee of the Vietnam Private Entrepreneurs Association and some typical businessmen, Prime Minister Nguyen Xuan Phuc said that Vietnam is building a resilient economy when participating in the global economy. Therefore, the government has considered promoting different types of businesses, especially private enterprises, as its top priority.

The Prime Minister also emphasized that "equality", "protected", "incentive" and "giving opportunities" should be the core in the competition with FDI enterprises, thereby ensuring fairness in access to resources for development.

Secondly, domestic enterprises are encouraged to expand investment, research and innovation activities in the high-tech field. With the success of Vingroup, Hiep said that the Vietnamese government is focusing on creating “champions” in key sectors to create momentum for the country's development.

Accordingly, FDI enterprises can come and go, so investing in domestic enterprises is essentially an investment of long-term value and strongly contributes to the prosperity of the country.

Finally, Vietnamese enterprises are advised to cooperate with their FDI counterparties and participate in the global supply chain. This measure is considered to be of utmost importance in creating opportunities for domestic companies to quickly improve capacity as well as contribute and create greater value.

ISEAS experts believed that if the above three options are successfully implemented, the Vietnamese economy will become more flexible and sustainable. However, the Government also needs to be cautious in implementing this plan, especially in the context of an economic turmoil caused by the Covid-19 pandemic.

Source: ISEAS

Vietnam Economy

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