ATTRACTION HIGH QUALITY FDI
World industry experts believe that about 20% of production capacity will be moved out of China to other countries next year. What can the Government of Vietnam do to promote the emerging opportunities that are increasingly apparent?
Ben Luc - Long Thanh expressway
Obviously, not all of this movement will flow to Vietnam, but we can attract high quality FDI based on many advantages such as cost and quality of labor; great achievements in disease control; good rankings in the evaluation methods that foreign enterprises make when considering investing in the construction of production facilities abroad...
Must be more attraction!
There are many factors that the Government can consider implementing to make Vietnam more attractive in order to attract more FDI. One of them is accelerating development and improving infrastructure because Vietnam's logistics costs are still among the highest in the region. Building a deep-water port next to industrial parks helps to solve the problem of importing raw materials and exporting finished products. In addition, the development of belt roads around the Ho Chi Minh city and Hanoi city.
In order to support economic growth after the COVID-19 pandemic, the Government of Vietnam is disbursing funds to boost infrastructure projects. These projects and other solutions will help Vietnam rank up in the World Bank's national logistics capacity index (currently ranked 45th).
In a recent World Bank study on ease of doing business, Vietnam ranked 70th, ahead of Indonesia and the Philippines, but behind Malaysia and Thailand.
The government has issued many preferential policies and has made significant improvements, but there is still a lot of work to be done. In the immediate future, it is advisable to focus on improving administrative procedures related to company establishment, licensing, and tax payment.
In the long term, the Government may consider a number of proposals to make Vietnam more attractive to foreign investors. There should be an independent investment promotion agency, in charge of proactively and flexibly promoting Vietnam as an ideal destination for FDI inflows around the world. We will actively choose the appropriate capital flow instead of waiting for investments to come to Vietnam.
Invest in research and development activities, upgrade technical universities, create a high-quality workforce to serve the production of complex products or provide high-tech services. This strategy has been very successful in China. Finally, the Government may consider promoting the formation of industrial clusters around potential areas.
Developing industry clusters is the invention of a famous professor at Harvard Business School. An industrial cluster is usually a city or an area consisting of manufacturers, suppliers, and closely related universities and research institutes.
The best example of this innovation is Silicon Valley. Or like the Boston model, the biopharmaceutical industry is built around the city's famous universities and hospitals. There are many companies in the industry from manufacturing medicines to medical equipment... supplying around the world.
The industrial cluster strategy will create dual benefits, both maximizing FDI and strengthening businesses' confidence to position higher value-added production right in that country. Vietnam is currently a country participating in the most free trade agreements compared to other countries in the world. Vietnam is still negotiating to join a number of more agreements. These agreements are the clearest evidence of Vietnam's desire to integrate economically with the world.
Finally, there is the issue of taxes. Usually, countries often apply many tax incentives to attract investment. The fact that tax incentives are too large is not the most important thing for Vietnam to continue to achieve success in attracting FDI. Tax revenue can be used to develop infrastructure, education, health care and other areas that are important for the sustainable development of the country.
Move along the global supply chain
Multinational companies are considering moving some production facilities out of China. They recognize the need for sourcing diversification. Among them are some companies that are expected to move their production bases to Vietnam, a country with lower labor costs, a geographical location close to Asian sources and not being dragged into the US-China trade war.
But to really expand their supply chains, these companies need to ensure they can source potential from a range of different suppliers, which will benefit Vietnam. When foreign enterprises develop their supply chains in Vietnam, many domestic enterprises will also benefit.
The first is the transfer of knowledge and experience. Research by the Brookings Institution indicates that: “Advanced production technology, management experience and working practices will be transferred from FDI companies to domestic companies”, improving the efficiency of the workforce in local production. In return, local businesses will promote production and business activities to win potential cooperation opportunities with FDI enterprises.
These forms of development were soon established, both in China and in other countries, from the early years of the twentieth century. This is also the reality that happened in China in the past and we believe it will also happen in Vietnam to a certain extent.
What can the Vietnamese government do to promote such spillover benefits? They can refer to the way that the Singapore Government did more than 30 years ago. Before that, Singapore had rapidly developed its manufacturing sector. Multinationals looking to invest in Singapore have found that 90% of local suppliers are unable to meet their quality standards, while 80% are unable to deliver as scheduled.
To solve this problem, as well as the situations that arise, the Government of Singapore has established a national industrial upgrading program, the Government and foreign companies come together to find ways to strengthen the connection with domestic enterprises. Accordingly, many cooperation programs have been implemented, increasing supplier efficiency by 17% and value added per work by 14%.
Ireland also implemented a similar program in the late 1980s and early 1990s, which increased efficiency by 36% and revenues by 83%. Vietnam can do the same, with strategies tailored to the country's environment and situation.