Vietnam economists warn against addiction to foreign investment

By Ngan Anh, Thanh Nien News (The story can be found in the March 21 issue of our print edition, Vietweek)

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Belatedly, Vietnamese experts wake up to the danger of being addicted to foreign investment and resultant loss of self-reliance
A worker in an assembly line at a South Korean mobile phone factory in northern Vietnam

Vietnam is opening its doors wider to attract foreign investment hoping that will help its economy recover, but economists warn against undue dependence on overseas investors.

Vietnam is in active negotiations for the Trans-Pacific Strategic Economic Partnership Agreement (TPP) and plans to allow more foreigners to buy housing in the country.

Nguyen Dinh Cung, head of the Central Institute for Economic Management (CIEM), said: “It is now the time to review what negative and positive impacts FDI has on Vietnam.”

According to international norms, FDI should account for only 5 percent of gross capital formation, he said, but in Vietnam, it now makes up 25 percent, which may cause risks to the economy.

Economist Pham Chi Lan concurred, saying: “The development of an economy cannot rely on foreign firms, only local ones. Foreign investors could leave Vietnam for other markets when the country no longer has advantages or offers them the incentives it does now.

“What will happen to our economy if investors leave Vietnam en masse like they did in Thailand in 1997? The reliance on FDI is a big challenge to economic development.”

Current policies only benefit foreign firms and cause difficulties to local private businesses, she said.

Equal treatment

“No country offers incentives to foreign investors like Vietnam. We should review our policies, cutting out too generous incentives for foreign investors and providing equal treatment to local private firms.”

Bui Kien Thanh, another economist, said many provinces, which want to compete with others in attracting FDI, offer them too many incentives but do not know if the projects are useful.

“They are exempt from corporate tax and get thousands of square meters of land free in industrial parks for many years.

“On the other hand, local firms find it hard to get even 100 sq.m for their workshops.

“Authorities should reconsider the issue. Why do we cause difficulties for our local firms? FDI should support development of our products instead of overwhelming Vietnamese firms. Our firms are being crushed by foreign firms.”

Unable to compete with foreign rivals, many local firms have disappeared from the market. Some firms with good brand names have been bought up by foreign rivals in the last two years when they faced financial difficulties.

Thanh urged the government not to let local firms with good products, good markets, and good management be in a position where they cannot compete with foreign firms only because they cannot get bank loans.

“The government should implement a monetary policy which ensures enough money flows for the economy’s development,” he said.

“Private firms should play the leading role in the economy. State-owned enterprises should work to serve the development of private firms, while foreign invested firms should support it.”

Limited contribution

Lan said the country has been too friendly in inviting in foreign investors, and the economy has lost much and gained little with this approach.

Many foreign companies are benefiting from cheap Vietnamese resources, including labor, but abuse transfer pricing and announce losses to avoid paying taxes, she said.

Economist Dinh The Hien said foreign businesses' contribution to the country is not worth the damage caused to the country's resources and environment.

The FDI sector was the best performer in the country with a trade surplus of $14 billion last year compared to a deficit of $13.1 billion made by the state and domestic private sectors.

But its importance to the country's overall growth was not high because its exports had little to no added value, the General Statistic Office said.

Economist Nguyen Minh Phong said the biggest disappointment with FDI projects is that they have done very little technology transfer to benefit Vietnam.

Foreign investors tend to keep their technologies secret while local authorities do not demand them, he said.

The lack of technology transfer might not be a good thing but the situation can actually be 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, harming the environment.

Fourteen percent of foreign businesses use outdated technologies, more than twice the number that use high-tech methods and equipment.

Thanh said the country needs to tweak its FDI policies, forcing foreign investors to use new technologies and be content with fewer incentives, and offer more incentives to local private firms.

"We need to boost the development of domestic firms to build a strong economy," he said.

Foreign investors brought in $1.12 billion in the first two months of the year, up 6.7 percent from a year ago, according to the General Statistics Office.

Vietnam has forecast total disbursement of $11-12 billion this year compared to $11.5 billion in 2013.

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