A STUDY ON FOREIGN DIRECT INVESTMENT

IN VIETNAM (1988-2006)

MOE CHIT KHAING

[B Com & MPA]

JANUARY, 2009
 ABSTRACT

This study was carried out with the objective of finding out the benefits achieved
by Vietnam from foreign direct investment during 1988-2006. It was found out that
Vietnam benefited from FDI. FDI share has contributed more than 10% of total
investment. Contribution of FDI to GDP has increased to more than twice during the
decade of 1996-2006. The share of FDI in industrial output has contributed nearly 50%.
Thus Vietnam has easily entered into the international market. FDI has also contributed to
the state revenue, receiving USD 1400 million in 2006. Moreover, FDI has created
employment opportunities, and has generated many technicians and managers. Therefore
FDI has largely benefited to national economy.
Vietnam has transformed from centralized economy to market oriented economy.
WTO accession and Bilateral Trade Agreement put Vietnam in a frame to be manageable
FDI. Vietnam has liberalized many FDI policies in which upgrading infrastructure is
placed on the top priorities. Moreover, Vietnamese government has attracted to FDI by
various incentives. Therefore other developing countries can take successful ways to
develop FDI inflow in a short period.
 ACKNOWLEDGEMENTS

Sincere appreciation must be given to economic researchers, MPI, FIA, and GSO
in Vietnam for the data that was used in my paper.
Besides, I wish to show my special thanks to my parents and husband. I'm also
very indebted to the staffs from JICA and our institute.
Lastly, I would like to express my thankfulness to all persons who helped directly
or indirectly to accomplish my research paper.
 TABLE OF CONTENTS

Page

ABSTRACT i
ACKNOWLEDGEMENTS ii
TABLE OF CONTENTS iii
LIST OF TABLES v
LIST OF FIGURES vi
LIST OF ABBREVIATIONS vii

CHAPTER 1 INTRODUCTION 1
1.1 Rationale for the Study 1
1.2 Objectives of the Study 2
1.3 Method of the Study 2
1.4 Scope of the Study 2
1.5 Organization of the Study 2

CHAPTER 2 CONTRIBUTIONS OF FDI TO THE DEVELOPMENT 3

OF COUNTRIES

CHAPTER 3 OVERVIEW OF VIETNAM ECONOMY 6

3.1 Geography, Population, and Ethnic Groups 6
3.2 Brief Overview of Vietnam Economy 8

CHAPTER 4 RECENT TRENDS AND DEVELOPMENT IN FDI 12

4.1 Inflow of Foreign Direct Investment 12
4.2 Distribution of FDI by Economic Sector 15
4.3 Foreign Direct Investment by Investing Countries 17
4.4 Distribution of FDI by Province and Region 19
 TABLE OF CONTENTS (Cont'd)

Page

CHAPTER 5 POLICY REFORMS IN FDI 21

5.1 Shift in the Idea of the Government and 21
Liberal Policy in FDI
5.2 Licensing Procedure Reform and One Door Policy 21
5.3 Forms of FDI in Vietnam 23
5.4 Harmonization with International Agreements 24
and Rules
5.5 Removal of Restrictions 25
5.6 Creating Zonal Infrastructure 25
5.7 Banking for Foreign Investors 26
5.8 Fiscal Incentives and Other Incentive for FDI 26

CHAPTER 6 IMPACTS OF FDI ON VIETNAM ECONOMY 30

6.1 FDI Share in Total Investment 30
6.2 Contribution of FDI to GDP 30
6.3 FDI Share in Industrial Output 31
6.4 FDI and Export 32
6.5 FDI Contribution to State Revenue 33
6.6 FDI and Employment Creation 33

CHAPTER 7 CONCLUSION 35
7.1 Findings and Discussion 35
7.2 Conclusion 38

REFERENCES 40

APPENDIX
 LIST OF TABLES

Page

Table 3.1 Economic Growth 8

Table 4.1 Foreign Direct Investment Projects Licensed in Period 1988-2006 13
Table 4.2 Foreign Direct Investment Projects Licensed from 1998 to2006 15
by Economic Sector
Table 4.3 Foreign Direct Investment Licensed from 1988-2006 by Countries 17
Table 4.4 Foreign Direct Investment Projects Licensed from 19
1988 to 2006 by Region
Table 5.1 Incentive for CIT Rate 27
Table 5.2 CIT Exemption and Reduction 27
Table 5.3 CIT Incentive for Existing Projects 28
Table 5.4 Exemption for Land and Water 29
Table 6.1 FDI Contribution to GDP 30
Table 6.2 Number of Employees in FDI 33
 LIST OF FIGURES

Page

Figure 3.1 Economic Structure 9

Figure 3.2 Monthly Labor Costs (USD) in 2007 11
Figure 4.1 FDI Inflows in Vietnam in Period of 1988-2006 14
Figure 4.2 FDI by Economic Sector during 1988-2006 16
Figure 4.3 FDI in Vietnam 1988-2006 by Investing Country 18
Figure 4.4 FDI in Vietnam 1988-2006 by Region 19
Figure 4.5 FDI in Vietnam 1988-2006 by Province 20
Figure 6.1 Comparison of GDP by Ownership 31
Figure 6.2 Industrial Output by Ownership 31
Figure 6.3 Export by Ownership 32
 LIST OF ABBREVIATIONS

APEC - Asia-Pacific Economic Cooperation

ASEAN - Association of Southeast Asian Nations
BCC - Business Cooperation Contract
BIT - Bilateral Investment Treaties
BOT - Build - Operate - Transfer
BT - Build - Transfer
BTA - Bilateral Trade Agreement
BTO - Build - Transfer - Operate
CIT - Corporate Income Tax
EPZs - Export Processing Zones
FDI - Foreign Direct Investment
FIA - Foreign Investment Agency
FIEs - Foreign Investment Enterprises
GDP - Gross Domestic Product
GSO - General Statistics Office
HCMC - Ho Chi Minh City
HDI - Human Development Index
IZs - Industrial Zones
km - kilometer
MPI - Ministry of Planning and Investment
SBV - State Bank of Vietnam
SOEs - State Owned Enterprises
TRIMs - Trade Related Investment Measures
UEL - Unified Enterprise Law
UIL - Unified Investment Law
U.S - United States
USD - United States Dollar
VND - Vietnamese Dong
WTO - World Trade Organization
 CHAPTER ( 1 )
INTRODUCTION

1.1 Rationale for the Study

Foreign direct investment (FDI) has increasingly been recognized as a crucial
factor in the development process of host economies. Besides bringing capital, FDI is a
key for obtaining foreign technology, organizational and managerial practices and skills,
for entering international market easily, and for generating employment opportunities.
Traditionally, investment rates increase only if saving rates increase. But on the
modern track, investment can be partially enhanced via more FDI inflows. Moreover, FDI
has the ability to change the structure of economy, increasing the share in industry and
service sector. Hence, more and more countries have welcomed FDI inflow, and
increased attention is being placed to policies that enrich FDI inflow.
Vietnam is one of the countries which attract more FDI. Vietnam adopted a
centrally planned economy until the late-1900s. However, Vietnam introduced an
economic reform ( doi moi ) in 1986. As a result, from 1990, Vietnam has been one of the
fastest growing economies in the world with the average growth rate of 7 percent per
annum. Vietnam has made one of Asia's best growth success stories, reaching 8.4 percent
in 2005.
Among the causes of this success, FDI plays an important role. According to the
World Bank, Vietnam attained higher GDP growth through FDI than many other
countries with the average rate of around 7 % in the 1990s, while it was about an average
rate of 3 % in East Asia in this period.
The contribution of FDI in Vietnam economy has become more and more
significant. Its contribution to GDP increased from 7.4 % in 1996 to 17.0 % in 2006. In
addition, FDI has grown substantially in the export sector with over half of the total
export level.
Although Vietnam has a short story with regard to FDI, FDI inflow has strongly
accelerated. During 20 years (1988-2007), Vietnam has managed FDI with many
successes, receiving over USD 90,000 million.
1.2 Objectives of the Study
To find out the benefits that Vietnam achieved from FDI, and to gain lessons from
Vietnam's experience in FDI and its policy reforms regarding FDI.

