Tightening administrative procedures, upgrading infrastructure and increasing the caliber of human resources will better serve Vietnam in luring foreign investment than offering too many tax breaks, economists say.
The granting of investment incentives must become more selective since it's a very expensive strategy, said Brian Portelli from the UN Industrial Development Organization (UNIDO) during the release of the Vietnam Industry Investor Survey on Thursday.
A reckless distribution of incentives could undermine the national tax system and reduce state budget collection, he said.
“Tax incentives enhance competitiveness, but do not substitute for competitiveness," Portelli said. "When they do so, it becomes a race to the bottom.”
Most foreign-invested enterprises (FIEs) in Vietnam have received fiscal intensives, including tax breaks and land rent reductions, according to the survey conducted by the UNIDO and the Ministry of Planning and Investment in 2011 which questioned nearly 1,500 foreign and local firms in 9 cities and provinces.
Economist Ta Loi from the National Economics University said the country has been too friendly in welcoming foreign investors--adding that the economy has lost much and gained little through this approach.
Many foreign companies are benefiting from the fiscal incentives and cheap Vietnamese resources, but abuse transfer pricing to avoid paying taxes in Vietnam, he said.
Echoing him, economist Bui Kien Thanh said: “No country offers incentives to foreign investors like Vietnam. We should cut overly-generous incentives for foreign investors. They should have received specific incentives based on what they can bring to the country, such as jobs generated and added-value products.”
Many provinces now compete to attract FDI by offering incentives without considering whether or not the projects are actually useful, he said.
UNIDO Vietnam representative Patrick Gilabert said fiscal incentives are an important factor for investors in medium and low-tech projects. Meanwhile, the qualify of human resources is the decisive factor for investors in high-tech projects, he said.
In Vietnam, only five to six percent of foreign-invested projects can be described as high-tech, he said.
Vice Head of the Foreign Investment Agency Dang Xuan Quang admitted that despite all Vietnam's incentives, the country has failed to bring FDI to its tech and agriculture sectors, as well as its many under-developed provinces.
According to the Ministry of Planning and Investment, FDI in the agriculture sector accounted for eight percent of total FDI in 2001, but has since fallen to one percent.
Chairman Nguyen Mai of the Vietnam Association of Foreign Invested Enterprises said the current criteria for investors enjoying tax breaks has grown outdated. For example, Vietnam had decided to offer incentives to labor-intensive projects, but the criteria should not be applied across the board
Foreign-invested projects in the garment and footwear sectors in big cities like Hanoi, HCMC and Hai Phong should not receive tax breaks, Mai argued. Vietnam should use the incentives, instead, to draw big investors into tech projects and under-developed localities like Lai Chau, Dien Bien and Son La.
Patrick Gilabert suggested that Vietnam develop a monitoring mechanism to determine whether incentives actually bring the desired investment outcome in terms of productivity and value-added generation.
Crush local enterprises
Economist Bui Kien Thanh said the current policies have hurt local businesses.
“Foreign-backed firms are exempt from corporate tax and have occupied thousands of square meters of free land in industrial parks for years. On the other hand, local firms find it hard to get even 100 square meters for their workshops,” he said.
“Authorities should reconsider their approach. Why do we cause difficulties for our local firms? FDI should support our development instead of overwhelming Vietnamese firms. Our firms are being crushed by foreign competition.”
Unable to compete with foreign rivals, many successful local firms have folded and sold their brands to foreign rivals in the past few years.
Despite receiving many incentives, Thanh argues that contributions from foreign businesses pale in comparison to the damages they've caused to Vietnam'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 reported by the state and domestic private sectors.
FDI's contribution to the country's overall growth was not high because the sector's exports had little to no added value, the General Statistic Office said.
Economist Nguyen Minh Phong said the biggest disappointment caused by the FDI projects is that they have transferred very little technology to Vietnamese workers. Foreign investors tend to keep their technology secret and local authorities don't demand that they share it.
Vietnam lured FDI of $6.85 billion in the first half of this year, a 35.3 percent drop compared to the same period last year, according to the Foreign Investment Agency.