Experts feel employment generation will take a huge hit
Workers as a footwear factory. Foreign-invested companies in Vietnam now employ around two million direct workers.
The weakening foreign investment influx is a matter for serious concern as it could hurt economic growth and constrain employment opportunities, experts say.
Official statistics show that pledged foreign direct investment into the country declined 28 percent in the first seven months from a year earlier. Only 504 new projects were registered during the period, down 34 percent.
Committed investment for each project has also fallen, with the largest projects having a capital of around US$1 billion, a sharp contrast from previous years when Vietnam attracted many $4-5 billion mega-projects, although these were mostly in real estate and not production.
FDI is one of the country's major sources of foreign currency, together with export revenues and overseas remittances. It accounts for around 25 percent of the capital that the economy needs.
Now that the inflow is weakening, experts fear the economy and employment will be badly affected. The FDI sector employs around two million workers and creates jobs for millions of others indirectly.
Phan Huu Thang, former director of the Foreign Investment Agency, said global economic difficulties have hindered investment into Vietnam. Even major partners like the US, Japan and South Korea have cut back on investment here, he said.
Considering the situation of other economies, it's inevitable that foreign investment would decline, Thang said.
The European Chamber of Commerce in Vietnam said in a report last month that there is a "wait and see" attitude toward investment plans. Its Business Climate Index survey for the third quarter found that while 52 percent of European companies in Vietnam still want to increase their investment, 45 percent are looking to just maintain or even reduce their investment in the country.
The situation is the same with other emerging Asian markets. The Asian Development Bank said last week that capital inflows to the region are moderating as investors' risk appetite recedes. The European debt crisis elevated the uncertainty in the global financial market, likely contributing to this trend, the bank said.
Economist Pham Chi Lan said amid falling capital inflows Vietnam should change its strategy and focus on attracting high-quality projects instead of trying to lure as much capital as possible.
Lan, a former government advisor, has been constantly calling for measures to cool down excessive investment in real estate. She said what the country really needs is more industrial and hi-tech projects.
Real estate projects only accounted for 3 percent of total foreign investment from January to July, a sharp fall form 23 percent in the same period last year. Meanwhile, the capital for industrial projects surged from 29 percent to 47 percent.
Several hi-tech projects have been announced this year, including a $1-billion solar panel factory in Ho Chi Minh City and Wintek's touch panel plant in the northern province of Bac Giang.
Samsung also said it has been approved to increase the capital of its production complex in Bac Ninh to $1.5 billion from $670 million. The expansion will allow the company to boost its exports from $3 billion to $16 billion in 2015.
Nguyen Mai, chairman of Vietnam's Association of Foreign Invested Enterprises, said the trend toward hi-tech projects is positive, but noted that it's more a coincidence than a result of any policy shift.
Policy makers should start focusing on attracting investment in technology, healthcare and infrastructure, he said.
Mai added that Vietnam has received investment from multinational corporations such as IBM, Intel and Canon. However, the number of world's top companies present here is still low compared to neighbors like Thailand, Indonesia and Malaysia, he said.
Vietnam targets FDI of $11 billion to $11.5 billion this year, about the same as in 2010. New pledges are expected to rise 16 percent to $20 billion.