1.3 Method of the Study

Descriptive method of the study is used on secondary data that were taken mainly
from Ministry of Planning and Investment, Foreign Investment Agency, and General
Statistics Office of Vietnam, and relevant web sites.

1.4 Scope of the Study

This paper encompasses the development trend and policy reforms of FDI in
Vietnam for the period of 1988-2006, and impacts of FDI on Vietnam economy during
1996-2006.

1.5 Organization of the Study

This paper is structured in seven chapters. Chapter (1) is the introductory chapter.
Chapter (2) then presents some background literature on FDI. Overview of Vietnam
economy is mentioned in Chapter (3). Chapter (4) then presents recent trends and
development of FDI in Vietnam. In Chapter (5), policy reforms in FDI is explained,
followed by Chapter (6) where the impacts of FDI are examined. Chapter (7) presents
findings and discussion, and conclusion.
 CHAPTER ( 2 )
CONTRIBUTIONS OF FDI TO THE DEVELOPMENT
OF COUNTRIES

Foreign direct investment is a key ingredient of successful economic growth in

developing countries because the very essence of economic development is the rapid and
efficient transfer of managerial and technical or deployment of technology from abroad
(Borensztein et al., 1998).
Using data from forty six developing countries, Balasubramanyam et. al. (1996)
also investigates the effect of FDI on growth in developing countries. First, the effect on
growth is stronger in countries with a policy of export promotion than in countries that
pursue a policy of import substitution. Second, in countries with export promoting trade
regimes, FDI has a stronger effect on growth than domestic investment. Both findings
relate to the results of Borensztein et. al. (1998).
According to Hayami (2001) and Todaro and Smith (2003), the contributions of
FDI to the development of a country are widely recognized as increasing the tax revenues,
and improving management, technology, as well as labor skills in host countries. These
could help the country to break the vicious cycle of underdevelopment (Hayami, 2001).
Thus, countries can in effect use such firms as catalysts that allow them to
leapfrog stages in development. Foreign direct investment can thus speed up the structural
shift of the economy.
FDI has also been argued to act as a catalyst for inward investment by
complementing local resources and providing investment opportunities (Agosin and
Mayer, 2000).
FDI beneficially affect the productive efficiency of domestic enterprises. Local
firms have an opportunity to improve their efficiency by learning and interacting with
foreign firms. FDI can also raise the quality of domestic human capital and improve the
know-how and managerial skills of local firms. Moreover FDI stimulates the
development and propagation of technological skills (Borensztein et al, 1998). FDI also
helps to increase local market competition, create modern job opportunities and increase
market access spillovers among firms (Borensztein et al, 1998).
FDI also helps to increase local market competition, create modern job
opportunities and increase market access of the developed world (Noorbakhsh, Paloni,
Youssef, 2001) all of which should ultimately contribute to economic growth in recipient
countries.
Borensztein et. al. (1998) utilize data on FDI flows from industrialized countries
to sixty nine developing countries to test the effect of FDI on growth. First, FDI
contributes more to domestic growth than domestic investment, suggesting that it is
indeed a vehicle of technology transfer. Second, FDI is more productive than domestic
investment only when the host country has a minimum threshold stock of human capital.
Foreign direct investment (FDI) inflows play a critical role in the growth of
recipient countries (De Mello, 1997, 1999; Buckley et al., 2002; Akinlo, 2004).
De Gregorio (1992) for 12 Latin American countries and Blomstrom et al. (1996)
for less developed countries also found a strong effect of FDI on economic growth.
Wang (2002) found that only FDI in the manufacturing sector has a significant
and positive impact on economic growth, and she attributes this positive contribution to
FDI's spillover effects.
Li and Liu found that there was a strong complementary connection between FDI
and economic growth in both developed and developing countries. They furthermore
reported that FDI not only directly promoted economic growth by itself but also indirectly
did so via human capital.
De Gregorio (1992) argued that FDI can increase a country's output and
productivity through a more efficient use of existing resources and by absorbing
unemployed resources.
A large number of empirical studies on the role of FDI in host countries suggests
that FDI: is an important source of capital, complements domestic private investment
which is usually associated with new job opportunities; enhances both technology transfer
and spillover and human capital (knowledge and skill) enhancement boosts overall
economic growth in host countries. (Chowdhury and Mavrotas, 2005)
FDI is one of the major channels in providing developing countries with access to
advanced technologies. The knowledge spillovers may take place via imitation,
competition, linkages and/ or training (Kinoshita, 1998; Sjoholm, 1999).
The imitation channel is based on the view that domestic firms may become more
productive by imitating the more advanced technologies or managerial practices of
foreign firms. In the absence of FDI, acquiring the necessary information for adopting
new technologies is too costly for local firms. Thus, FDI lowers the cost of technology
adoption and may expand the set of technologies available to local firms.
 The competition channel emphasizes that the entrance of foreign firms intensifies
competition in the domestic market, encouraging domestic firms to become more efficient
by upgrading their technology base.
The linkages channel stresses that foreign firms may transfer new technology to
domestic firms through transactions with these firms. By purchasing raw materials or
intermediate goods, a strong buyer-seller relationship may develop that gives rise to
technical assistance or training from the foreign firm to the domestic firm.
Finally, the training channel arises if the introduction of new technologies requires
an upgrading of domestically available human capital. New technologies can only be
adopted when the labor force is able to work with them. The entrance of foreign firms
may give an incentive to domestic firms to train their own employees. If labor moves
from a foreign firm to a local firm (through labor turnover), the physical movement of
workers causes knowledge to move between firms.
 CHAPTER ( 3 )
OVERVIEW OF VIETNAM ECONOMY

3.1 Geography, Population, and Ethnic Groups

Vietnam is located on the eastern coast of the South-east Asian Indochinese
Peninsula, and is bordered by China in the North, Laos and Cambodia in the West, and
the East Sea in the East. The total area of Vietnam is 331, 211 km2, and the coast line is
along 3,260 km. Its climate is tropical in South, and monsoonal in North with hot, rainy
season (mid-May to mid-September), and warm, dry season (mid-October to mid-March)
Vietnam's population was 84.1 million in 2006, of which more than 60 % is under
25 years old. About 73 % of the population lives in the rural area.
Ninety percent of the population is Vietnamese, who settled in the Red River Delta
thousand of years ago. Chinese ethnic, the largest minority group, has settled in Vietnam
since the last 300 years, and live in the cities and provincial towns. Other important
minority groups are the Khmer and the Cham, who live in Central and Southern Vietnam
and others are Muong, Tai, Meo, and Man. Moreover, there are many tribal groups who
migrated from Asian countries over a period of several thousand years.
Buddhism is the principal region. There are also Taoist, Roman Catholic, indigenous
beliefs, Muslim, Protestant, Cao Dai, and Hoa Hao. As language, Vietnamese is an
official language. Other languages are Chinese, English, French, Khmer, and other tribal
languages (Mon-Khmer and Malayo-Polynesian).
 Map of Vietnam and its Neighboring Countries

This map describes Vietnam and its neighboring countries. The country name of
Vietnam is Socialist Republic of Vietnam. Its government type is Communist State. The
flag of Vietnam represents a yellow star with red background.
3.2 Brief Overview of Vietnam Economy
Vietnam's economy was only agrarian and subsistence until French colonization
(1858-1954). However, French colonizers developed the country, with the specialization
of the South for agricultural production and the North for manufacturing. As a result, coal
from the North and rice from the South were exported, importing manufactured goods
from French.
In 1954, the North and South were divided politically. The different economic
ideologies were adopted communist in the north and capitalist in the South. Second
Indochina War (1954-1975) seriously destructed the economy of Vietnam with the 1.5
million military and civilian deaths and 1 million refugees, including professionals,
technicians, and skilled workers. Unifying the North and South in 1975, Vietnam had
adopted a planned economy between 1976 and 1986. In 1977, Vietnam joined United
Nations. In 1986, Vietnam launched Doi Moi policy with 3 main pillars:
- Transition from centralized to market-oriented economy
- Transforming from single-sector (state owned) to multi-sector economy, encouraging
participation of private sector.
- Transforming from closed to open economy, developing trade and investment
relations with other countries.
Vietnam joined ASEAN in 1995. During the 1997 Asian Financial Crisis, there
was a recession in Vietnam. GDP growth fell to 6 % in 1998 and 5 % in 1999. However,
Vietnam's recession was not serious than other Asian countries. From 2000, its economy
has recovered and its economic growth sustained (Table 3.1).
Vietnam became a member of APEC in 1998. On July 13, 2000, the signing of the
Bilateral Trade Agreement (BTA) between the U.S and Vietnam has benefited Vietnam's
economy. It has attracted FDI not only from the U.S but also from Europe. In addition, it
transformed into a manufacturing-based and export-oriented economy than before. On
November 7, 2006, Vietnam became 150th member of WTO after 11 years of preparation
and negotiation.

