A recent drop in the influx of foreign direct investment to Vietnam should not concern the country so much as where the money ends up, experts say.
Foreign direct investment (FDI) to Vietnam totaled US$11.57 billion in the first eight months of this year, down 12.3 percent from a year ago, according to the Ministry of Planning and Investment. Vietnam had hoped to attract between $22 million and $25 million of FDI in 2010.
Nguyen Mai, Chairman of the Vietnam Association of Foreign Invested Enterprises, said it is unnecessary to worry about a reduction in the flow of FDI. However, a large part of the FDI has not made it into building the nation's production capacity, he said. Instead, much of the money has ended up in the real estate sector.
Goodbye industry, hello real estate
Industrial parks, which focus mainly on production fields, receive a small share of the FDI, Mai said.
According to the Ho Chi Minh City Export Processing and Industrial Zones Authority (HEPZA), the city's industrial parks accounted for 13 out of the 165 FDI projects registered in the metropolitan area during the first seven months of this year. Capital for the industrial projects accounted for 4.57 percent of the total FDI allocated to HCMC.
The capital scale of the city's industrial projects is also smaller, according to officials from HEPZA. Only four out of the 13 projects received capital investments totaling $10 million or more.
Foreign firms investing in the industrial and processing sectors now account for 20- 30 percent of the total FDI. Years ago, that figure was 70-80 percent, Deputy Minister of Industry and Trade Nguyen Thanh Bien said during a recent meeting.
Bien said his agency is working with the Ministry of Planning and Investment to offer preferential treatment for foreign firms that invest in industrial parks. The incentives, he said, are aimed at encouraging the industrial and processing sectors.
Meanwhile, the real estate sector has become an attractive area for foreign investment. Real estate ranked third in Vietnam's FDI investments in the first eight months of 2010 and $2.39 billion was spent on such projects. The sum accounted for 20.7 percent of total FDI during this period, according to the Foreign Investment Agency.
Foreign investors often earn profits of 30- 40 percent in real estate projects as opposed to 17-18 percent profit margins gleaned from electronic or hotel ventures.
Real estate prices in Vietnam are rather high compared to other countries. A square meter of Keangnam, a residential development in Hanoi that was financially backed by a Korean firm, is priced at some $3,000.
FDI in the property field may not do much for the economy, some say.
Vietnamese people can build houses for themselves, Dr. Hansjorg Herr from the Berlin School of Economics and Law said at a recent conference.
Large foreign investment in the sector may create a real estate bubble that could destabilize the economy, Hansjorg said.
Nguyen Tran Bat, chairman and general director of HCMC-based legal consultancy Invest Consult Group, said some localities should be more careful in licensing foreign investment projects, as they seem eager to bring in FDI projects no matter what the cost.
"The assessment should also be done at many levels, from assessing partners to assessing technology and socioeconomic impacts," he said.