Some situation and measures taken to attract japanese foreign direct investment in Viet Nam

INTRODUCTION On January 1973, Paris Agreement was signed, declaring termination of United State Military’s presence in Vietnam. It’s an important politic prerequisite for Japan to set up diplomatic relation with Democratic Republic of Vietnam on September 21st 1973. Two years later, however, American’s failure in Vietnam War forced it to change its strategies in the South East Asia and created a power blank, is considered a favorable international factor encouraging Japan to expand its influence out to all over the South East Asia. In such background, Japan put forth Fukuda theory, formally confirming Japan’s post- Vietnam War foreign policies in the South East Asia. According to Fukuda theory, together with consolidation and expansion of multi-lateral co-operative relations with ASEAN countries, Japan continues to reach out to Indochina countries (including Vietnam) for relations through economic assistance in order to help the 3 Indochina countries to reconstruct themselves after the wars. On October 1975, Japan signed Agreement on Non- refundable aid of 49 millions USD in favor of Vietnam, and opened Japanese Embassy in Hanoi. On December 1976, it was the first time in the two countries’ history of relationship, a delegation of Japanese officials from all fields of industry, services, investment, finance, trade, forestry and transportation lead by Mr. Arita – a diplomatic official , visited Vietnam. But it’s possible to say that Fukuda theory’s idea about economic assistance for Indochina countries, including Vietnam was not doable until Vietnam enters its way of “Innovation” and economic reform. However, Japan had basic approaching steps to Vietnamese market, although the United State had not abolished its embargo against Vietnam. Japan was not vigilant of US embargo in expanding economic- commercial relations with Vietnam. They did not come late in both areas of Investment and Trade as the US did, but for long, Japan has become the greatest partner, the largest ODA provider, and one of the largest FDI prospective suppliers in Vietnam in the recent time. I have covered one year for studying Japanese language, understanding Japanese culture, civilization, economic development, so I would like to choose the subject: “ SOME SITUATION AND MEASURES TAKEN TO ATTRACT JAPANESE FOREIGN DIRECT INVESTMENT IN VIET NAM ” The purpose of this subject is to give the reader an overview of the actual situation and the measures taken to attract Japanese Foreign Direct Investment in Vietnam in order to promote Vietnamese economic growth rate in the next years. Besides the Introduction, Conclusion, the thesis includes 4 chapters: Chapter1.An Overview of Foreign Direct Investment in Vietnam (2004-2006) Chapter2.Japanese Foreign Direct Investment in Viet Nam-Real Situation Chapter3.Research Methodology Chapter4.Some Measures Taken to Attract Japanese Foreign Direct Investment in Viet Nam Chapter 1 An Overview of Foreign Direct Investment (FDI) in Vietnam (2004-2006) Theoretical aspect 1.What is Foreign Direct Investment? Foreign Direct Investment (FDI) is the process whereby residents of one country (the source country) acquire ownership of assets for the purpose of controlling the production, distribution and other activities of a firm in another country (the host country). The International Monetary Fund’s Balance of Payments Manual defines FDI as “ an investment that is made to acquire a lasting interest in an enterprise operating in an economy other than that of the investor, the investor’s purpose being to have an effective voice in the management of the enterprise ”. The United Nations 1999 World Investment Report (UNCTAD, 1999) defines FDI as “ an investment involving a long – term relationship and reflecting a lasting interest and control of a resident entity in one economy (foreign direct investor or parent enterprise) in an enterprise resident in an economy other than that of the foreign direct investor (FDI enterprise, affiliate enterprise or foreign affiliate). The term “ long – term ” is used in the last definition in order to distinguish FDI from portfolio investment, the latter characterized by being short – term in nature and involving a high turnover of securities. The common feature of these definitions lies in terms like “control” and “controlling interest”, which represent the most important feature that distinguishes FDI from portfolio investment, since a portfolio investor does not seek control or lasting interest. There is no agreement, however, on what constitutes a controlling interest, but most commonly a minimum of 10 per cent shareholding is regarded as allowing the foreign firm to exert a significant influence (potentially or actually exercised ) over the key policies of the underlying project . For example, the US Department of Commerce regards a foreign business enterprise as a US foreign “affiliate” if a single US investor owns at least 10 per cent of the voting securities or the equivalent. Both equity and debt- financed capital transfers to foreign affiliates are included in the US Government’s estimates of FDI. Sometimes, another qualification is used to pinpoint FDI, which involves transferring capital from a source country to a host country. For this purpose, investment activities abroad are considered to be FDI when there is control through substantial equity shareholding; and there is a shift of part of the company’s assets, production or sales to the host country. However, this may not be the case, as a project may be financed totally by borrowing in the host country. 2.Basic Forms of Foreign Direct Investment in Viet Nam In order to carry out direct investment overseas, investors may build an entirely new production – business entity, or acquire operating ones in the host country. Some basic forms of FDI in Vietnam which are often implemented by the investors: 2.1Business Co- operation Contract It is a written document duly signed by two or more parties, which are referred to as business co – operating parties to jointly perform one or several activities outcomes to each party. Under this form, no joint – venture or any other legal corporate is established. Its characteristic is that no new company or enterprise is established. The main content shows title, responsibilities of each party to the other without mentioning the parties’ capital. 