Table (3.1) Economic Growth

1986-1990 1991-1995 1996-2000 2001-2005 2006
GDP growth rate 4.45% 8.20% 6.95% 7.51% 8.17%
Source: General Statistics Office of Vietnam
 Vietnam's economy has become one of the fastest growing in the world, averaging
over 7 % after 1990s. GDP growth rate significantly increased from the average of 4.45%
during 1986-1990 to 8.20% during 1991-1995. Its growth doubled and reached to 8.17%
in 2006, and (8.4% in 2007 according to Central Intelligence Agency World Fact book).
From 2005, Vietnam has become the second largest economic growth in Asia after China.

Figure (3.1) Economic Structure

GDP by Sector in 1996

Agriculture,
forestry and
Service, fishing,
42.51% 27.76%

Industry and
construction,
29.73%

Source: General Statistics Office of Vietnam

GDP by Sector in 2006

Agriculture,
Service, forestry and
38.08% fishing,
20.36%

Industry and
construction,
41.56%

Source: General Statistics Office of Vietnam

 The role of industry and construction sector in economic structure is getting
stronger, increasing from 29.73% in 1996 to 41.56% in 2006. Service and agriculture
sector decreased to 38.08% and 20.36% respectively in 2006.
Agriculture and forestry occupied 20.36% of GDP in 2006. Principal products of
this sector are rice, maize, sweet potato, peanut, soy bean, cotton, coffee, cashews.
Cultivated land is about 12.2 million hectares. As land use, arable take 21%, forest and
woodland is 28%, others are 51%.
Industry and construction accounted for 41.56% of GDP in 2006. Its principal
types include mining and quarrying, manufacturing, electricity, gas, water supply, cement,
phosphate, and steel.
Service sector contributed 38.08% to GDP in 2006. Principal types are wholesale
and retail trade, repair of vehicles and personal goods, hotel and restaurant, transport,
telecommunications, and tourism.
In the external trade sector, the revenue from export was 39.6 billion in 2006. The
major exported goods include crude oil, rice (second largest exporter in the world), sea
products, garments, textiles, coffee, footwear, rubber, and handicrafts. Vietnam's main
export partners are Japan, Germany, Singapore, Taiwan, Hong Kong, France, South
Korea, United States, and China. Many products were imported in the amount of USD
44.4 billion in 2006. Machinery and equipment, petroleum products, fertilizers, steel
products, raw cotton, grain, cement, motorcycles are the main imported goods. They are
mainly imported from Singapore, South Korea, Japan, France, Hong Kong, Taiwan,
Thailand, and Sweden.
In addition, with the sustained economic growth, poverty rate has reduced from
70% at the end of the 1980s to 37% in 1998 and to 18.7% in 2006. According to the
UNDP Human Development Index (HDI), literacy rate is over 90% in 2006. Life
expectancy is 69.27 years (total population), 66.84 years (male) and 71.87 years (female).
As 60% of the population is under 25 years old, Vietnam has young, abundant, and
industrious labor force. Each year, approximately 1.5 million workers enter into the labor
market. In 2006, labor force participation was 44.58 million people.
Figure (3.2) Monthly Labor Costs (USD) in 2007

383
360

Unskilled labor

Skilled labor
150

70 60
45

Thailand China Vietnam

Source: http://www.business-in-asia.com

Labor cost in Vietnam is very low for unskilled labors as well as skilled labors, as
compared with other countries.
Vietnam has also upgraded infrastructure from 1986. Vietnam's road system
developed to 210,000 km including 10,732 bridges and 178 ferries. Inland waterways
were also developed. For railway, there was 2,600 km of single-track line. In addition,
3 international airports, the domestic airports and 11 major seaports were also built.
 CHAPTER ( 4 )
RECENT TRENDS AND DEVELOPMENT IN FDI

4.1 Inflow of Foreign Direct Investment

Vietnam is a late comer in FDI as compared with other countries in ASEAN
region. However, FDI inflow in Vietnam has significantly developed in a short period.
The 1987 law on FDI was the first time for Vietnam. Although Vietnam has a short story
concerning FDI, it has managed to attract much inflow of FDI till reaching one of the
largest recipients among ASEAN countries.
In addition to the investment of foreigners, Vietkieu (Overseas Vietnamese) also
involves in this FDI inflows.
Ministry of Planning and Investment covers two kinds of capital: registered
capital and implemented capital. Registered capital is the capital committed in the
investment license. Implemented capital is defined as the actual disbursement of the
registered capital. Registered capital is relatively different from implemented capital.
Table (4.1) Foreign Direct Investment Projects Licensed in Period 1988-2006
Number of Registered Capital Implementation Capital
Years
Projects (Million USD)* (Million USD)

1988 37 341.7 -

1989 67 525.5 -

1990 107 735 -

1991 152 1291.5 328.8

1992 196 2208.5 574.9

1993 274 3037.4 1017.5

1994 372 4188.4 2040.6

1995 415 6937.2 2556

1996 372 10164.1 2714

1997 349 5590.7 3115

1998 285 5099.9 2367.4

1999 327 2565.4 2334.9

2000 391 2838.9 2413.5

2001 555 3142.8 2450.5

2002 808 2998.8 2591

2003 791 3191.2 2650

2004 811 4547.6 2852.5

2005 970 6839.8 3308.8

2006 987 12003.8 3956.3

Total 8266 78248.2 37271.7

* -including supplementary capital to licensed projects in previous year
Source: Ministry of Planning and Investment
Figure (4.1) FDI Inflows in Vietnam in Period of 1988-2006

14000

12000

10000
Million USD

8000

6000

4000

2000

0
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Years
Registered Capital (Million USD)* Implementation Capital (Million USD)

Source: Ministry of Planning and Investment

Prior to 1991, FDI inflow was very low. It gradually increased after two
amendments in 1990 and 1992. Although 1996 law on FDI increased the FDI inflow, its
flow fell sharply because of the 1997 Asian financial crisis. However, FDI has gradually
recovered since 2000. After the unified investment law in 2006, FDI inflow has
significantly accelerated. The registered capital in 2006 increased to nearly twice than
that in 2005. Unlike the last years, Vietnam reached over USD 20,000 million in 2007
with the culmination of FDI inflow, after becoming a member of WTO (Nguyen Ngoc
Anh, et.al. -1 Jan 2008).
4.2 Distribution of FDI by Economic Sector
FDI in agricultural sector occupy only a small share in the total FDI both in terms
of the number of projects and registered capital. However, 5,645 projects of FDI flowed
into the industrial sector, accounting for 52,686.1 million of registered capital. As
manufacturing in industry sector could attract 5,338 projects of total projects, it exists as a
major role among all kinds of economic activities. The service sector has also attracted
most of FDI inflows, receiving 1963 projects.

