Boosting linkages between FDI and domestic enterprises

Tuesday, 2018-07-31 17:49:47
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The FDI's spill-over effect on domestic firms through advanced technology and labour productivity remains limited (illustrative image)
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NDO – The linkages between domestic and FDI firms being below expectations was among the issues discussed at the midterm Vietnam Business Forum 2018 (VBF) held in Hanoi earlier this month, which also focused on reviewing the three decades of FDI attraction in Vietnam.

Linkages between domestic and FDI firms fail to meet expectations

Over the past 30 years of attracting FDI, Vietnam has made many achievements but is yet to fulfil an important target of connecting FDI and domestic enterprises. The FDI's spill-over effect on domestic firms, through advanced technology and labour productivity remained limited, particularly in the area of high technology.

The surveys on the provincial competitiveness index (PCI) conducted by the Vietnam Chamber of Commerce and Industry (VCCI) have shown that a low rate of domestic private enterprises have participated in providing goods and services in the value chains of FDI enterprises.

By 2017, only 10% of domestic enterprises acted as suppliers for FDI firms in Vietnam. Statistics also show that FDI firms purchased only 26.6% of the value of their input in Vietnam but it is sad that a majority of their purchases are from other FDI firms based in Vietnam. FDI firms in the area of hi-tech production have a trend of importing input from their countries rather than from local firms of the host country.

The latest report at the VBF 2018 stated that Vietnam ranked 93rd out of 137 in firm-level technology absorption, 89th in technology transfer between FDI and domestic firms, and 106th in business sophistication. Notably, Vietnam is ranked below Thailand, Malaysia, Indonesia and Cambodia in terms of technology transfer.

Kyle Kelhofer, International Finance Corporation's Country Manager for Cambodia, Laos, and Vietnam, said that FDI sector has made important contributions to the Vietnamese economy. However, to enhance the competitiveness of domestic firms, Vietnam should adjust its policy on FDI attraction with a focus on increasing the linkages between FDI and Vietnamese firms to create mutual benefits. It is an urgent need in the context that Vietnam is integrating deeply in the world economy, Kyle Kelhofer noted.

Narrowing the disparities

Despite weaknesses in linkages between FDI and domestic firms, it can't be denied that FDI has made considerable contributions to the Vietnamese economy. As many as 128 countries and territories have invested in approximately 26,000 projects worth US$326 billion in Vietnam.

The FDI sector has affirmed its crucial role in the Vietnamese economy as it contributes 25% to the total social investment capital and 25% to the national GDP. About 58% of FDI capital is poured into the manufacturing industry.

In particular, the export revenue of the FDI sector accounts for 72.6% of total export revenue of Vietnam. The sector is also creating jobs for 3.6 million direct workers and 5-6 million indirect workers.
Minister of Planning and Investment Nguyen Chi Dung said that although the linkages between domestic and FDI firms fail to meet expectations and there remains limitations in technology transfer, the FDI's spill-over effect on domestic firms is considerable which urges domestic firms to approach advanced technology, enhance management skills up to international standards and generate more jobs.

The problem for Vietnam is how to boost the linkages and promote the development of domestic firms and support industries, Dung noted.

FDI firms, which have enormous potential and are of a bigger size in capital, technology, management capacity, and market connectivity while suffering fewer effects from institutional barriers and economic instability, have quickly seized a greater proportion in key pillars of the economy, including the manufacturing industry.

In the eyes of foreign investors, Vietnam has advantages of low costs, appropriate FDI preferential policies, stable business environment, and reasonable tax rates, among others.

Some opinions arose suggesting that the linkage between FDI and domestic firms should not be conducted hastily due to the wide disparity in ability and competence between large corporations and small and medium-sized domestic firms. If domestic firms, with advantages in geographical distance, are able to produce supporting products with equal or lower prices compared to imported products, there is no reason for FDI firms not to cooperate with them.

There are many solutions to increase the linkages between FDI and domestic firms but they need to be supplemented to bring about more effective results. In addition to improving the labour quality and narrowing the gap in technology capacity, Vietnam should use the geographical factor to enhance the connectivity between FDI and domestic firms.

Thus, the establishment of industrial and processing zones exclusively for FDI enterprises must take into account the connection with industrial zones designed for small and medium-sized domestic enterprises.

Moreover, when attracting investment in high technology, Vietnam should create beneficial conditions and encourage foreign investors to set up and promote research and development (R&D) centres with the participation of domestic engineers, experts said.