Economists balk at Vietnam's 'overly-generous' FDI incentives

By Ngan Anh, TN News

Email Print

Granting of investment incentives must become more selective since it's a very expensive strategy (Photo: Ngoc Thang) Granting of investment incentives must become more selective since it's a very expensive strategy (Photo: Ngoc Thang)
The generous incentives offered to potential investors in Vietnam's outlying provinces and high-tech and agricultural sectors failed to help the country meet its FDI targets.
Vice head of the Foreign Investment Agency Dang Xuan Quang said the incentives haven't drawn additional FDI. Investors continue to pour money into labor-intensive manufacturing (particularly garment and footwear and automobile factories) which mostly rely on imported materials and equipment.
According to the HCMC Export Processing and Industrial Zones Authority (HEPZA), foreign investors announced plans to inject US$264.7 million into the zones in the first half of this year. Of the registered capital, nearly 80 percent will go into the textile and garment sector.
Offering foreign investors low taxes and land-use fees has only allowed foreign companies to exploit cheap resources, while doing little to help Vietnam increase its technological capacity, Economist Pham Chi Lan said.
According to a 2011 survey conducted by the United Nations Industrial Development Organization and the Ministry of Planning and Investment, 97 percent of firms in Vinh Phuc, 79 percent in Hanoi, and 72 percent in Dong Nai reported receiving fiscal incentives, including tax breaks and land rent reductions.
However, only 5-6 percent of foreign-invested projects in Vietnam can be described as high-tech.
Japanese Economist Kenichi Ohno, who has studied Vietnam’s economy for many years, said the investment from hi-tech companies like Intel, Samsung, and Canon won't necessarily make Vietnam any more tech-savvy.
Multinational companies often invest in developing countries to cheaply execute the labor-intensive assembly stage without transferring the technology to local businesses, he said.
Most don't even involve local enterprises in their production chains. Of the 68 firms which supply Samsung's factories in Vietnam, only 20 are domestic companies which mostly provide cheap materials like packaging. The situation is the same for Toyota--only two of its twelve suppliers in Vietnam provide it with manufacturing components.
Olin McGill, a senior economist for the United States Agency for International Development, said foreign firms have invested in Vietnam only due to its low labor costs and taxes. When Vietnam no longer offers those benefits, they may leave the country for other markets.
A lack of technology transfers might not be a good thing, but the situation could actually get worse if Vietnam becomes a dumping ground for outdated technologies.
Many foreign investors focus on exploiting cheap natural resources at low prices, and use outdated technologies that hurt the environment.
Fourteen percent of foreign businesses use outdated technologies--double the percentage of firms that employ high-tech methods and equipment.
Economist Dinh The Hien believes the contributions made by foreign businesses aren't worth the damages to the country's resources and environment.
Selective incentives
The FDI sector remains the most lucrative export generator in the country. FDI-backed manufacturers generated of $43.7 billion- (or 61.49 percent of the country’s total export revenues) in the first half of this year. However, the sector imported materials and equipment worth nearly $40 billion during that same period.
Many view the FDI sector's contribution to the country's overall growth as insignificant because the exports carried little to no added-value, according to the General Statistic Office.
Le Xuan Nghia, head of the Business Development Institute, said the failure of Vietnam to reach its FDI targets was caused by policy shortcomings.
The government has offered overly-generous incentives to foreign investors, but hasn't required them to make any commitments about job creation or adding value to the local supply chain.
According to the UNIDO survey, there doesn't seem to be much difference in the performance of foreign firms receiving incentives and those not receiving incentives.
Overall, foreign companies are less likely to invest in the future compared to domestic companies, as they expect more incentives, said Brian Portelli from the UNIDO.
Economist Pham Chi Lan said many countries have begun offering privileges only to foreign firms willing to invest in sectors and localities that benefit the government's development plans.
This aims to ensure that incentives will do actually trigger the desired investment outcome in terms of productivity performance and value added generation, she added.
Vietnam should use incentives to direct cash toward specific projects and make sure it has the human resources to meet the needs of foreign investors. “We should review which sectors need foreign investors and which could function with local firms operating with appropriate incentives,” she said.
Vietnam’s economy cannot rely on foreign investors who only come to Vietanm seeking profits that ultimately leave the country, Lan added.
Many investors overstate the extent of their contribution, Lan said. Meanwhile, localities compete to attract FDI by offering incentives without considering whether or not the projects are actually useful, she said. “It is really a race to the bottom.”
Brian Portelli said the granting of investment incentives must become more selective since it's a very expensive strategy. A reckless distribution of incentives could undermine the national tax system and reduce state budget collection.
FDI disbursement during January-July period reached $6.8 billion, up 2.3 percent from a year ago, the Foreign Investment Department said in a recent report.
Also in the first seven months, the country licensed 889 new projects with a total investment of $6.85 billion, down 0.9 percent compared with the same period last year.

More Business News