Table (4.2) Foreign Direct Investment Projects Licensed from 1988 to 2006 by
Economic Sector

Percentage Registered Percentage of

Number of
Sector of total capital total registered
projects
projects (Million USD)* capital
I. Agriculture sector 658 7.90% 3854 4.93%
Agriculture and forestry 504 3349.2
Fishery 154 504.8
II. Industry and Construction sector 5645 68.30% 52686.1 67.33%
Mining and quarrying 103 3480.5
Manufacturing 5338 41462.8
Electricity, gas and water supply 23 1928.1
Construction 181 5814.7
III. Service Sector 1963 23.80% 21708.2 27.74%
Wholesale and retail trade,
Repair of motor vehicles, motor cycles
and personal and household goods 97 512.0
Hotels and restaurants 253 5652.5
Transport, storage and communications 242 4715.8
Financial intermediation 61 830.4
Real estate, renting business activities 1014 8077.0
Education and training 88 135.2
Health and social work 42 478.9
Recreational, cultural and sporting
activities 103 1273.2
Community, social and personal
service activities 63 33.2
Total 8266 100% 78248.2 100%
*- including supplementary capital to licensed projects in previous year
Source: Ministry of Planning and Investment
Figure (4.2) FDI by Sector during 1988-2006

Number of Projects by Sector

Agriculture,
Forestry, and
Service, Fishery,
23.80% 7.90%

Industry, and
Construction,
68.30%

Registered Capital by Sector

Agricuture,
Forestry,and
Sector, Fishery,
27.74% 4.93%

Industry, and
Construction,
67.33%

Source: Ministry of Planning and Investment

As shown in Figure 4.2, industry sector accounted for a substantial share of the
investment capital. Industry has been the largest sector with the 68.3% of total projects
and 67.33% of total registered capital. The average share of service sector took 27.74% of
total registered capital during 1988-2006.
4.3 Foreign Direct Investment by Investing Countries
Table 4.3 shows the distribution of FDI by investors in Vietnam. Vietnam has
attracted investors from over sixty six countries as yet 2006. (See Appendix A)

Table (4.3) Foreign Direct Investment Licensed from 1988-2006 by Countries

Registered Capital
Rank Country Number of Projects
(Million USD)
1 Singapore 543 10002.9
2 Taiwan 1743 9502.3
3 Republic of Korea 1438 9251.9
4 Japan 838 8397.6
5 Hong Kong SAR (China) 548 6400.3
6 British Virgin Islands 329 5361
7 United States 374 3121.2
8 France 236 2902.5
9 Netherlands 91 2765.7
10 United Kingdom 99 2065.5
11 Malaysia 239 1863.8
12 Fed. Russian 95 1854.5
13 Thailand 199 1783.7
14 Australia 176 1539.1
15 China P.R. 508 1242.3
16 F.R. Germany 100 521.7
17 Philippines 40 346.7
18 Indonesia 21 286
19 Brunei 28 88.9
20 Laos 8 23.7
21 Cambodia 5 4.5
22 Others 608 8922.4
Total 8266 78248.2
*- including supplementary capital to licensed projects in previous year
Source: Ministry of Planning and Investment
Figure (4.3) FDI in Vietnam 1988-2006 by Investing Country

Singapore,
12.8%
Others, 23.7%

United
Kingdom, 2.6% Taiwan, 12.1%

Netherlands,
3.5%
Republic of
France, 3.7%
Korea, 11.8%
United States,
4%
British Virgin Japan, 10.7%
islands, 6.9% Hong kong,
8.2%

Source: Ministry of Planning and Investment

The top ten investors occupy 75.4% and 76.3% of total investment in terms of the
number of projects, and the registered capital during 1988-2006. FDI inflows come
mainly from Asian region that accounted for 63% of total registered capital in the period
of 1988-2006. After signing BTA with US in July 2000, FDI from western countries such
as US, France, and Netherlands has been increasing. According to the rank, Singapore has
been the largest foreign investor with 543 projects and million USD 10,002.9 of
registered capital.
4.4 Distribution of FDI by Province and Region
Table 4.4 shows the distribution of FDI by region in Vietnam. All regions receive
FDI inflow.

Table (4.4) Foreign Direct Investment Projects Licensed from 1988 to 2006
by Region
Number of Registered Capital
Regions
Projects (Million USD)*
Red river delta 1781 20241.0
North East 358 2445.2
North West 27 115.4
North Central Coast 125 1472.6
South Central Coast 349 5275.8
Central Highlands 113 1041.3
South East 5126 42337.2
River Delta 334 2315.3
Petroleum & Gas 53 3004.4
Total 8266 78248.2
* - including supplementary capital to licensed projects in previous year
Source: Ministry of Planning and Investment

Figure (4.4) FDI in Vietnam 1988-2006 by Region

Petroleum & Gas,
3.8%
River Delta, 3% Red River Delta,
25.9%
North East, 3.1%

North West, 0.2%

North Central
Coast, 1.9%

South Central
Coast, 6.7%

Central
South East, 54.1%
Hightlands, 1.3%

Source: Ministry of Planning and Investment

 All sixty four cities and towns in Vietnam have received FDI. But, the distribution
of FDI across provinces is uneven. In the South East region, Ho Chi Minh City and its
neighboring towns occupy the largest share of FDI. South East region accounted for 62%
of total project and 54.1% of total registered capital. This region attains the largest share
of FDI because of its rich natural resources and faster institutional reforms (on line
system) of the local government. In the North area, Hanoi and neighboring provinces also
account for the most FDI share. The share of other regions take only a small proportion of
total FDI. (See Appendix B)

Figure (4.5) FDI in Vietnam 1988-2006 by Province

Others, 19.4% Ho Chi Minh,

Quang Ninh, 22.9%
1.7%

Hai Duong,
1.8%
Ha Tay, 1.9%
Quang Ngai,
2.8%

Hai Phong, 3.4% Hanoi, 16%

Ba Ria- Vung
Tau, 8.2%

Binh Duong, Dong Nai,

8.6% 13.3%

Source: Ministry of Planning and Investment

The capital flows into urban areas, especially 22.9% in Ho Chi Minh City
(HCMC) and 16% in Hanoi during 1988-2006. Hanoi and Ho Chi Minh City are the two
main economic hubs over the country. However, as the cost of living and doing business
in the two cities increases, foreign investors look elsewhere for the investment location.
Moreover, the local governments have also attracted to receive the FDI inflow
competitively. (See Appendix B)
 CHAPTER ( 5 )
POLICY REFORMS IN FDI

5.1 Shift in the Idea of the Government and Liberal Policy in FDI
The Vietnamese government has tried to attract investment from all sectors,
including foreign investors, private sectors, and also Vietkieu (Overseas Vietnamese).
In 2001, the 9th Communist Party Congress recognized the "foreign invested
economic sector" for the first time (Tuan Bui, 2003). Before this, the Communist Party
had identified that the main ownership groups are only the state, private, and household.
Foreign direct investment was assumed as a non-importance sector. However, in 2001,
confirming the importance of FDI sector for national economy, it was incorporated in the
long term strategy (2001-2010) for social and economic development, and was targeted to
become an industrialized country by 2020.
The liberal FDI policy has been reflected in a number of regulatory changes and
procedure reforms. The first law on FDI was promulgated on 29 th December 1987. This
1987 law was amended 2 times in 1990 and 1992. In 1992, the same tax treatment
between Joint Venture and 100 percent foreign-owned firm was provided, and
infrastructure facilities were constructed. In 1996, law on FDI was modified. This 1996
law allowed for new forms of investment including build-operate-transfer (BOT), build-
transfer-operate (BTO), and build-transfer (BT). In 2000, this law was amended to
acknowledge the right of foreign investors to merger and acquire companies and branches,
and the right to transfer the form of investment. In 2005 December, the Unified Law of
Investment and Unified Enterprise Law were passed. These new laws, which came into
effect on 1 July 2006, were prepared to meet the requirements of accession to the WTO.

