Workers put the fishing touches to new Piaggios inside the Binh Xuyen industrial park in Vinh Phuc Province.
The recent indifference among foreign investors to Vietnam is often attributed to the global economic slowdown, but the real reason is that the nation has not prepared for the fierce competition from neighboring countries, analysts say.
In the first two months FDI was worth a mere US$630 million, down by more than half year-on-year, according to the Foreign Investment Agency.
There were no big-ticket projects, with the biggest being a $98-million health-equipment production plant by a Japanese investor in Dong Nai province.
Economist Nguyen Minh Phong said while the government has tried to improve the investment environment by ensuring economic stability, curbing inflation, and restructuring the banking system, "the efforts are not enough amid increasingly fierce competition from regional countries."
Since Vietnam has not carried out reforms, investors do not see new investment opportunities, he said, adding corruption has assumed serious proportions.
Nguyen Duc Thanh, director of the Economy and Policy Research Center at the Hanoi National University's Economics University, said foreign investors are interested more in Indonesia, Thailand, Myanmar, and some other ASEAN member countries.
"This is a challenge to Vietnam, especially in the context that macroeconomic instability in the past few years has affected its business environment."
Many Japanese firms -- the biggest investors in Vietnam -- like Toyota and Mitsubishi are expanding investment in Indonesia, Myanmar, and Malaysia, but not in Vietnam.
In fact, Japanese investment in Vietnam, despite increasing in recent years, has been modest compared to that in Thailand and Indonesia, Hirokazu Yamaoka of the Japan External Trade Organization said.
The Vietnamese government should take more measures to improve the country's competitiveness, he said.
Herb Cochran, executive director of the HCMC Chapter of the American Chamber of Commerce in Vietnam (AmCham), said a growing number of members are finding it more difficult to do business in the country than in the past.
"Non-market administrative decisions on which items can be imported, how products can be priced, who can work in Vietnam, what programs can be broadcast on television, who can provide health care, and much more have contributed to a perception that investors are not welcome in Vietnam," Saigon Times newspaper quoted him as saying.
"We meet regularly with the government at the Vietnam Business Forum and other consultations opportunities to discuss what the Government and businesses could do to attract more US FDI.
"Unfortunately, not many of our recommendations have been accepted in recent years, nor have many recommendations from other foreign business associations or international experts."
Another obstacle that could discourage foreign investors is the low rate of FDI disbursement. Investment in many billion-dollar projects has yet to actually come in due to obstacles in acquiring and clearing sites.
The case of Indian conglomerate Tata Steel Ltd is an example. It first signed an agreement with Vietnam Steel Corp. in May 2007 to build a $5 billion plant with a capacity of 4.5 million tons in Ha Tinh Province.
But the project has been repeatedly delayed over land allocation while a site previously earmarked for Tata was handed over to a competitor. Under Vietnamese law, the government pays for land clearance. But the province wants Tata to cover some of the cost, and the two sides have been unable to reach a consensus.
Nguyen Mai, chairman of the Vietnam Association of Foreign Invested Enterprises, said though the country is now focusing on attracting FDI in technology, not labor-intensive sectors as before, policies have not changed much.
"In fact, we still place priority on labor-intensive projects.
"Our incentives for hi-tech projects have not met the requirements of investors."
Investors in the tech sector have different needs from those in sectors like textiles and footwear.
Most are from developed economies like the US, EU, and other members of the Organization for Economic Cooperation and Development, who have stricter requirements with regard to legal transparency and safeguarding intellectual property rights.
Mai said: "We have not met the requirements of hi-tech investors, especially the big ones. The government should reconsider the current policies to meet these requirements."
Phong said Vietnam has the advantage of low labor costs, which would be quickly eliminated due to wage increases and increasing demand for skilled workers.
It would be difficult for Vietnam to attract FDI if labor quality does not improve, he said, adding many foreign projects already find it hard to find the skilled employees they need.
FDI to rebound?
Nguyen Xuan Thanh, a Ho Chi Minh City-based lecturer at the Harvard Kennedy School's Vietnam program, said the country's policies are not good enough to attract many new investors but are not so bad as to force existing investors out either.
Thus it could hope for stronger FDI inflows in future, he said.
Phong said Vietnam's closer cooperation with Japan, the US, and Russia would also facilitate FDI inflows from these countries. "But [it] should deal strongly with problems hindering foreign investors."
The Hongkong and Shanghai Banking Corporation said in a recent report that Vietnam could do more to attract foreign investment.
With the fiscal space constrained, more foreign investment was needed to pick up the slack of domestic investment.
"But to do this, Vietnam would need to improve its business environment, most notably reducing red tape and creating clearer laws on how to resolve insolvency."
Without that, firms were entering Vietnam only to take advantage of the wage costs rather than to take advantage of the dynamic domestic market.
This showed in the contraction of registered FDI with the exception of Japan as investors had other attractive markets such as Indonesia and Thailand.
As such, for Vietnam to realize its ambitions, reforms needed to be carried out to not only eliminate the bad debt but also improve the efficiency of the economy.
The Foreign Investment Agency said Vietnam hopes to attract FDI worth $13-14 billion this year.
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