2.2Joint- venture Enterprises It is the enterprise established by a Vietnamese party with one or more foreign parties on the basic of joint – venture contract, and carries out business operation in Vietnam’s national economic fields. This form’s characteristic is establishment of new enterprise and operation on the basic of independence principle in the form of a company limited. There is no maximum limit for foreign parties’ contribution, but it must be at least many or equal to 30 % of the enterprise’s legal capital. Divisions of profit, risks of the enterprise are prorated according to capital contribution ratio. 2.3 100% Foreign- owned Enterprises It is the enterprise belongs wholly to established and managed by foreign organization, individual, which is responsible for business outcomes. This type of enterprise is established in the form of company limited. 2.4 Other Forms 2.4.1Export Processing Zone It is the zone, which is separated from the territory by natural or artificial hedge and operates according to specific rules. Enterprises operate mainly to process goods for export. Goods are exempted from export duties and subject to other incentives regarding taxes, levy. 2.4.2Build- Operate- Transfer (BOT) It is investment form implemented on the basic of a written document signed between the foreign investor with competent governmental agency to build infrastructure projects. In this type of investment, the investor constructs the project in such a long time enough to retrieve investment and proper profit. Then they will hand over the whole structure to Vietnamese Government without collecting any sum. 2.4.3Concentrated Industrial Park It is industrial Park set up by the Government, with determined border, geography, specializing in industrial production, services supporting industrial production, without residents. 3.The Effects of Foreign Direct Investment FDI involves the transfer of financial capital, technology and other skills (managerial, marketing, accounting, and so on) as we have seen so far. This process gives rise to costs and benefits for the countries involved, the investing country (the source of the investment) and the host country (the recipient or the destination of the investment). It is not clear, however, what costs are borne and what benefits are enjoyed by the two countries, at least not quantitatively. 3.1The Provision of Capital The two gap model, which is often used in development economics, shows that developing countries typically encounter the problem of increasing their saving to match their investment needs, and that of financing imports through export earnings. The first problem arises from the saving gap (the difference between investment and saving), whereas the second problem arises from the foreign exchange gap (the difference between imports and exports) 3.2The Effect of FDI on Output and Growth One of the most important aspects of FDI is its effect on output and therefore growth in the host country. This effect naturally is more important for developing countries, where inward investment is viewed as a means of boosting economic development. 3.3The Effect of FDI on Employment and Wages There is a relationship between investment and employment. In general, the employment effects of FDI may be summarized as follows: * FDI is capable of increasing employment directly, by setting up new facilities, or indirectly by stimulating employment in distribution. *FDI can preserve employment by acquiring and restructuring ailing firms. *FDI can reduce employment through divestment and the closure of production facilities. 3.4The Balance of Payments Effect The balance of payments effect is more important for developing countries than for developed countries. This is because foreign exchange is regarded as a scarce resource affecting growth through the foreign exchange gap. Hence, any effect of FDI may mitigate or worsen the constraints imposed by the balance of payments on the attainment of macroeconomic objectives pertaining to growth and employment. 3.5The Effect of FDI on Trade Flows The most critical issue about the relationship between FDI and Trade is whether they are complements or substitutes. In other words, to what extent do production and sales by subsidiaries in a foreign market replace or help to increase exports to the same market? One reason we should believe that FDI and trade are substitutes is that they are two alternative modes of entry, as we have seen. 3.6The Effect of FDI on Productivity Productivity is likely to rise and unit cost likely to decline if : + FDI is export- promoting and the products of the subsidiary are destined for the large world markets. +The underlying conditions and policies allow the installation of plants designed to achieve full economies of scale. 3.7. FDI and Technology Technology diffusion plays a central role in the process of economic development. The interaction between FDI and technology is considered to be of great and critical importance in the discussion of FDI. Indeed, the transfer of technology has perhaps become the predominant issue around which discussions of MNCs and their dealings with developing countries evolve. 3.8FDI and Training Foreign investors, much as they dislike to spend on the training of locals, realize that such expenditure may be crucial for the success of their investment. Therefore, expenditure on training becomes part of the initial investment and another sunk cost. 3.9FDI and Inter – Industry Linkages FDI can influence the economy of the host country via inter- industry linkages. To the extent that foreign subsidiaries establish links with local suppliers for locally- produced material and parts, FDI can help to provide local firms with increased opportunities that in turn affect their employment and income positions. These are called backward linkages. Forward linkages can also be established for distribution purposes. 3.10The Effect of FDI on Market Structure FDI is likely to affect the structure of the industries it is directed towards. It may be responsible for improving the competitive forces or for worsening the monopolistic elements in the host economy. This is because FDI is thought of as a vehicle for disseminating the transfer of technology, including a higher level of technical efficiency. 