Strengthening local businesses

Focusing on turning local businesses into strong pillars of the economy is necessary to reduce the reliance on foreign direct investment (FDI), an important stimulus for the Vietnamese economy, and encourage utilising FDI effectively.

FDI’s contradictory effects

Since the Law on Foreign Investment was passed in 1987, the FDI flow into the country has been stimulated, strongly affecting the economy. According to Dr. Do Nhat Hoang, Director of the Ministry of Planning and Investment (MPI)'s Foreign Investment Agency (FIA), FDI contributes around 22-25% of the total investment and 14% of the State budget. The segment of FDI in the gross domestic product (GDP) has steadily risen for years, accounting for around 20% of GDP in 2014. The FDI sector has created over two million direct jobs and about three to four million indirect jobs, helping improve the quality of human resources and change the labour structure. It has also made important contributions to the export revenue with US$25.1 billion, including the turnover from crude oil export, in the first quarter of this year, accounting for 70.3% of the total export value.

However with the positive effects on the economy and the country’s sustainable development, the sector conceals many shortcomings. Analysis by the MPI’s National Center for Socio-economic Information and Forecast says that the country’s FDI structure is not balanced with numerous FDI projects in natural resource extraction, pollution-causing industries and real estate. It is an unsustainable structure as investment in natural resource extraction has no spillover effects; pollution-causing industries leave consequences and remedial costs for the country while FDI businesses yield profits; and FDI in real estate can result in property bubbles, causing instability. In addition, many FDI businesses regularly declare losses for many consecutive years to avoid taxes and engage in transfer pricing. Notably, many of them have gained monopoly power, disturbed and distorted the market, decimated competitiveness, and impacted local businesses’ development.

Creating stimulus from connectivity

Evaluating FDI’s impact on the economy, Le Quoc Phuong, Vice Director of the Industry and Trade Information Centre, under the Ministry of Industry and Trade, said that FDI flow accounts for 25% of total investment, which is quite high, may entail risks and shows the weakness of local investment.

The economy depends greatly on FDI. The FDI sector makes up 70% of the total export turnover (including crude oil export) while surplus or deficit totally depends on the sector as it can cause a deficit for the economy with its surplus reduction. The sector’s industrial production accounts for over 60%, even 100% in many industries.

Dr. Vo Tri Thanh, Vice President of the Central Institute of Economic Research and Management, wondered why the country has few large-scale businesses after nearly three decades of the renewal process while FDI businesses’ presence has become produced. He questioned what would stimulate national economic development when the State-owned sector is tapered off and the economy is so reliant on FDI.

However, Thanh felt optimistic as the draft political report to the upcoming 12th Party Congress, set to be publicised, states that the private sector is an important stimulus for the economy. When being supported effectively, the private sector can become an important pillar of the economy and ensure sustainable development, a counterweight to the FDI sector to help reduce the economy’s current reliance on foreign investment.

Agreeing with Thanh’s viewpoint, Dr. Do Nhat Hoang from the FIA said that though FDI is very important, local businesses, particularly medium and small-sized businesses, which form the foundation for the economy, need support through preferential policies in capital and technology to take advantage of potentials in the integration process.

Vu Quoc Huy, Vice Director of the MPI’s Department of Economic Zones Management, suggested that local businesses, which are weak in capacity, technology, management, promotion and market expansion skills, should learn from FDI businesses.

As the ties between local and FDI businesses have not been promoted, the State should better its role in linking them together, sharing information, supporting and creating close relations between the two sectors while improving the roles and responsibilities of FDI businesses, especially large-scale businesses, in connecting and supporting local businesses, Huy said.

(Source: nhandan.org.vn)