Prominent achievements in attracting the foreign direct investment into Vietnam

1. Introduction
Vietnam has many advantages in attracting FDI such as stable politics, ample natural resources, abundant human resources, and rapid market growth. Since 1986, Vietnam has made considerable progress in its economic reforms, which dealt with the restructuring of domestic economy and the opening up of the economy to the external trade and investment. The reforms have brought about the crucial achievement. In 1992-1997, annual economic growth averaged 8,8% with the significant change in the structure of the economy (Le, 2012). The share of agricultural production in GDP decreased from 40,5% in 1991 to 21,8% in 2003, while the industrial and services sectors expanded rapidly. The investment ratio has tripled from 11,7% of GDP at the beginning of the reform in 1986 to a noticeably high ratio of 35,1% in 2003.
Foreign direct investment has deeply involved in the reform process. It has come with remarkable amount of capital, technology and management expertise. The important role of FDI in contributing in economic growth in Vietnam was indicated in studies of Pham Hoang Mai (2004) and Ohno (2004). Vietnam has been remarkably successful over the last decade in attracting substantial foreign direct investment (FDI) inflows. The foreign-invested sector is now an important element of the corporate community in Vietnam, and an equally important engine of economic growth for the country.
2. Review of Foreign Direct Investment inflow in Vietnam
2.1. Foreign Direct Investment inflow by scale
In 1987, Vietnam for the first time issued its ever first Law on Foreign Direct Investment. The liberal FDI policy has been reflected in a number of regulatory changes and development. In the first three years of 1988-1990, the FDI attraction was limited, with only 211 projects with a total registered capital of US $ 1,603.5 million. Foreign investment in this period has not really affected the socio-economic situation in this period. The FDI law was amended several times in 1992, 1996, 2000 and most recently replaced by a new law on investment integrating both domestic and foreign investment (Unified Investment Law 2006). These changes and amendments aim to remove obstacles against the operation of foreign investors and to improve the investment climate in Vietnam. Usually, these changes are to provide more tax incentives, to simplify investment licensing procedures, and to promote transfer of technology. It must be noted that although some of these changes are due to Vietnamese governments own initiatives to accommodate foreign investors, many are due to external pressures from international economic integration (such as under the Bilateral Trade Agreement (BTA) or WTO accession).
In 1992, a number of articles were added and amended to grant foreign investors with more rights and incentives, allowing FDI in the construction of infrastructure facilities, giving the same tax treatment between joint-ventures and wholly foreign-owned enterprises, and longer operation duration. In 1996, the Law was modified to allow for new forms investment including BOT (Build-Operate-Transfer), BTO (Build-Transfer-Operate), and Build-Transfer (BT) contracts. The modification also gave more rights and incentives to investors, such as the right to assign the contributed capital to other parties. However this law still retains a number of limitations such as the principle of unanimity in the board of management, preferences to purchasing local inputs in Vietnam. In 2000, the Law was amended and modified again to acknowledge the right of foreign investors to merger and acquire companies and branches, and the right to transfer the form of investment. Most recently the Unified Law of Investment was passed on 29 December 2005 to replace all previous laws and regulation on domestic and foreign investment. The new Law which came into force on 1 July 2006 was prepared to meet requirements of the accession to the WTO. Under this new law, foreign and domestic enterprises are treated equally according to the rule of non-discrimination under WTO. Several other laws have also been passed by the National Assembly including the Competition Law, the Law on Bankruptcy and the new Unified Enterprise Law. Despite its relative short history, Vietnam has managed to attract a substantial amount of FDI. In relative term, Vietnam has been quite successful as compared with other countries, ranking the third largest recipient in the ASEAN (Mirza and Giroud (2004)).
In the period 1991-1995, FDI into Vietnam increased significantly with 1,409 projects, with a total registered capital of 18,379.1 million USD. This can be seen as the beginning of the FDI boom in Vietnam. In this phase, the investment climate in Vietnam is becoming more attractive to investors due to lower investment and business costs compared to other countries in the region; cheap labor was available; many potential markets have not been exploited.