3.11. FDI and The Environment It is arguable that, because MNCs have significant financial, political and negotiating power, they can get away with causing a lot of damage to the environment, particularly in developing countries that are trying to attract FDI. Indeed, one of the reasons why MNCs choose to locate production facilities in developing countries is that these countries have less stringent environmental damage requirements. Indeed, the governments of these countries may even inflict damage on the environment in an attempt to attract FDI. A Final Remark In this part we discussed the effects of FDI, a highly controversial and contentious issue. There is no doubt that FDI affects both home and host countries. In theory, the effects on the host country can be highly positive, but the benefits are not realized automatically. There are certain conditions that have to be satisfied for a positive effect to materialize, and these conditions are more likely to be satisfied by a developed rather than by a developing host country. The empirical evidence is so mixed that it cannot resolve the underlying issues. So far we have dealt with the characteristics, determinants and effects of FDI. In the following four chapters we shall deal in more detail with some aspects of FDI and the behaviour of MNCs that we have encountered. 4.Role of Foreign Direct Investment in Vietnam FDI emerged as an important economic phenomenon in the course of economic development worldwide in 1950s- 1960s. However, all economic phenomena have its head and tail. 4.1 For Investors 4.1.1Positive Effects Most investing countries are developed industrial ones, with strong economic capabilities, or some new industrial countries with rather high standard of development, so factors developing production extensively loss gradually, as a result, fund is abundant in the country and they find way to bring the fund overseas to invest. FDI is the most important element helping the investor countries overcome aging situation of products. This is one of best solutions to help domestic industries at their sunset. Through FDI, the investors can transfer machines, technologies that are now not advanced in their countries to the invested countries in order to expand the product’s life span, while continuing to develop dawn industries with high tech products in their countries. This is a phenomenon complying the objective rule in international fund transfer process. Besides, FDI also help the invested country build up stable material supply market with low price by exploiting plentiful materials from invested countries, helping the invested country to expand its economic power and raise prestige in international area. The increasing trend of integration makes FDI becomes the most effective measures to penetrate and occupy market. Through building of production plant and consuming overseas, the fund exporter countries will expand consumption market and avoid the protective tariff. 4.1.2Negative Effects FDI does not only produce positive effects but also adverse ones on employment and income of home employees. It reduces domestic savings flows and employment, making the domestic goods less competitiveness. 4.2 For Invested Country 4.2.1Positive Effects FDI solve the problem of lacking fund to implement industrialization, modernization of Vietnam. Due to insufficient capital, internal accumulation is low, which limits investment scale and technical renovation, causes imbalance import- export. Payment of foreign debts can also be taken from proceeds from FDI enterprises. FDI promotes economic growth, taking advantage of capital and technologies overseas to develop the economy is the turning point helping Vietnam get out of the muddled cycle of poverty. Practice and experiences of many countries show that any nation implementing the economic strategy of an open economy to the outsiders, taking advantage of and promoting influence of external factors to turn it into internal ones, should create higher economic development speed than the others do. Receipt of management are experience and technology transfer. When investing into a given country, the investor does not only transfer to that country funds but also capital in objects such as machines, equipment, invisible capital, technical experts, management secret and capability of market approaching. FDI is the significant additional part to State Budget’s income through taxation on FDI enterprises. FDI helps local enterprises to approach global market through joint- venture with foreign parties and their broad network of consumption. FDI positively affects education, training and psychology of labor force, while encouraging investment within invested country. 4.2.2Negative Effects FDI widens the rich- poor gap between industries, regions nationwide. Although FDI is carried out in host country, but actually, this funding source is directly managed and used by the investors for their specific purposes in the legal framework of the host country. Final objective of the investors is profit maximization, so they only invest in high profitability industries, favorable regions. As the result, the development gap between different regions increase, leading to widen rich- poor gap. FDI enterprises often have advantages regarding capital, technology, and management experiences compared to domestic ones. Therefore, home enterprises are often less competitive, consequently, they are likely to go bankrupt or operate perfunctorily. In long- term view, decrease savings rate and domestic investment will make the invested country become more and more depend on the investing countries. When FDI projects come into operation, deficit of payment balance will increase because foreign currency amounts is transferred overseas in the form of returning profit, loan interest, material cost, etc. Which are much larger than FDI capital transferred by the investors to invested country. Technology transfer through FDI is still limited. Many investors do not follow regulations of the host countries, leading to minor technology transfer, backward technologies, environment polluting technologies and technology’s price is often higher than common international price. In brief, FDI always has its duplicity, benefits bought in by FDI to two sides are great, especially to developing countries as Vietnam, FDI is the push for Vietnam to take advantage of favorable objective conditions created by the investors to develop economically and socially. It is why the countries encourage FDI activities. Contribution of FDI for Vietnam’s Economy *FDI companies contributed 13.3% to the GDP, 35% to the industrial output, 23% to export, 25% to total State Budget revenues in 2004 but provided only 0.7% of overall employment. *Vietnam an impressive performance considering the share of FDI pledges to every US$ 600. *On other hand the FDI attracted into Vietnam is by regional standards quite modest (FDI in Vietnam is about 4% of FDI in China). *In year 2004 alone, Vietnam earned US$8.6 billion from exports and