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Why foreign investors are losing faith in Vietnam

Last updated on: April 4, 2013 15:41 IST

Why foreign investors are losing faith in Vietnam

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Barun Roy


Due to slow reforms and rising corruption, the growth in foreign investments has turned negative in Vietnam.

Something has gone wrong for Vietnam. It finds it's no longer the same darling of foreign investors it used to be.

For three years in succession, it has failed to reach its foreign direct investment (FDI) targets and the government, judging from recent remarks by its ministers, is worried.

If the slide continues, they fear, there will be an adverse impact on economic growth, and if economic growth falters, investors could become even more hesitant.

This forms a vicious circle, and for being caught in it, Vietnam has only itself to blame. It thought it was special because of its past, and the world would be wooing it no matter what.

But business never waits for too long; if you aren't ready for it, it'll simply head for the next green pasture. That's exactly what's happening in Vietnam's case.

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Image: Former Japanese PM Naoto Kan (L), Australia's PM Julia Gillard (2nd L), Vietnam's Prime Minister Nguyen Tan Dung (C), Former Chinese Premier Wen Jiabao (2nd R) and India's Prime Minister Manmohan Singh join hands during a photo opportunity as part of the 5th East Asia Summit.
Photographs: Christophe Archambault/Reuters
Tags: Vietnam , FDI

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Why foreign investors are losing faith in Vietnam

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While it drags its feet in pushing or upgrading reforms, its old competitors are all tidying up their acts and new ones have arrived to stake their own claims.

Not that the tap is going dry, but new commitments are surely slower in coming while old ones are in the ice box.

Last year, against a target of $15-17 billion, new commitments fell off to $13 billion, which was smaller than $14.7 billion received the year before, which, in turn, was much smaller than $18.1 billion committed in 2010.

According to the United Nations Conference on Trade and Development (UNCTAD), even at current exchange values, FDI inflows to Myanmar rose 90 per cent and to Cambodia 104.3 per cent last year from the year before.

Of course, both are way behind Vietnam in absolute terms, but it's the rate of growth that matters and last year's rise for Myanmar came on the heels of a 100 per cent jump in 2011.

The Japanese are Vietnam's biggest investors, having registered 1,859 projects so far with total commitments of $29 billion.

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Image: The growth of foreign investment in Vietnam has turned negative in the past two years.
Photographs: Reuters
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Why foreign investors are losing faith in Vietnam

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But right now, they're more interested in expanding in countries like Myanmar, Indonesia and Malaysia because, they believe, Vietnam isn't as competitive as the others.

The economy is stable, inflation is under control, the banking system is better organised than earlier, but efforts aren't "good enough" and corruption is on the rise.

Then there are issues that worry all investors, like salary increases, finding raw materials and components, dearth of skilled workers, complicated customs procedures, and inadequate infrastructure, for which the government still has no credible answers.

It's lacking even in basic services like acquiring land and clearing project sites.

The strange case of the Tatas is a good example of what's wrong with Vietnam. Five years ago, in May 2008, Tata Steel signed an agreement with Vietnam Steel Corporation to build a $5 billion plant, having a capacity of 4.5 million tons a year, in the Vung Ang Economic Zone in Vietnam's Ha Tin Province.

Five years on, the project is still without a site while a location previously meant for it has been handed to a competitor.

The real story is more bizarre. Tata needs around 4,000 acres for the plant, which the provincial authorities have estimated will need some $200 million to be readied for construction.

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Image: Former Tata Group Chairman Ratan Tata speaks during Tata Steel annual general meeting.
Photographs: Reuters
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Why foreign investors are losing faith in Vietnam

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But they say they don't have the money and want Tata to pay. Of course, Tata has refused since, under Vietnamese law, land clearance is the government's job.

Tata had signed another memorandum of understanding with Vietnam Steel to set up a cold rolling mill in the same province.

Both projects were to have been phased over 10 years. But, though the Vietnamese keep saying they want the Tata investment, nobody knows what's going to be its fate.

Acquisition and clearance of sites are among the biggest problems that have slowed down the pace of FDI in Vietnam recently. Besides, there are questions like legal transparency and intellectual property rights.

Investors want a transparent business environment, firm laws on how to deal with insolvencies, faster policy decisions.

They're sceptical also of the government's increasing inclination towards hi-tech investments even when basic investor requirements haven't been entirely met.

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Image: Skyline of Ho Chi Minh, Vietnam largest city.
Photographs: Iostream01/Wikimedia Commons
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Vietnamese media have slammed the legislative process as snail-paced. The government can't rule always by decrees, and the National Assembly has little sense of urgency.

It's all very unfortunate, since Asia remains a favourite FDI destination despite a slowdown in global inflows.

UNCTAD figures show that of the $1.311 trillion global FDI last year (18.3 per cent lower than the year before), developing economies drew in $680 billion, and Asia accounted for $399 billion of the developing-country total.

More significantly, most of the Asian pie was shared by East Asia ($213.1 billion, including $120 billion for China alone) and Southeast Asia ($106.5 billion). That being the case, Vietnam's foot-dragging is strange.

One would have thought it would be extra-anxious to preserve the head start it has had and improve on it in the face of stiffening competition.


Image: Vietnamese currency dong is seen at a bank in Hanoi.
Photographs: Kham/Reuters
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