In addition, external factors have contributed to increasing FDI such as: the wave of FDI flowing to emerging markets in the early 1990s; foreign capital inflows into the transitional economies. Vietnam is a country in Southeast Asia, also enjoying many advantages from these factors. In this period, the annual growth rate of FDI was quite high, reaching over 50% in many years, especially in 1995 attracting 415 projects, with a total registered capital of $ 7,925.2 million, growth 85,95% of the registered capital in 2014.
The amount of registered and implementation FDI peaked in the 1996 and 1997 and dropped sharply subsequently when the Asian economic crisis began to seriously impact on Vietnam. In addition, Vietnam's investment environment is slowly improving, while it has suffered from strong competition from other countries such as China. The reduction of FDI inflow from 1997 has emphasized the significant role of this capital in Vietnams economy.
Then, in the period 2001-2005, FDI inflows into Vietnam started to recover but the pace was slow. In 2004 and 2005, the highest rate of FDI attraction was achieved (42.94% and 50.86%, respectively) due to the large number of newly licensed large scale projects.
In the period of 2006-2010, FDI fluctuated abnormally. In 2006, the total registered capital was 12,004 million USD, an increase of 75.5% compared to 2005. Since January 2007, Vietnam became official member of the World Trade Organization (WTO). So, in 2007 and 2008, FDI into Vietnam increased rapidly.
Besides, the domestic investment and business environment has been improved and the legal framework for investment has become more and more consistent with international standards and more favorable to foreign investors. In addition to developing its own FDI regulation framework, Vietnam has signed bilateral investment treaties (BIT) with over sixty countries. Although Vietnam and the US do not have the BIT, the BTA signed in 2000 contains an important chapter on investment. This resulted in large waves of investment from Korea, the United States and Japan poured capital into Vietnam. According to released statistics by the Government Statistical Office of Vietnam, 797 FDI projects with a total registered capital of US$ 7.57 billion were licensed in 2006 across 43 provinces in the country. In the first three month in 2007, the result is even more spectacular with over 300 FDI projects and US$ 2.5 billion registered capital. The FDI inflow tripled from US$ 4 billion in 2006 to US$ 12 billion in 2008.
In 2009 and 2010, due to the impact of the global economic crisis, FDI inflows into Vietnam also decreased significantly. FDI augmented slightly in the period 2011-2015. In 2011, there were 1,186 newly licensed projects with a total registered capital of US $ 15,589 million (down 21.57% compared to 2010). The decline in FDI is due to the global economic downturn, investors have lost confidence, inflation and input costs raised.
However, from 2012 to 2015, the number of FDI projects and total registered capital tended to improve. By 2016, with the entry into force of a series of Free Trade Agreements (FTAs), the flow of FDI has started to increase. In general, the total registered capital of new projects, supplementary capital and investment in the form of capital contribution and share purchase in 2016 reached over USD 24.3 billion, an increase of 7.1% compared to 2015. It is worth noting that implemented FDI in 2016 is estimated at $ 15.8 billion, an increase of 9% compared to 2015, reaching the highest level of FDI disbursement ever.
Thus, from 1988 up to now, FDI inflows to Vietnam have fluctuated but total FDI has increased over time. However, in order to improve the ratio of implemented capital to registered capital, it is necessary to have policies to attract stable investment capital, manage and use FDI more effectively.2.2. Foreign Direct Investment inflow by counterparts
Figure 2 depicts the distribution of FDI by main counterparts. Asian countries are now the most important source of capital in the country. The biggest foreign investors come from Korea, Japan, Singapore, Taiwain,… There are only about 100/500 transnational corporations in Vietnam. The bulk of FDI inflows mainly originate from the neighboring countries in search of cost reduction and regional location complementation in manufacturing activities. The number of investors from Asian countries accounted for 69% of the total foreign- invested enterprises.