5.2 Licensing Procedure Reform and One Door Policy

Investment license granting procedure of Vietnam was a great issue for investors,
and also an obstacle for improving FDI flow because it was a complicated and time
consuming legal procedure. Foreign investors often complained about it. Prior to 1996,
during the pre-licensing evaluation process, foreign investors had to provide any
necessary documents that MPI request, except those stipulated by the law. After finishing
a completed application dossier, it took at least four months and even years to obtain an
investment license.
 In 1996, the government set a "one door policy", which means that investors no
longer need to work with dozens of state agencies to receive an investment approval.
Investors had to deal with only the licensing authority, and the licensing authority took
responsibility for obtaining all needed approvals from other state agencies. This process
of granting investment licenses was decentralized to local government in 1996. However,
provincial authorities had only the power to grant licenses to small scale investments and
investments in less importance sectors. Large scale investment and investments in
importance sectors were authorized by the Ministry of Planning and Investment, and also
required the Prime Minister's approval.
Since 1996, granting licenses procedures have been gradually streamlined. The
decentralization of license granting authority has lead to competition among provinces
and cities. In 2000, an amendment to the 1996 FDI law significantly simplified the
procedures. According to this amendment, the licensing procedure was divided into two
categories:
i. Registration licenses without evaluation by the authority, and
ii. Procedure with evaluation before granting licenses.
The first categories is to grant small-scale investments and low importance sectors.
Large-sector investment and importance sectors require evaluation prior to licensing.
Registration procedure without evaluation takes at least 30 days. In the case of
investments required evaluation, it takes 45 days to obtain a license.
In addition, as a result of competition, Ho Chi Minh City has implemented an
online registration system for investment. This system causes a greater consequence.
Therefore, Ho Chi Minh City can decrease significantly the time to 10-20 days for
investments subject to evaluation, and 2-5 days for investments without evaluation.
Hence, on-line registration system reform is very effective.
In 2005, Vietnam passed the Unified Investment law and Unified Enterprise law.
The Unified Investment Law, a legal investment foundation for all, is to bring more
favorable conditions to investors. The following factors are involved in this law:
i. Bringing equal treatment to foreign and domestic investors (according to the rule
of non-discrimination under WTO)
ii. Decentralizing the power to lower government agencies and provinces (more
than before)
iii. Broadening the freedom in making investment
iv. Going in line with international commitments
 v. Improving the capacity of state management on investment
Like this, Unified Enterprise Law in 2005 is to create a better business
environment by bringing equal treatment for firms regardless of ownership (state, private,
foreign), simplifying procedure, and unifying the registration and licensing procedure.
Moreover, this law allows firm owners freely in setting up business.

5.3 Forms of FDI in Vietnam

Law on Foreign Investment specified (4) types of forms for foreign investors: (i)
business cooperation contract (BCC), (ii) joint venture (JV), (iii) 100 percent foreign-
owned enterprise, and (iv) some other forms.
i. A Business Cooperation Contract (BCC) includes two or more parties (a foreign
investor and a Vietnamese partner) which cooperate such as in the form of profit
sharing, product sharing. Parties have to implement a project and produce their goods
and services of a period as defined in the contract. As BCCs do not involve the
creation of a legal entity, they are more flexible than joint ventures and 100 percent
foreign-owned enterprise.
ii. A joint venture is an enterprise established on the basic of a contract signed by one or
more Vietnamese parties and one or more foreign parties. It has to be carried out in
the form of a limited liability company and is a legal entity consistent with law of
Vietnam.
iii. A 100 percent foreign owned enterprise is an enterprise owned by a foreign investor.
It is a legal entity under Vietnamese law.
iv. Other forms of FDI include build-operate-transfer (BOT), build-transfer-operate
(BTO), and build-transfer (BT).
Foreign investors have preferred 100 percent foreign-owned enterprises to joint
ventures. In the late 1980s, joint ventures accounted for more than 70 percent of licensed
projects due to the land ownership and access to credit (Tuan Bui). In that period, 100
percent foreign-owned enterprises accounted for just 5-10 percent. However, in 2001, 100
percent foreign owned projects accounted for 61 percent of licensed projects, while joint
ventures accounted for 34.2 percent. There are two reasons in this change. First,
regulations have been liberalized to the entry of 100 percent foreign-owned enterprises.
Second, many foreign investors have unsatisfied joint venture arrangements, especially
the dealings with SOEs and the difficulties in cooperating with a domestic partners.
5.4 Harmonization with International Agreements and Rules
After applying to join the WTO in 1995, Vietnam has gradually removed
investment restrictions that are not consistent with the TRIMs agreement. To meet the
requirements of the WTO accession, Vietnam experienced many challenges. According to
the WTO, it must treat domestic and foreign enterprises equally and a transparent and
predictable legal system must be created. WTO accession and TRIMs agreement
implementation created pressures to accelerate many reforms by eliminating the
restrictions on FDI. In 6 November 2006, Vietnam could enter as a member of WTO.
Vietnam also agreed the Bilateral Trade Agreement (BTA) with the United States
in 2000. The BTA covers WTO commitments related to investment (TRIMs), including:
 eliminating restrictions that are not consistent with trade-related investment measures
(WTO-TRIMs),
 opening up goods and particularly services sector for foreign investment,
 non-discrimination and elimination of dual price system, and
 transparency in the promulgation and implementation of investment policies.
Vietnam has implemented a number of commitments in the BTA, and revised
thoroughly by the end of 2005 its overall legal framework for investment and enterprise
registration by developing a new Unified Investment Law (UIL) and a new Unified
Enterprise Law (UEL). Removal of all dual pricing system provided to foreign firms was
completed in 2005. Moreover, the Unified Investment Law and the new land law allowed
foreign investors to mortgage their land use rights to borrow loans from credit institutions
licensed to operate in Vietnam.
Vietnam has also signed bilateral investment treaties (BIT) with over sixty
countries. Although Vietnam has not concluded BIT with the U.S, the BTA includes a
number of commitments as above mentioned. In addition to the BTA, the BIT has also
made investment regime of Vietnam more in line with international standards and more
favorable to foreign investors.
5.5 Removal of Restrictions
In order to create a good FDI environment, the Vietnamese government has
focused on the removal of restrictions. One of the main changes was that in April 2003,
the government abolished the requirement for Vietnamese and Foreign Investment
Enterprises (FIEs) to convert income from foreign currencies to Vietnamese dong.
The dual price system was gradually eliminated in areas such as tourism, air, rail
transportation and seaport charges, charges for television advertising, and utilities such as
telephone charges, electricity and water. Upgrading of infrastructure, especially in power
and clean water supply, and Internet connection, is also placed on the top priorities.
Therefore, with the improvement of the hardware infrastructure, the reform of the
software facilities was accelerated. Other reforms were implemented:
i. opening some sectors for foreign investment, such as stock exchange market,
and real estate;
ii. allowing FIEs to issue stock to the public;
iii. removing the conditions for foreigners to invest in privatized state-owned
enterprises;
iv. removal of forcing foreign firms to buy domestic products per local contents
requirements;
v. reduction on the prohibition of FIE exports;
vi. allowing flexible conversion among the various investment forms to foreign
firms.
From the late 1980s to the early 1990s, the foreign firms had to recruit their labor
force through employment centers. In the late 1990s, the procedure for recruiting
employees had been simplified. However, from 2003, the foreign firms have been entitled
to recruit their employees freely and directly.

5.6 Creating Zonal Infrastructure

Vietnam has provided special investment conditions for foreign investors by
different types of industrial zones: Export Processing Zones (EPZs), Industrial Zones
(IZs), and Hi-Tech Zones.
EPZs were established in 1991. An EPZ specializes in the production of goods
and the provision of services for export. There are both foreign and domestic investors in
EPZs.
 IZs were created in 1994. An IZ specializes in the production of industrial goods,
and services for the production of goods.
A Hi-Tech Zone is a zone in which hi-technology industrial enterprises provide
hi-technology development services, including scientific technological research and
development, and training services.

5.7 Banking for Foreign Investors

Under the 1987 FDI law, foreign investors had to open domestic bank accounts at
the Bank for foreign trade of Vietnam or at a branch of a foreign bank in Vietnam with
the approval from the State Bank of Vietnam (SBV). However, in the 1992 law, those
investors were allowed to open bank accounts at any banks in Vietnam, and loan capital
accounts at overseas banks with the approval from the SBV.
Moreover, from 2000, foreign enterprises have been able to open their overseas
accounts. Moreover, they were permitted to use the value of the land use right as security
to borrow loans from credit institutions operating in Vietnam.

