Although FDI inflows into our country remain high, there are worrying signs of a slowdown in growth, which could directly affect FDI disbursement in the coming years.
The traditional model of FDI flows may be disrupted.
Statistics on attracting FDI in the first six months of 2018 are very positive, with total additional capital, equity investments, and newly registered capital reaching US$20,33 billion, 5,7% higher than the same period last year.
However, this growth is largely due to foreign investors' capital contributions and share purchases. In the first six months of this year, FDI investors contributed capital and purchased shares in Vietnamese businesses totaling $4,1 billion, an increase of 82,4% compared to the same period in 2017.
On the other hand, foreign direct investment (FDI) inflows decreased compared to the same period last year. Total newly registered FDI capital was 99,7% of the same period last year (US$11,8 billion), and additional capital of US$4,43 billion decreased by 13,8% compared to the same period last year. Contrary to the downward trend in registered capital, disbursed capital increased compared to the same period last year, specifically reaching US$8,37 billion, an increase of 8,4% compared to the same period in 2017.
Therefore, the Ministry of Planning and Investment recently submitted a report to the Government stating that although the trend of FDI flows remains positive, there are also many concerns that foreign investment has begun to deviate from the traditional model, with the rate of disbursed capital increasing faster than the rate of registered capital increasing.
According to the Ministry of Planning and Investment, the reason for this situation is that the amount of registered capital in previous years was very high, and this is the time for investors to fulfill their commitments. On the other hand, because the amount of newly registered FDI capital in 2017 was very high, the slight decrease this year is understandable.
In the first half of 2017, according to statistics from the Ministry of Planning and Investment, Vietnam received $11,83 billion in newly registered FDI capital, an increase of 57,9% compared to the same period in 2016; meanwhile, additional registered capital amounted to $5,14 billion, an increase of 35,8% compared to the same period in 2016.
The Ministry of Planning and Investment stated: "Such a reduction will affect the pace of FDI implementation in subsequent years."
If this trend continues, it will have negative impacts on the economy. For many years now, experts have agreed that the amount of FDI disbursed is the most important factor. A slowdown in disbursement reduces the growth of new capacity for the economy, thereby impacting GDP growth, especially as the FDI sector is increasingly becoming a crucial driver of the Vietnamese economy.
Challenges from the trade war
One question is how the Vietnamese economy will be affected by the trade war between China and the US? The impact is not limited to trade but also includes the flow of foreign direct investment (FDI) into Vietnam.
Adam McCarty, an economist at Mekong Economic in Hanoi, believes that tensions in the US-China trade relationship are driving South Korean, Japanese, Hong Kong, and Chinese companies to Vietnam, primarily to diversify their investments. According to McCarty, this trend is particularly strong in the manufacturing sector, where costs are significantly lower in Vietnam compared to China.
The China Morning Post, after quoting Adam McCarty and emphasizing that tensions that could lead to a trade war between the US and China have contributed to a surge in FDI inflows into Vietnam.
This trend had already been underway, with foreign companies shifting their factory locations away from China to Southeast Asian countries to save costs. The US-China conflict merely acted as a catalyst, accelerating this process.
Economist Nguyen Thanh Phong shared the same view when he told the press: Trade wars and protectionist trends will cause FDI flows in the region and the world to avoid markets subject to high tariffs and instead seek markets with less risk of protectionist measures. From this perspective, Vietnam seems to have many advantages.
Nevertheless, from the perspective of a foreign investment management agency, the Ministry of Planning and Investment remains concerned about the fluctuations in FDI flows into Vietnam as trade protectionism and political tensions continue to spread, as well as as risks of slowing growth emerge in Vietnam's major trading partners such as Japan, China, and the European Union (EU). The consequences could escalate when the global economy becomes unstable.
Not to mention other difficult challenges related to the Fourth Industrial Revolution, the ability of Vietnamese businesses to participate in global supply chains is still weak, which is also an important factor affecting the attraction of FDI.
"Incidentally, summarizing the results of 30 years of attracting FDI in Vietnam, there needs to be an adjustment in the FDI attraction strategy. We shouldn't chase after quantity, but rather selectively attract large, high-quality projects with significant spillover effects, advanced technology, and environmental friendliness," the Ministry of Planning and Investment expressed its view.www.expertis.vn
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