In the period 1988 - 2016, there were 78 countries and territories in the world investing in Vietnam. Of the total, the country with the largest FDI was South Korea with 5,773 projects and a total registered capital of $ 50,553.9 million. Some significant projects from Korean investors are Samsung, Lotte,...
The second biggest investment partner of Vietnam is Japan with brands such as Honda, Toyota... with 3,292 projects and total registered capital of 42,433.9 million USD. Aeon Group has built three Aeon Mall centers in three of Vietnam's largest cities, Hanoi, Danang and Ho Chi Minh City. The third important investor is Singapore with the FDI capital investment in Vietnam tends to increase strongly. This amount of capital is most concentrated in the processing industry and real estate business.
Taiwan is the fourth largest investment partner with 2,516 licensed projects with a total registered capital of $ 31,885.5 million invested in 21 economic sectors. Of which, the processing and manufacturing industries make up the most (over 90% of total capital), followed by the waste processing sector (7%).
After these partners, the British Virgin Islands, Hong Kong Special Administrative Region (China) are the major investment partners of Vietnam.

2.3. Foreign Direct Investment by sector
As of 31/12/2016, industry and construction was the most attracted FDI sector with 13,312 projects and registered capital of USD 199.781,8 million, accounting for 68.2% of total FDI capital. This source of capital has contributed to forming some key industries of the economy such as telecommunications, oil and gas exploitation, processing, electronics, information technology. It contributed significantly to the transformation process of economic structure, the products diversification, raising the value of export goods, absorbing advanced technologies, and to the improvement of infrastructure in localities.
Then, the service sector has attracted 8,760 projects with a total registered capital of $ 90,344.8 million, accounting for 30.76% of total FDI. FDI in this area has contributed to develop the field of high quality services such as hotels, offices, banks, and insurance. These services have created new ways of distributing goods and consuming goods, stimulating domestic trade and contributing to the increase in export turnover.
Besides, the agriculture, forestry and fisheries has attracted 522 projects with total capital of USD 3,576.8 million (accounting for 1.22% of total registered FDI). The investment projects are diverse and focus on all fields such as cultivation, animal husbandry, forestry and forest product processing, forestation and production of paper materials, sugar production. The development in these sectors helps improving the socio-economic life, improving infrastructure, and reducing poverty of many agricultural and rural areas.3. Drawback of attracting FDI in Vietnam
Despite the indispensable growth of FDI, there are drawbacks of FDI in aspect sustainable development in Vietnam. Firstly, the use of FDI was not really effective. Added value was low; the ratio implementation capital/registered capital was about 50-60% (figure 1).
Secondly, the structure of FDI sector has not exploited the advantages of Vietnam and not meets the demand for FDI towards sustainable development. Agro-forestry-fisheries accounted for 1.6%, declining by the time, FDI in priority areas is limited.
Since the opening of the economy, especially since the promulgation of the Law on Foreign Investment in Vietnam, FDI inflows into Vietnam have been constantly increasing. However, the business environment of Vietnam still has many barriers to foreign investors.
Firstly, challenges of the Vietnamese business environment include the lack of transparency in the legal framework and business conditions, lack of transparency, accountability, high operating costs and, in particular, poor performance.
Secondly, the majority of enterprises operate in manufacturing and processing, with low added value; It lacks of linkage between FDI enterprises as well as domestic private sector, restrict opportunities for domestic firms to take advantage of technology and improve productivity; attracting foreign investment capital into Vietnam is not commensurate with the potential. Few largest investors are the large financial corporations. The proportion of foreign private sector investment in Vietnam still accounts for a small proportion of total foreign investment. Vietnam mainly developed multifunctional industrial parks. They have not helped each other to develop; it causes the increase the cost of products due to large transportation costs. In this context, Vietnam needs to make necessary changes in mechanisms and policies to attract resources from foreign investment.
