The overall performance of foreign direct investment (FDI) to Vietnam in 2011 was somewhat mixed with the most notable point being the shift in FDI structure.
There’s no question that 2011 was a tough year for Vietnam’s and the global economy. The austerity drive in major economies - the main providers of FDI projects in Vietnam - caused their investors to think twice before investing anywhere, with a subsequent decline in terms of capital and project numbers in Vietnam.
According to the Foreign Investment Agency (FIA), pledged foreign direct investment fell 26 per cent during the year, to $14.7 billion, while disbursed FDI capital was estimated at $11 billion, equal to 2010’s figure.
Given the existing conditions, with investors becoming increasingly cautious and markets more selective, the disbursement figure was a bright point for Vietnam. Despite the macro-economic ups and downs of recent years, disbursement has remained relatively stable and 2012 will not be dramatically different, with the FIA forecasting disbursement at around $11-12 billion.
There was no avoiding a sharp decline in registered FDI in 2011. Be that as it may, it largely mirrored the difficult global economic climate. In a nutshell, so long as the global economy continues to struggle, the natural tendency for registered FDI will be to fall, with the extent depending on the pace and direction of capital flows and on the country’s intervention. It has been suggested that since the current fall is likely to be only temporary, authorities should do exactly what they have been doing to date: improving the quality of FDI.
Last year Vietnam issued licences for 1,091 new projects with combined registered capital of $11.6 billion, while 374 existing projects boosted their registered capital by $3.14 billion. The relatively stable project numbers hides important changes in FDI composition. For the past few years FDI capital has mainly found its way into the real estate while other sectors, such as manufacturing and agriculture, have struggled to attract the capital source.
But there was a steady change in the structure of FDI during 2011. Official figures show that the industrial and manufacturing sector ranked first on the investment list with 382 new projects worth $6.24 billion, accounting for 76.4 per cent of all FDI. Electricity, gas and water production and distribution ranked second with $2.5 billion, or 20 per cent, followed by the construction sector with $1.19 billion. Notably, the real estate sector, which was previously the most attractive for foreign investors, drew in only $445 million, or 3.7 per cent.
The continuing shift in FDI composition is welcomed, as Vietnam is focusing on increasing the effectiveness and quality of foreign investment by attracting FDI to sectors such as infrastructure, green industry and high technology.
East Asian investors continued to dominate their western counterparts in investing in Vietnam. Hong Kong remained the leading source of foreign investment last year, with $3.09 billion, accounting for 24.3 per cent, followed by Japan with $2.12 billion and 16.7 per cent, Singapore with $1.58 billion and South Korea with $1.16 billion. Singapore has been the largest investors in Vietnam to date, with $24 billion in registered capital, followed by South Korea, Japan and Taiwan.
The biggest project last year was the $2.26 billion thermoelectric plant developed by the JAKS Hai Duong Power Company, followed by the $400 million tyre factory of a Chinese investor and a $323 million plant of the Specific Glass Company by the UK’s Pilkington NSG Group (PGL).
In the last 12 months, among the 48 cities and provinces that had new FDI projects, Ho Chi Minh City took the lead by absorbing nearly $3 billion, or 20.4 per cent of the total. Hai Duong, Hanoi, and Ba Ria Vung Tau followed, with $2.55 billion, $1.1 billion and $917.8 million, respectively. The southeast region is still the most attractive for foreign investors, with $6.25 billion, accounting for 42.6 per cent of the total registered investment. The Red River Delta region came a close second, with $5.95 billion, or 40.5 per cent, with the central highlands being the least attractive, with just 0.1 per cent of all registered capital.
In 2012 the composition of FDI by origin will depend on how well countries and economies around the world navigate the economic waters. European countries have been overwhelmed by the crisis while Asia has been less affected. But this won’t automatically mean that FDI will rise in 2012. Analysts warn that this will be another tough year and the FIA is only targeting to attract some $15-16 billion during the 12 months.
According to independent international institutions, Vietnam is still regarded as an attractive destination for foreign investors. It ranks first among ASEAN members in FDI attraction, up three notches, and is one of the Top 10 economies regarding investment attraction according to the World Investment Prospects Survey 2010-2012 conducted by the United Nations Conference on Trade and Development (UNCTAD).
It is also worth noting that the composition of FDI projects has changed by sector and size as well. Mr Nguyen The Phuong, Deputy Minister of Planning and Investment, said that improving the efficiency and quality of State management over FDI was imperative. “FDI management will focus on disbursing FDI capital and attracting FDI projects in line with the country’s development plan for the 2011-2015 period, targeting infrastructure and green technology,” he said.
In general, the prospects for attracting FDI are high and come from a variety of factors. While the pace of economic restructuring may be the subject of some debate, Vietnam’s commitment to such reform is beyond question.
In the long run, the high growth of the economy will attract interest from investors and authorities are expected to become more proactive in assisting foreign investors. Vietnam’s high profile diplomatic activities have also increased investor confidence in the country and its restructuring process.
Last but not least, the increasingly strong performance of the domestic sector, especially small- and medium-sized enterprises, is particularly encouraging. It provides a skill set that will continue to attract FDI in the long term as well as a range of investment partners that have the financial wherewithal to add value to a joint venture through capital, market awareness and management skills adapted to the local environment.