Academic journal article Journal of Southeast Asian Economies

Sudden Surge in FDI and Infrastructure Bottlenecks: The Case in Vietnam

Academic journal article Journal of Southeast Asian Economies

Sudden Surge in FDI and Infrastructure Bottlenecks: The Case in Vietnam

Article excerpt

I. Introduction

During the reform period (initiated since 1986), Vietnam has already achieved notable success in attracting FDI, and it has become an important component in gross national investment. By 2008, foreign-invested sector accounted for about 25 per cent of total gross domestic investment in the Vietnamese economy. Foreign invested enterprises (FIEs) have begun to make a significant contribution to employment generation and export expansion. The impressive economic outcome of FDI participation in the economy served to strengthen government commitment to further bring in reforms to improve Vietnam's attractiveness to foreign investors, particularly in export-oriented manufacturing.

The main objective of this paper is to investigate the roots of sudden increase in FDI inflow and patterns of FDI in Vietnam over the past two decades of reform with emphasis on investment area/sectoral composition. The causes and possible impacts of the increase in FDI on infrastructure development will also be carefully examined. This paper is based on data compiled from administrative records of Vietnam's Ministry of Planning and Investment (MPI) and other important databases on FDI (UNCTAD, CEIC and ASEAN FDI databases).

The structure of this paper is as follows. Section II reviews the impact of policy change on FDI inflows in Vietnam. This is followed by a discussion on the changes in the form of investment and patterns of source country. Analysis of FDI by investment area will be presented in section V. In addition, this paper assesses the geographical distribution of FDI in Vietnam with the premise of conventional classification of seven regions. Short conclusions on trends and patterns of FDI in Vietnam will be presented in the last section.

II. Policy Change anal Sudden Surge in FDI Inflows

A Law on Foreign Investment was approved by the National Assembly just one year after the reform was launched in 1986. This law was amended five times in 1990, 1992, 1996, 2000 and 2003. The appearance and amendment of this law have contributed to the Reform (Doi Moi) policy of Vietnam. It was highly appreciated by the international community as an open, attractive law and was in line with international norms. Besides, over fifty bilateral and multilateral agreements related to FDI were also approved in order to encourage and protect foreign investors given the existing imperfect market mechanism in Vietnam.

The most important change in FDI policy was the approval by the National Assembly of two new laws--Investment Law and Law on Enterprises in December 2005. This reform aimed to create a consistent legal system as well as to set up a common playground for three main players: FIEs, state-owned enterprises (SOEs) and domestic private enterprises (DPEs). The new Investment Law has some main benchmarks. The first is the new law replaces two separate laws--the FDI Law and the Law on Domestic Investment Promotion. Therefore, all kinds of investment are treated in the same way. The second significant feature is reduction of paperwork involved in FDI approval/monitoring and the response time for issuing an investment certificate. The third one involves strong decentralization on approving and licensing FDI projects to the provincial people committee and the management committee of industrial zones/export processing zones (IZs/ EPZs). Lastly, all regulations related to FIE establishment and operation were separated from the Investment Law. Alternatively, these firms will be governed by the new Law on Enterprises as other firm types.

The data on FDI inflows have been inconsistently published among different census organizations. There is a significant difference between the data published by Vietnamese government agencies and the data from international organizations. For example, Table 1 compares FDI inflows from three different sources: MPI, UNCTAD and the General Statistics Office of Vietnam (GSO). …

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