5.8 Fiscal Incentives and Other Incentives for FDI

The Vietnamese government has attracted to FDI by various incentives:
i. corporate income tax incentives,
ii. import tax incentives,
iii. land and water surface rent incentives, and
iv. other incentives and supports.
The government has provided tax incentives to eligible projects by defining list of
sectors and geographical areas.
Under the law on Investment, Decree 108/2006/ND-CP dated 22nd Sep 2006
defined:
List A: List of sectors entitled to special investment incentives
List B: List of sectors of common investment incentives
Area 1: Geographical areas with specially difficult socioeconomic conditions
Area 2: Geographical areas with difficult socioeconomic conditions

( i ) Corporate Income Tax (CIT)

From 1987, foreign enterprises had to pay from 15 to 25% of earned profits. From
1996, these enterprises had been subject to CIT from 10 to 25% on the profit earned.
These enterprises were provided exemption period ranging from two years to eight years
from the first profit-making year. Now, standard CIT rate is 28%. There are (3) types of
CIT incentive: tax rate, tax exemption and reduction.
Decree 24/2007/ND-CP, February 2007, describes guidelines for the
implementation of Corporate Income Tax (CIT) law:

Table (5.1) Incentive for CIT Rate

Incentive Duration of
List A List B Area 1 Area 2
CIT application (year)
10% 15 
10% 15 
15% 12  
20% 10 
20% 10 
Source: [email protected]

Incentive CIT for new project is provided at 10%, 15%, and 20% rate, depending
upon sector and area of the project.
New projects in List A attain two types of CIT rate: 12% with the duration of 12
years, and 10% with the duration of 10 years. List B's incentive CIT rate is 10% during
the period of 15 years. New projects in Area 1 have to pay only 10% for 15 years. New
projects in Area 2 receive 15% CIT rate during 12 years and 20% rate in 10 years.
In addition, new projects attain CIT exemption for the start-up years and 50% CIT
reduction for the following years.

Table (5.2) CIT Exemption and Reduction

Exemption Reduction
In general 2 years 2 years
List B 2 years 3 years
Area 2 2 years 6 years
List B + Area 2 3 years 7 years
List A or Area 1 4 years 9 years
Source: [email protected]
 In general, CIT exemption and 50% reduction are provided during 2 years. List B
is allowed for 2 years exemption and 3 years reduction. Area 2 attains 2 years exemption
and 6 years reduction. Projects which are eligible for List B as well as Area 2 are entitled
to 3 years exemption and 7 years reduction. List A or Area 1 obtains 4 years exemption
and 9 years reduction.
Existing projects receive incentives for the expansion of the projects: exemption
for 2-4 years thereafter.

Table (5.3) CIT Incentive for Existing Projects

Exemption Reduction
New production line 1 year 2 years
List B or Area 2 1 year 4 years
List A or Area 1 2 years 3 years
List B or Area 2 3 years 5 years
List A + Area 2 3 years 7 years
List B + Area 1
4 years 7 years
or List A+ Area 1
Source: [email protected]

New production line of existing projects attains 1 year exemption and 2 years
reduction. Some projects in List B or Area receive 1 year exemption and 4 years
reduction. 3 years exemption and 5 years reduction are provided to some projects in List
B or Area 2. Existing projects in List A or Area 1 obtain 2 years exemption and 3 years
reduction. 3 years exemption and 7 years reduction are allowed to projects that are
eligible for List A as well as Area 2. 4 years exemption and 7 years reduction are entitled
to projects which are eligible for List B as well as Area 1 (or) List A as well as Area 1.

( ii ) Import Tax Incentives

According to Decree No.149/2005/ND-CP, December 2005, for FDI, import tax
exemption is allowed for equipments, materials, means of transportation and other goods
to implement investment projects in List A and List B.
( iii ) Incentives for Land and Water Surface Rental Rate
Decree No. 142/2005/ND-CP, 14th November 2005 defined guidelines on land
and water surface rent. Exemption of Land and Water surface rent is provided, from the
date of starting operation.

Table (5.4) Exemption for Land and Water

Exemption
List B 3 years
List A or Area 2 7 years
Area 1 or (List B + Area 2) 11 years
List B + Area 1 15 years
Source: [email protected]

3 years exemption is attained by List B. Projects in List A or Area 2 receive 7

years exemption. 11 years exemption is provided to projects eligible in Area 1 (or) List B
as well as Area 2. Eligible projects in List B as well as Area 1 obtain 15 years exemption.

( iv ) Other Incentives
Foreign investors also obtain other incentives that include removal of withholding
tax, carry forward losses in continuous 5 years, reduction of tax on remittance, and
accelerated depreciation of fixed assets for projects in investment incentive sectors with
high economic efficiency.
As investment supports, the Vietnamese government provides technology transfer
support, and training support. In addition, it supports for construction of infrastructure
outside the fence of industrial Parks, Export Processing Zones, Hi-tech Park, and Special
Economic Zones. Another support is the establishment of infrastructure inside the fence
of above mentioned zones.
 CHAPTER ( 6 )
IMPACTS OF FDI ON VIETNAM ECONOMY

6.1 FDI Share in Total Investment

FDI has made an important contribution to investment of the country. It
contributed 25% of total investment on average in 1991-1995 (Tuan Bui, 2003).
According to the FIA and GSO, FDI accounted for approximately 26%, 28%, and 21% in
1996, 1997, and 1998 respectively. Its contribution was about 17% during 1999-2002 and
16% in 2003. In 2004, 2005, and 2006, the share of FDI in total investment was about
14%, 15%, and 16% respectively.

6.2 Contribution of FDI to GDP

As can be seen from Table 6.1, the contribution of FDI to GDP has significantly
increased.

Table (6.1) FDI Contribution to GDP

Year Contribution to GDP
1995 6.3%
1996 7.4%
1997 9.0%
1998 10.0%
1999 12.3%
2000 13.3%
Source: Ministry of Planning and Investment

According to the GSO, in 2001, FDI accounted for about 14%, and between 14%
and 15% in 2002 and 2003. Its contribution rose to about 15%, 16%, and 17% in 2004,
2005, and 2006 respectively.
Figure (6.1) Comparison of GDP by Ownership

1996 2006
FDI
FDI
7.4%
17.0%

Non- Non-State
State State 45.7%
39.9% 52.7% State
37.3%

Source: General Statistics Office of Vietnam

As shown in figure-6.1, FDI ownership in GDP more than doubled during the
decade of 1996-2006.

6.3 FDI Share in Industrial Output

During the early 1990s, industrial output from foreign invested enterprises could
absorb only 10%, and from 1995, it has relatively increased. Despite FDI share was over
25% from 1995 to 1997, it increased to more than 30% in 1998 and 1999.

Figure (6.2) Industrial Output by Ownership

100%
90%
25.1 26.5 29.0 33.2 38.1
80% 41.3 41.5 41.5 43.1 43.6
70%
60% 24.8 23.9 23.7
21.4
50% 22.0
24.5 27.0 27.0 27.5 29.0
40%
30%
50.1 49.6 47.3 45.4
20% 39.9
34.2 31.5 31.5 29.4 27.4
10%
0%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

State Domestic Private FDI

Source: General Statistics Office of Vietnam

 The contribution of FDI has become more and more significant. From 2000, the
share of FDI in industrial output has contributed over 40%. It reached nearly 45% in 2006 as
published in GSO.

6.4 FDI and Export

As foreign invested enterprises have invested in export oriented industries, they
have played as an important role in export growth of the country. The contribution of FDI
to export sector has increased from more than 25% in 1995-1996 to more than 30% in
1997-1998. In 1999, the share of FDI took 40% of total export.

Figure (6.3) Export by Ownership

100%

90%
27 29.7
35 34.3
80% 40.6
47 45.2 47.1 50.4 54.7
70% 57.2

60%

50%

40%
73 70.3
65 65.7
30% 59.4
53 54.8 52.9 49.6 45.3
20% 42.8

10%

0%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Domestic sector FDI

Source: General Statistics Office of Vietnam

FDI contribution surpassed 45% in the period of 2001-2003. In 2002, FDI share
contributed to some key industries, such as footwear (42% of total footwear exports);
textile and garments (25%); and electronics, computer, and supplies (84%) (Tuan Bui,
2003).
 According to the MPI and General Department of Statistics, FDI value has gone
up from about USD 400 million in 1994 to USD 4,500 million in 2002. In the period of
2004, its contribution was till 50% of total export share. Form 2005, the role of FDI has
been getting stronger and stronger in export sector, climbing to more than half of total
export.

6.5 FDI Contribution to State Revenue

FDI sector contributed about total USD 1,500 million to the state revenue during
1996-2000 or 6% to 7% of total revenue per annum (Tuan Bui, 2003). If revenues from
oil and gas are included, FDI share was about 20% in the state revenue during 1996-2000
(Luan, Hai, and Quan, 2003).
According to General Department on Taxation of Vietnam (excluding oil revenue),
FDI accounted for about USD 300 million in 2001 and USD 400 million in 2002. Its
contribution rose from about USD 600 million in 2003 to nearly 900 million in 2004. FDI
reached around USD 1200 and 1400 million in 2005 and 2006 respectively.

