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Dr Nick Freeman
In the first five months of this year, foreign investors in Vietnam generated over US$4.1 billion in export receipts, thereby accounting for 52 per cent of the country’s total export earnings. Foreign invested companies now account for roughly 37 per cent of Vietnam’s industrial output; roughly the same as the once dominant state enterprise sector. Given that foreign direct investment (FDI) into Vietnam only commenced 15 years ago, policy-makers in Hanoi have done a remarkable job in establishing a substantial and productive FDI community in a relatively short period of time.
In this regard, Vietnam has emulated the success of several of its Southeast Asian neighbours, in attracting foreign investors to establish operations in the country, principally (but not exclusively) as a platform for export-oriented production activity. As a result, foreign investors in Vietnam are now an important source of employment, tax revenues, foreign exchange earnings, and an engine of economic growth for the country. Vietnam has also emulated its neighbours in having mixed success in using FDI inflows to derive technology transfer, and in establishing linkages between local firms and foreign investors.
Where Vietnam differs from its regional neighbours is that the pursuit of FDI inflows has been conducted simultaneously with - and has been a key pillar of - a far-reaching economic transition and business liberalization process. Essentially lacking a domestic private sector in the early 1990s, FDI has arguably entailed the importation of an ersatz private sector into Vietnam. Recent years, however, have seen the country take significant strides to develop a domestic private sector, as evidenced by the epochal Enterprise Law of 2000, and the registration of literally tens of thousands of new companies.
If the number of new company registrations is to be believed, a domestic private sector is rapidly on the rise in Vietnam. Indeed, this latest number of registrations has been cited by some observers as hard evidence that the economic reform process in Vietnam remains in high gear. But the real challenge for Vietnam’s policy-makers will be to translate these numbers for new company registrations into a tangible - and much more robust - private sector business community. More specifically, Vietnam needs to see a substantial proportion of these firms become larger and more efficient companies, able to compete with foreign firms for both domestic and overseas markets. They will also need to improve in terms of product quality, if they are to have any hope of creating linkages with foreign investors, and thereby ‘plug into’ the burgeoning number of cross-border production networks in global manufacturing.
Thus far, the anecdotal evidence is mixed, at best. Foreign investors in manufacturing sectors such as garments or electronics complain that they are not able to source as many inputs locally as they would like, usually because the quality of these inputs is too low or the price is too high, or a combination of both. If one looks at which garment and footwear companies in Vietnam are winning contracts with global players like Nike and The Gap, foreign-invested companies seem to be faring better than many local firms (hence their stellar export performance). Therefore, the linkages between foreign and local firms, through which vital technology and skills transfer might be expected to flow, appear to be weak at present.
WATCHPOINT: Improved future output and export performance by the domestic private sector will be a critical indicator of whether newly-established private companies in Vietnam are maturing into a corporate community able to collaborate and compete with foreign investors.
About our company:
AFG Venture Group is an Asia and Australia based corporate advisory and consulting firm with over 20 years experience in creating alliances, relationships and transactions in Australia, South East Asia and India; including a 15 year history of corporate and equities advisory in Australia, undertaking merger, acquisition, divestment, fund raising and consulting for private and public companies.
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