As Vietnams economy is still heavily dependent on exports and foreign investment flows, it is strongly affected by the decline in foreign investment worldwide. Global investors tend to withdraw from emerging markets.
In view of the trend of limiting capital flows of many countries, Vietnam needs to change the policy of attracting. In nearly 30 years of renovation, Vietnam has changed its policy of attracting foreign investment in line with international practices, ensuring the principle of national treatment, and most favored nation.
4. Solutions to boost Foreign Direct Investment in Vietnam
Firstly, improving the quality of foreign investment should be considered as the most important direction in order to shape the modern economic structure. Accordingly, priority projects will be e-tech, informatics, high-class services, high-qualified human resources training, modern health care and healthcare facilities, and infrastructure. It is necessary to build a clear direction for foreign investors and domestic enterprises to improve the quality of attracting foreign investment in connection with dealing with the relationship between the domestic market and the export of goods and services, create new products of high quality, and maintain the competition in the international market
Vietnam should focus on the development of supporting industries in order to reduce the import of raw materials from other countries, create conditions for the manufacturing and processing industries to develop.
It should also limit the foreign investment in processing industries, low added value items, sectors using lots of energy and resource. It is necessary to strengthen the cooperation between foreign invested enterprises and domestic enterprises in order to support each other.
Secondly, FDI with regional and local economies needs to be adjusted in terms of perception and awareness to have the right solution. The distribution of resources including FDI needs to be adjusted in the direction of creating a number of economic “locomotives” in localities such as Hanoi and Ho Chi Minh City. At the same time, the capital must be distributed reasonably to less attractive areas such as remote and mountainous areas.
Thirdly, it is necessary to continue reviewing laws and policies on investment and business so as to amend the contents of incomplete, inconsistent and supplemented contents; Revision of regulations is still inadequate, not clear related to investment and business procedures.
Fourthly, solutions to accelerate the disbursement must be applied, avoiding to license backward technology projects which have bad impacts on the environment.
Fifthly, accelerating the negotiation of bilateral investment agreements between Vietnam and major partners and implementing preferential policies for strategic partners need to be focused.
Sixthly, it is necessary to have specific priority policies to some localities in order to gradually bridge the gap between regions in attracting FDI for socio-economic development in their respective localities and the whole country in general.
Lastly, the legal documents on investment promotion need to be propagated in order to create a unified legal corridor in terms of state management, coordination mechanism and organization of investment promotion activities.
5. Conclusion
Prominent achievement of attracting foreign direct investment has contributed significantly in the socio-economic development of Vietnam. However, in the context of strong competition in attracting investment among countries, Vietnam should continue to strongly reform the policy mechanism, creating attractive business environment. In this context, Vietnam needs to make necessary changes in mechanisms and policies to attract resources from foreign investment. This policy concludes policy to attract foreign capital inflows, policy on upgrading the quality and effectiveness of FDI projects, and policy to encourage relationships between transnational corporations with domestic enterprises and between foreign invested enterprises.

Reference:
1. Ohno, Kenichi (2004), “Vietnam's Industrialization Strategy in the Age of Globalization: Key Issues and Policy Advice”, NEU-JICA Joint Research Project, 2000-03, Revised Dec. 2003;
2. Pham Hoang Mai (2004), “Foreign Direct Investment and Development in Vietnam: Policy Implications”, Institute of Southeast Asian Studies, 2004;
3. Lê Việt Anh (2004), “Locational Determinants of Foreign Direct Investment: The Case of Vietnam”, Presentation at JVECs Meeting 29th May.
4. Mirza, H., and Giroud (2004), “Regional Integration and Benefits from Foreign Direct Investment in ASEAN Countries: The Case of Vietnam”, Asian Development Economic Review, Vol. 21(1), pp 66-98.
5. General Statistic Office (GSO) (2016), “Statistical Handbook of Vietnam”, Statistical Publishing House.