6.6 FDI and Employment Creation

In the 1990s, employment created by FDI was not high. The number of employees
in FDI sector accounted for about 200,000 during 1996-1999.

Table (6.2) Number of Employees in FDI

2000 2001 2002
Agriculture, Forestry, and Fishery 33,313 40,957 63,224
Industry, and Construction 304,418 362,068 512,189
Service 38,469 42,959 46,085
Total 376,200 445,984 621,498
Source: Ministry of Planning and Investment

In 2000, although the number of employees rose to 376,200, it was about 2% of

the total number of employees. According to FIA, FDI contributed about 800,000 in 2003
and 900,000 in 2004. The employees of FDI sector reached to nearly about 1,000,000 and
1,100,000 in 2005 and 2006 respectively (FIA).
 In addition, FDI has contributed to raising the living standard of employees. The
wage of employees in foreign enterprises is higher than that in private and state
enterprises. In textile and garments industry, annual income was nearly 14 million VND
per worker in foreign firms and about 8 million VND per worker in private and state
firms in 2000 (Le, Bui, and Dao,2002).
FDI has also generated many technicians and managers. According to Le (2002),
about 300,000 workers have been trained, and 25,000 technicians and 6,000 managers
have also been trained.
 CHAPTER ( 7 )
CONCLUSION

7.1 Findings and Discussion

In 1986, Vietnam transformed from a planned economy to a market oriented
economy. With this transformation, from 1990, Vietnam's economic growth has
accelerated and sustained. Due to higher productivity of economic sectors, Vietnam has
become the fastest growing economy in the world and second largest growth in Asia.
Another cause is that labor force in Vietnam participate young, abundant, cheaper, and
literate people.
It can be found that the contribution of GDP to industry sector increased from
29.73% in 1996 to 41.56% in 2006. The role of industry sector is getting stronger in
Vietnam's economy with encouragement of multi-sector economy.
Vietnam is leading as the second largest exporter in the rice market of the world.
Its export and import partner is mainly from Asian countries. Vietnam's trade unbalance
can be occurred as the revenue from export was USD 39.6 billion and import earning was
USD 44.4 billion in 2006.
Regarding to the trends of FDI, Vietnam is a late comer and also has a short story.
However, its success is great. Besides foreigners, Overseas Vietnamese also contributed
to this FDI inflows. During the first years (1988-1990), although there was little
registered capital, implemented capital was only zero. In that period, there was no
experience of government in transition of economy with the continued administrative
bottlenecks. Moreover, poor infrastructure also lowered FDI inflows. Therefore, the first
law was amended in 1990 and 1992. In 1992, Vietnamese government provided same tax
treatment between JVs and 100% foreign owned enterprises, and also constructed
infrastructure facilities.
With the modification of FDI law in 1996, inflow of FDI doubled in this year.
Unfortunately, FDI inflow decreased half in 1997 due to Asian currency crisis. The cause
of this is that FDI in Vietnam has flown mainly from Asian countries. After FDI has
recovered, in 2006, FDI inflow reached to the peak than that in 1996.
By sector, another finding is that two third of FDI has flowed into the industry and
construction. The main type of foreign firms in FDI sector is the industry and
construction. Asian countries have taken the position of top five investors during 1988-
2006. Singapore is leading as the largest investor.
The major finding is that all the provinces have received FDI. However, its
distribution is relatively uneven. South East region and North region occupy the largest
share of FDI. These two regions have abundant natural resources and faster institutional
reform. In these regions, Ho Chi Minh City and Hanoi City attain the most FDI. These
two cities have been the economic hubs of the country.
The Vietnamese government has accelerated in attracting FDI. In 2001, the
foreign invested sector was recognized as an importance role for the first time, targeting
to become an industrialized country. In this discussion, although FDI inflow was high
before 2001, the industrial output ownership of foreign firms was only about 20% and
30% before 2000 (Figure 6.2). But, the contribution of FDI has significantly increased to
above 40% since 2000. In 2001, its share reached to nearly 45%. Therefore, the
importance of FDI has been accepted for its target.
FDI policies have been liberalized by making many procedure reforms. The first
law on FDI has also been amended 5 times from 1987 to 2006. These reforms and
changes led to the accession to WTO. In this case, despite Vietnam applied to join the
WTO in 1995, the negotiating stage was just reached in 2003. Vietnam's rules and
regulations did not meet with the requirements of WTO, especially discrimination
between domestic and foreign investors. Although the Unified Investment Law and
Unified Enterprise Law were passed in 2005 December, these laws came into effect on 1
July 2006. The statements in these laws caused to become WTO member on November 7,
2006.
Another finding is that Vietnamese government has decentralized the process of
licensing procedure since 1996. In this discussion, granting of investment license in
Vietnam was a complex and time consuming procedure. Foreign investors had to deal
with dozens of state agencies, and had to provide any necessary documents besides those
defined by law. Moreover, this process took at least four months and even years for
obtaining an investment license. In 1996, the government set one door policy, delegating
the authority to the local governments. However, the Ministry of Planning and Investment
had authorized investments in importance sectors. But, in 2000, the licensing procedure
was divided by the registration with and without evaluation to simplify the procedure. It
takes 30-40 days. In Ho Chi Minh City which registers with online system, a process
takes only 2-20 days. In addition, from 2000, the government has decentralized than 1996
law. This simplified and time saving procedure is a consequence of the decentralization.
Furthermore, decentralization causes a competition among provinces. Ho Chi Minh was
the first city that implemented online registration system.
In the case of investment form, 1996 law extended forms of BOT, BTO, BT. One
of the important findings is that the favor of investors changed from JVs to 100 percent
foreign owned enterprises. This change was caused by the liberalization of regulations to
the entry of 100 percent foreign owned enterprises, and difficulties in cooperating with
domestic partners. In type of BCC, without requiring the legal establishment, it can be
carried out and cooperated by two or more foreign and Vietnamese partners.
Vietnam has harmonized with international agreements, such as TRIMs, BTA
with the US, BIT with over sixty countries. These agreements made investment regime
more flexible and favorable to foreign investors. The rights of land use have been entitled
to foreign investors, in order to borrow loans from banks. The government removed the
conditions for foreign firms to buy domestic value added products and to invest in
privatized state owned enterprises. In addition to eliminating dual price system, the
prohibition on FDI exports was reduced.
In 2003, the government abolished converting income of FIEs from foreign
currencies to Vietnamese dong, and recruiting employees through employment centers.
Moreover, foreign firms were allowed to open stock exchange market, real estate, and to
change investment forms easily. Special conditions for investment have been provided by
constructing industrial zones. It also can be found that the attraction of Vietnamese
government to FDI is getting higher by various incentives. CIT exemption and reduction,
land and water surface rental rate and other incentives can be found as well.
The most important finding is that impacts of FDI have accelerated Vietnam's
economy. Between 1996 and 2006, FDI share in GDP has increased more than twice. FDI
ownership of industrial output has reached nearly half of total output. It is more than both
kinds of state and domestic ownership. Furthermore, FDI sector has occupied more than
50 percent of total export of the country after 2003. Therefore, international market has
been entered.
Even though tax exemption and reduction has provided to FDI, it relatively
contribute to state revenue. In the period of 1996-2000, its contribution was about 20
percent a year, if oil revenue included. In 2005 and 2006, state revenue from FDI reached
over one thousand million USD.
 In employment creation, FDI sector contributed nearly about one million workers.
Each worker in textile and garment industry earned about 14 million VND per annum in
2000. It is more 6 million VND than that in textile and garment industry in 2000.
Moreover, FDI has generated many technicians and managers. As FDI has largely
benefited to national economy, Vietnam has placed attention and prioritized FDI sector.

