Academic journal article Asian Development Review

Regional Integration and Benefits from Foreign Direct Investment in ASEAN Economies: The Case of Viet Nam

Academic journal article Asian Development Review

Regional Integration and Benefits from Foreign Direct Investment in ASEAN Economies: The Case of Viet Nam

Article excerpt

In recent years Viet Nam has been pursuing the twin goals of promoting inward foreign direct investment (FDI) and regional development in the context of the Association of Southeast Asian Nations (ASEAN). The paper surveys transnational corporations (TNCs) with operations in ASEAN, and finds that Viet Nam has now largely achieved its initial objective of being a major FDI recipient. The regional aspect is especially manifest in consumer electronics, although most subsidiaries in Viet Nam still perform assemblytype operations oriented toward the local market. This has to change if Viet Nam is to maintain its development momentum. Under the threat of international competition and in order to maximize the dynamic gains from FDI, Viet Nam has to reorient its policies and emphasize a shift toward targeting efficiency-seeking investments and developing more advanced links with TNC regional and global value chains. This new approach would benefit from a full-scale development of the ASEAN Free Trade Area (providing access to a regional market) and the ASEAN Investment Area (securing capabilities in Viet Nam and other ASEAN countries), as well as other regional trade and investment initiatives.

I. INTRODUCTION

Perhaps the most compelling reason for the Association of Southeast Asian Nations (ASEAN)' to cooperate in promoting inward foreign direct investment (FDI) is the need to enhance individual country and regional competitiveness through cooperation, thereby promoting ASEAN as an investment regiona regional model of attracting foreign direct investment. A linked reason is that, because of the region's integration process, it is natural to include investment given that trade arrangements and other aspects of economic cooperation are already part of the region's integration agenda. Clearly investment cooperation is a subset of a larger set of regional integration arrangements, but one that can help strengthen the overall integration process. The value of these arrangements, however, depends on the degree to which FDI and transnational corporations' (TNCs) regional operation strategies are centered on (or are evolving toward) using combined regional locational advantages (differential levels of resources, human capital, cheap labor, and markets in an area of 450 million people) to create value chains across the region (and beyond).2

This paper addresses two issues. First, it assesses the extent to which Viet Nam, as a new member of ASEAN,3 has been drawn into the trade and investment nexus in Southeast Asia and, in particular, the regional and global value chains established by TNCs (section III). second, it assesses whether Viet Nam should deepen and widen this process, in order to potentially secure greater net gains from inward FDI; and, if so, how should it proceed (section IV). These two issues are analyzed using both secondary data and some of the results of a recent research project called the Bradford study, conducted by the authors and other colleagues (Mirza et al. 2003), one aim of which was specifically to look at the lessons for the newer ASEAN member countries based on experiences of the older member countries. The Bradford study's methodology is introduced in the next section, prior to the analyses for Viet Nam in sections III and IV. The final section concludes with implications and policy recommendations.

II. PROJECT METHODOLOGY

Foreign direct investment impacts on the growth and development of host countries in a variety of ways (UNCTAD 1999, Giroud 2003), ranging from "direct effects" on employment and training; through classical "multiplier effects" (e.g., workers use their wages to buy goods, which stimulates other industries) to "spillover" effects whereby indigenous firms acquire knowledge and technology from foreign firms through a variety of transmission mechanisms (for further discussion of these effects, see Section IV.C). In this context, the ASEAN region is a prime target for investigating FDI impact because it has been a major and successful recipient of investment by TNCs for three decades, albeit the scale of inward FDI flows has declined in recent years. …

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