Vietnam’s rapid growth via high FDI inflows

Vietnam has undergone sustained industrial and economic transformation in recent decades with GDP (gross domestic product) growth averaging close to eight percent per year.

This became possible when, despite its economic system of state enterprise control (a feature of communism), the government allowed a liberal opening of the economy to the world, to foreign direct investments (FDIs), and to rely on the market mechanism to propel its growth process.

I focus on the role that FDIs play in the growth of other countries to draw attention to the inadequacy of Philippine performance on this score. As a supplement to the investment effort, FDIs assist in making the quality and depth of the country’s economic growth better and more efficient, making the conquest of poverty much more difficult.

Vietnam’s recent history. Vietnam achieved unification of its north and south after scoring military victory over the US military in the mid-1970s, signalling communist control over the whole country. However, during a decade and a half of internal consolidation under that economic system, the country remained very poor. The aftermath of the war destruction was severe.

Then two things happened: First came the collapse of communism as a model for economic growth with the collapse of the Soviet Union and the fall of the Berlin Wall in 1991. Second, China’s pragmatic economic reforms within the communist framework became an outstanding success as it opened the economy to the world and to foreign capital while also adopting the methods of capitalist enterprises.

Vietnam decided to follow China’s approach. Like China in the mid-1970s, Vietnam (during the 1990s) sought advice from the international development community to help it institute major economic reforms.

Economic reforms hold sway. The government undertook the reform of economic policies. It improved the legal environment for foreign direct investments to come in. By doing so, it exposed enterprises within to more competition with the world markets. It improved the banking system. It made its currency freely convertible.

By attracting FDIs, the acceleration of employment within the country became possible. Like China, it used its low wages as an attraction to entice foreign capital to locate their operations in the country. By also promoting labor-intensive industries, rapid employment creation became possible for its many workers. Vietnam, within a short period of time thus became a major exporter of textiles, garments, shoes, sporting goods, processed foods and also electronics assembly.

Vietnam’s FDIs gave encouragement to joint ventures while not closing the door to 100 percent FDI investors. Investors were welcome in many sectors of the economy. FDI policies encouraged industries especially in manufacturing to open. Initially, the labor intensive industries were highly favoured. As a result, textiles, garments, shoes became the initial points of entry of foreign investors. Promotion of international tourism enlivened the domestic economy, including the arts.

FDIs were further welcome in the processing industries in agriculture and in natural resources exploitation, in retailing distribution, in construction, in the property market. Foreign investors could obtain long term leases for factory and business uses. The emphasis in FDI attraction was one of “welcome” rather than “restrictions.”

In the following, we quantify FDI inflows to Vietnam and compare them to those of the Philippines. I use other statistical concepts to tell a proper story, such as FDI outflows and accumulation of stocks. (Such concepts were explained earlier in my Crossroads column on March 18, 2015, “FDIs to the Philippines and Indonesia compared”).

Also, in order to compare “apples-to-apples”, I use mainly data put together by UNCTAD (United Nations Conference on Trade and Development). Those numbers can, therefore, be checked against that source.

FDI inflows to Vietnam and the Philippines compared. In 2010, FDI inflows into Vietnam amounted to $8 billion. The three years following involved FDI flows as follows: $7.5 billion (in 2011), $8.4 billion (2012), and $8.9 billion (2013).  UNCTAD figures for 2014 are not yet fully known, but Vietnam’s agency monitoring foreign investment reports that FDIs in 2014 amounted to $20.3 billion, the biggest ever in years.

In comparison, the FDI inflows to the Philippines have been much lower than those going to Vietnam: it was $1.07 billion in 2010 (when President Aquino took over the presidency), $2.01 billion (in 2011), $3.2 billion (2012), and $3.86 billion (2013).  Philippine figures for 2014 are just above $6.0 billion.

FDI outflows from Vietnam and the Philippines compared. From 2010 to 2013, the FDI outflows from the Philippines were just slightly ahead of the FDI inflows. This means that there was hardly any net FDI increase in the country if we took into account also the volume of FDI outflows leaving the Philippines during the same period.

In the case of Vietnam, however, FDI outflows were insignificant. Vietnam has been essentially accumulating or building capital after its long period of capital destruction or usage due to war and civil conflict.

In more specific terms, this is how the comparison for the two countries compare in terms of ‘net’ outflows. Philippine FDI outflows were just slightly above FDI inflows, practically erasing the inflows gained during the Aquino government (except in 2013 when the inflows were just slightly above the outflows by $0.22 billion).

Considering that in Vietnam’s case, FDI outflows were practically insignificant, the net FDI inflows over outflows is as follows: $7.1 billion in 2010; $6.57 billion (2011); $7.2 billion (2012); and $7.3 billion (2013). From this dimension, the FDI statistics for Vietnam for the period are all the more impressive.

Stocks of foreign capital investments compared. The UNCTAD comparative data for stocks of foreign investment capital in the country use 1995 as the base. We now compare Vietnam’s FDI stocks versus Philippine FDI stocks since 1995.

In 1995, foreign capital stock installed in Vietnam amounted to $17.68 billion. This is how it built up from year-to-year: $142.49 billion (2010); $159.34 billion (2011); $185.7 billion (2012); and $185.46 billion (2013).  The comparative numbers for the Philippines are as follows: $6.73 billion (1995); $25.9 billion (2010); $25.4 billion (2011); $28.9 billion (2012); and $32.5 billion (2013).

To summarize this, in 1995 (just a few years after Vietnam opened its economy to world FDI), the stock of FDIs were just slightly below that of Philippine FDI stocks (90 percent of Philippine FDIs). The stock of capital in place in Vietnam has slowly built up far ahead of Philippine FDI stocks. In 2010, it was three times that of Philippine FDI stock; in 2011, it was 3.6 times; in 2012, it was 3.8 times, and by 2013, 4.2 times the level of foreign capital.

(To be continued)

Source: http://www.philstar.com/business/2015/04/08/1441356/vietnams-rapid-growth-high-fdi-inflows