What have we gained after 30 years of FDI attraction? Part 3: FDI has not taken root and spread as expected

According to the assessment, the connection between FDI enterprises and domestic suppliers is relatively weak. Photo by H. Anh.

Technology transfer is limited

The imprint of the FDI sector on Vietnam's socio-economic development over the past 30 years is remarkable. The question, however, is whether, in addition to what is visible, foreign investment in Vietnam has long-term benefits, or in other words, how is the FDI sector deepening impact to the domestic sector?

According to Prof. Nguyen Mai, Chairman of the Association of Foreign Investment Enterprises (VAFIE), the effect of new industries, new technology of FDI enterprises is very large, thanks to FDI enterprises, many economic sectors of Vietnam have merit technology in the region as well as in the world such as oil and gas, electronics and telecommunications. According to Mr. Le Duy Thanh, Vice Chairman of Vinh Phuc People's Committee, small businesses of Vinh Phuc also began to tap into the flow of FDI sector when many companies are participating as a supplier level 1 for FDI enterprises, bringing about changes in the experience of business production, the technology of enterprises.

But in reality, the story of FDI inflows is often referred to as the defect of attracting foreign investment. Despite the impacts of the FDI sector, the spillover effects of FDI on the domestic economy are still limited and not as expected. The World Bank report shows that the connection between FDI enterprises and domestic suppliers is relatively weak, if not very limited.

Regarding the technology transfer of the FDI sector in the past 30 years, according to the Ministry of Planning and Investment, the objective of attracting technology (high technology and source technology), as well as transferring technology, achieve as expected. About 80% of FDI projects use the world average technology, 14% are low and backward and only 5-6% use high technology. Technology transfer mainly takes place horizontally - between enterprises and enterprises, due to the low level of technology used in FDI projects, the efficiency of technology transfer is horizontally limited. The low technology leading to the enterprises in Vietnam mainly processing, resulting in Vietnam enterprises create low value-added, difficult to join the global production network. The Ministry of Science and Technology also said that in general, the exploitation and learning of technology through FDI has not achieved the desired results. The practice of the automobile industry in Vietnam is the best evidence of this. After many years of development, nowadays production technology does not have much improvement, still only in importing components and assembly. The localization rate is only 15-40%, the production cost is about 20% higher than that of other ASEAN countries, and the supporting industry just stops producing some simple components such as accumulators, tires.

The spillover effect is still very modest

In fact, the connection between the FDI sector and the domestic economy is a combination of factors including spillover potential of FDI, the absorption capacity of domestic enterprises and business policy, institutional environment of the host country. If one of the three factors is limited, diffusion will not produce good results. The evidence of Vinh Phuc can be clearly seen. It is known that the majority of partners of two big FDI companies in Vinh Phuc (Toyota and Honda) are FDI enterprises. Local, regional and national enterprises have not participated much in this production chain. This is similar to the Samsung Group. To date, a total of 215 Vietnamese enterprises (including 25 first-level suppliers and 190 second-tier enterprises) have been involved in the supply chain for its plants. According to a representative of Vinh Phuc province, on the one hand, large FDI companies when investing in Vietnam often pull along traditional partners, so opportunities for Vietnamese enterprises are very few. On the other hand, due to strategies and policies to welcome the spillover of the FDI sector of Vietnam is unclear, it is not feasible, such as policies on the development of supporting industries of the automobile industry.

The absorption capacity of domestic enterprises is also the reason for limiting the spread of FDI. The majority of domestic enterprises are SMEs, limited in terms of capital, technology, labor quality, management experience, business management etc., so cannot participate in the "competition" accessories for FDI enterprises. Thus, here, the story spread is not as expected, in addition to the large FDI corporations often have satellite companies accompany, the important cause is that the domestic enterprises have not really meet strict requirements on product quality, cost, the delivery time of FDI enterprises.

	What have we gained after 30 years of FDI attraction? Part 2: Is Vietnam's economy increasing its dependence on FDI?
	What have we gained after 30 years of FDI attraction? Part 1: The steps of the "giants"

Emphasizing the connection between FDI enterprises and domestic companies is very modest, Mr. Dau Anh Tuan - Head of VCCI Legal Department said: "The annual survey of VCCI showed that FDI companies only buy about 26.6% equipment or inputs from the Vietnamese enterprises, the rest is imported from the parent company. According to Mr. Tuan, from the type of operation, there have been many joint ventures between FDI and private enterprises, now almost FDI enterprises are 100% foreign-invested companies, this will limit the transfer of advanced technology to domestic enterprises as expected and committed. On the other hand, there are some weaknesses in the Vietnamese side such as transparency, poor quality of public services and limited infrastructure. In addition, the linkage is weak due to internal quality of human resources not meet the requirements, technology standard and technology absorption capacity of Vietnamese enterprises is limited. According to the World Bank, in 2015, Japanese FDI firms have 32% of their inputs from domestic firms, while those in China are 65% and Thailand is 55%; not mention that in that 32%, including the suppliers are FDI enterprises in Vietnam.

Need policies for FDI to root, diffuse

Although the development together with the domestic economy, the interaction between the FDI sector and the domestic economy is not close and support each other. The FDI sector operates separately, instead of acting as a catalyst for growth. Because of this, in Vietnam seems to exist two economies namely FDI and domestic.

Ms. Nguyen Thi Tue Anh, deputy director of the Central Institute for Economic Management (CIEM), said that in addition to the visible contributions of the FDI sector, the receiving countries also want the companies to take root, spread to the domestic economic sector. This means that FDI enterprises have to help their competitiveness, the productivity of domestic enterprises go up and this is also an indicator of the effectiveness of FDI. "FDI policy does not do well to create links between FDI enterprises and domestic enterprises. Therefore, it is necessary to develop a policy framework for FDI, which should consider the task of increasing the capacity of domestic enterprises so that the sector can connect with the FDI sector, thereby joining the regional value chain and globalization is an important component of FDI policy. This will increase the efficiency of FDI for the development of the domestic economy. "

Accordingly, Ms. Tue Anh said that it is necessary to form clusters to exploit the spillover effects of FDI in a number of large-capacity industries with the presence of leading FDI enterprises, thereby developing enterprises that produce inputs and intermediaries, encourage or condition the linkage of production and technology transfer of FDI enterprises in these industries to domestic enterprises. "Orientation for attracting FDI needs to be selective, which opens up opportunities for domestic firms to participate in the value chain of FDI enterprises and prepare for the initiative. Opportunities to participate in this value chain are conditions to attract FDI," said Ms. Nguyen Thi Tue Anh. In addition, it is necessary to set targets to improve FDI indicators for monitoring and surveillance such as indicators on technology absorption capacity; FDI and technology transfer; quantity and quality of domestic suppliers; breadth of chain, talents etc.

"We should not expect FDI enterprises to open up to Vietnamese enterprises if they are weak and lacking in many aspects," Dr. Phan Huu Thang, former director of the Foreign Investment Department under the Ministry of Planning and Investment, stressed that "the State must have policies to support enterprises to improve their capacity to meet the strict requirements of FDI enterprises. Longer is the way to build a more self-reliant economy so that Vietnamese companies can participate more deeply in the global value chain with 100% "Made in Vietnam" of Vietnam, not just outsourcing.