7.2 Conclusion
Foreign Direct Investment has been recognized as a key factor for successful
economic growth in developing countries. Vietnamese government has also confirmed
the importance of FDI sector for national economy. It has managed to attract much FDI
inflow by making many policy reforms. In fact, it had no experience in managing FDI
during the period of transition economy. However, WTO accession and BTA put in a
frame that is manageable FDI. As Vietnamese government has been flexible with
international regulations, much of the FDI has flown to Vietnam. After agreeing BTA
with the US, foreign investors from western countries have entered FDI in Vietnam as
well. In November 2006, after becoming WTO member, FDI flow in Vietnam more
accelerated in 2007. Therefore, the flow of FDI in Vietnam is more likely to develop in
the future.
Vietnam is in a good situation for economy, in terms of its geography, and young,
abundant and literate labor force. Vietnam can invite more FDI flow by improving these
literate labor forces.
As contribution of FDI to GDP has been higher, it increases productivity of the
nation, shifting production possibility curve to the right. Thus, resources of the country
have been more utilized. Remarkably, FDI has ability to the utilization of resources.
By removing many restrictions, the government has created a good FDI
environment. The removal of dual pricing regulation caused not only incentive for foreign
investors but also a member of WTO. The allowance of mortgage through the land use is
also an incentive to increase FDI flow. The liberalization of regulations and the simplified
and time saving procedure created more favorable conditions to investors.
The distribution of FDI is relatively uneven due to the difference in natural
resources and registration system. In order to attain equally distribution of FDI in all
provinces, local governments that receive less FDI should provide more incentives than
other regions that receive more FDI. Online registration system should also be
implemented in all provinces.
 As export revenue is less than import revenue, export sector should be promoted.
FDI can help this problem. FDI also give an opportunity to enter international market
through export sector.
The role of FDI is getting stronger in the economy of Vietnam. The acceleration
of economic growth would reduce poverty rate (according to mutual relationship between
growth and poverty reduction). Thus, FDI would indirectly cause poverty reduction.
Moreover, FDI is capable to upgrade human resource of Vietnam as many technician and
managers have been generated.
In employment creation, the number of employees in FDI sector is rather low as
compared with total number of employees. Therefore, labor intensive industries should be
invited more than now. In addition, FDI may also be fostered technological spillover via
the labor turnover.
As two third of FDI flow into the industry and construction sector, Vietnam would
be an industrialized country via FDI as its target.
Although the state of Vietnam is communist, it has encouraged private sector as
well as foreign sector, and it has managed FDI to become a good environment with the
many amendments of foreign investment law.
As objectives of this paper, other developing countries with less FDI can take
lessons via the experiences of Vietnam, can know what extent FDI contribute to the
national economy, and can learn how to manage FDI and what policies to be made.
Conclusively, as Vietnam has implemented the best condition in the registration
system, infrastructure, and incentives to attract FDI, the success of Vietnam in FDI is
more likely to accelerate continuously.
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 Appendix (A)
Foreign Direct Investment Licensed from 1988-2006 by Countries
Registered Capital
Rank Country Number of Projects
(Million USD)
1 Singapore 543 10002.9
2 Taiwan 1743 9502.3
3 Republic of Korea 1438 9251.9
4 Japan 838 8397.6
5 Hong Kong SAR (China) 548 6400.3
6 British Virgin Islands 329 5361
7 United States 374 3121.2
8 France 236 2902.5
9 Netherlands 91 2765.7
10 United Kingdom 99 2065.5
11 Malaysia 239 1863.8
12 Fed. Russian 95 1854.5
13 Thailand 199 1783.7
14 Australia 176 1539.1
15 Cayman Islands 22 1481.9
16 China P.R. 508 1242.3
17 Switzerland 56 1029.2
18 Samoa 35 986.3
19 Luxembourg 18 823.4
20 Panama 11 683.5
21 F.R. Germany 100 521.7
22 British West Indies 6 511.4
23 Canada 85 508.7
24 Sweden 14 402
25 Bermuda 8 381.4
26 Bahamas 6 350.4
27 Philippines 40 346.7
28 Indonesia 21 286
 Registered Capital
Rank Country Number of Projects
(Million USD)
29 Mauritius 24 195.3
30 Denmark 45 190.8
31 India 20 148.4
32 Poland 10 100.6
33 Italy 33 106.7
34 Channel Islands 14 105.7
35 Brunei 28 88.9
36 Belgium 29 84.3
37 Cook Islands 3 73.6
38 Norway 16 57.9
39 Siant Kitts Nevis 3 56.7
40 New Zealand 21 55.5
41 Liberia 1 47
42 Czech Rep. of 11 44.6
43 Republic of Slovakia 1 39
44 Liechtenstein 2 35.5
45 Turkey 5 33.5
46 Belarus 4 33.2
47 Ukraine 10 30.4
48 Iraq 2 27.1
49 Austria 12 24.9
50 Laos 8 23.7
51 Belize 4 22
52 Grand Cayman 1 20
53 Korea P.D. Rep. of 4 16.6
54 Macao SAR (China) 8 15.8
55 Cuba 2 15.2
56 Isle of Man 1 15
57 Hungary 10 13.2
58 Sri Lanka 4 13
 Registered Capital
Rank Country Number of Projects
(Million USD)
59 Dominica 2 11
60 Israel 5 7.6
61 Spain 5 6.9
62 Western Samoa 2 5.6
63 Bulgaria 2 5.1
64 Cambodia 5 4.5
65 Vanuatu 2 3.4
66 Others 29 103.1
Total 8266 78248.2
*- including supplementary capital to licensed projects in previous year
Source: Ministry of Planning and Investment
 Appendix (B)
Foreign Direct Investment Projects Licensed from 1988 to 2006 by Province

Number of Registered Capital

Regions
Projects (Million USD)*
I. Red river delta 1781 20241.0
Hà Nội 949 12561.6
Vĩnh Phúc 134 999.4
Bắc Ninh 67 459.7
Hà Tây 76 1455.1
Hải Dương 135 1419.2
Hải Phòng 266 2648.2
Hưng Yên 88 417.3
Thái Bình 22 49.2
Hà Nam 15 47.9
Nam Định 17 92.1
Ninh Bình 12 91.5
II. North East 358 2445.2
Hà Giang 3 6.4
Cao Bằng 9 14.3
Bắc Kạn 7 19.5
Tuyên Quang 2 26.0
Lào Cai 42 274.3
Yên Bái 14 31.0
Thái Nguyên 24 221.2
Lạng Sơn 42 106.8
Quảng Ninh 135 1362.4
Bắc Giang 33 40.0
Phú Thọ 47 343.3
III. North West 27 115.4
Điện Biên 1 0.1
Lai Châu 3 15.7
Sơn La 6 27.0
Hòa Bình 17 72.6
 Number of Registered Capital
Regions
Projects (Million USD)*
IV. North Central Coast 125 1472.6
Thanh Hóa 31 744.8
Nghệ An 24 329.2
Hà Tĩnh 13 61.7
Quảng Bình 6 34.7
Quảng Trị 12 59.6
Thừa Thiên - Huế 39 242.7
V. South Central Coast 349 5275.8
Đà Nẵng 126 1538.1
Quảng Nam 41 478.8
Quảng Ngãi 19 2186.1
Bình Định 26 184.9
Phú Yên 38 265.1
Khánh Hòa 99 622.8
VI. Central Highlands 113 1041.3
Kon Tum 3 15.1
Gia Lai 6 22.5
Đắk Lắk 4 20.4
Đắk Nông 6 16.4
Lâm Đồng 94 966.9
VII. South East 5126 42337.2
Ninh Thuận 9 32.5
Bình Thuận 56 284.9
Bình Phước 33 94.6
Tây Ninh 135 526.7
Bình Dương 1315 6700.1
Đồng Nai 870 10409.5
Bà Rịa - Vũng Tàu 204 6393.2
TP. Hồ Chí Minh 2504 17895.6
 Number of Registered Capital
Regions
Projects (Million USD)*
VIII. River Delta 334 2315.3
Long An 142 1150.6
Tiền Giang 20 153.6
Bến Tre 12 61.2
Trà Vinh 14 58.4
Vĩnh Long 13 41.3
Đồng Tháp 14 19.2
An Giang 13 27.5
Kiên Giang 21 501.0
Cần Thơ 59 230.4
Hậu Giang 3 1.8
Sóc Trăng 4 18.3
Bạc Liêu 10 36.1
Cà Mau 9 15.9
IX. Petroleum & Gas 53 3004.4
Total 8266 78248.2
* - including supplementary capital to licensed projects in previous year
Source: Ministry of Planning and Investment