Tendency to attract foreign investment in the field of processing and manufacturing development in the IZs and EZs
Over recent years, there has been progress in attracting foreign investment in the field of processing and manufacturing to the IZs and EZs, in terms both of investment capital and number of projects.
In 2006, foreign investment in the field of processing and manufacturing in the IZs and EZs only accounted for about $1.8 billion USD. However, by 2010, this figure rose to $4 billion USD, increasing over two times as much as the amount achieved in 2006. In addition, in the period 2010-2014 foreign investment in the processing and manufacturing sector on average accounted for approximately $7.7 billion USD per year, about four times higher than the foreign investment in 2006. In this period, foreign investment had a tendency to increase the each year. However, in 2014 foreign investment leveled off compared with previous years at $11 billion USD. The plateau in foreign investment growth over the past two years was caused by weakness in the investment flow into processing and manufacturing industries, which was caused by the economic slowdown in Europe and China.
In 2006, the IZs and EZs in Vietnam attracted 305 foreign investment projects in the field of processing and manufacturing. By 2014, the total number of investment projects reached 704, an increase of two times over the 2006 total. During the 2010-2014 period, the number of foreign investment projects attracted every year was 494 projects per year on average, about 62% higher than the 2006 total.
The primary accomplishment of IZs and EZs in recent years is in attracting capital in relatively big investment projects in the processing and manufacturing sector. This demonstrates the attractiveness of the investment environment of Vietnam in general, and of IZs and EZs in particular. This creates the foundation from which to promote and attract further investment capital into the processing and manufacturing sector in coming years.
Second, there has been growth in the size and the number of foreign investment projects in the processing and manufacturing sector, which accounts for about 70-80% of all foreign investment projects in the IZs and EZs. The scale of average investment capital of foreign investment projects in the processing and manufacturing sector has reached a considerable level (over $10 million USD per project). Specifically, the size of the average investment in 2013 was about $17 million USD per project, while in 2014 it reached $15 million USD per project.
Third, in recent years, the IZs and EZs have attracted a number of large-scale processing and manufacturing projects such as: the Samsung (South Korea) investments in Bac Ninh, Thai Nguyen, and Ho Chi Minh City with a total investment capital of $14.3 billion USD; and the steel production project of Formosa in Vung Ang Economic Zone, Ha Tinh Province with a capital investment of $10 billion USD. In addition to these, there are processing and manufacturing projects using high technology such as the automotive transmission wire project of the Robert Bosch (Germany) with investment capital of $230 million USD in Long Thanh Industrial Zone, Dong Nai Province, and the investment project of Doosan (Korea) in Dung Quat Economic Zone, Quang Ngai Province. These large-scale and high technology projects act as a driving force to the development of the processing and manufacturing sector in the IZs and EZs.
Limitations and Their Causes
First, the foreign investment projects in the processing and manufacturing sector in the IZs and EZs, as a whole, are not focused in a particular industry and have poor linkages. Therefore, there are no large-scale production clusters that would help increase the competitiveness of the processing and manufacturing sector of Vietnam.
Second, foreign investment projects in the processing and manufacturing sector mainly focus on assembly of imported components; they utilize few local raw materials, semifinal products or skilled workers. This results in low added value and limited spillover effects.
Third, except for a few high-profile projects using high technology, the majority of foreign investment projects utilize only medium or low technology, resulting in hardly any transfer of technology.
The above mentioned limitations are mainly due to 3 reasons: (i) the objective of the majority of foreign investors is to exploit the low cost of labor, energy, and natural resources of Vietnam; therefore, (ii) Vietnam has not attracted many investors having source technology as well as the large industrial manufacturers in the world; and, (iii) local investors have not been active yet in cooperating and developing ties with foreign investors to further the development of processing and manufacturing.
Review of strengths, challenges and solutions for promoting IZs and EZs as key area for processing and manufacturing
Review of strengths and challenges
First, Vietnam views IZs and EZs as long-term development strategies for Vietnam. The Party and the State are committed to their success and further development. Prime Ministerial Decision No. 1716/QD-TTg dated 11/13/2012 announced the establishment of a Steering Committee on IZ and EZ Development to remove any policy and process difficulties and obstacles in a timely manner. The Government also devotes significant resources to investing and improving the necessary technical infrastructure in the IZs and EZs over recent years. At present, the basic technical infrastructure of the IZs and EZs are available to attract investment and develop production.
Second, IZs and EZs have the following advantages in attracting investment into the processing and manufacturing sector:
- Investment incentives: According to Law on Investment (2014), IZs and EZs are "investment-encouraged areas." As regulated in the Law on Corporate Income Tax, investors in IZs and EZs receive corporate income tax incentives, particularly, investors in IZs receive two years of corporate income tax exemption and 50% of corporate income tax reduction in the following four years (except IZs in favorable socio-economic areas); investors in EZs receive four years of corporate income tax exemption, 50% of corporate income tax reduction in the following nine years and a 10% corporate income tax rate in 15 years (these are the highest investment incentives offered). In addition to this, investors also receive incentives on import tax on fixed assets investments for projects located in IZs and EZs, and other incentives such as reduced land rent fees and development investment credits.
- Infrastructure facilities: all coastal EZs are located in areas favorable to developing production, providing services and attracting investment. EZs are established in areas where important infrastructure works can be comparatively easily constructed for large scale production.
- IZs and EZs are equipped with comprehensive technical infrastructure and have available land for investors to implement their investment projects immediately. This reflects the understanding that processing and manufacturing projects usually have long payback period and large initial investment capital. Shortening factory construction time saves costs and reduces risk, both of which are important to investors.
- Market opportunities and investment attraction:
Vietnam has been widely and deeply integrating into the world economy through multilateral and bilateral free trade agreements and international trade institutions such as: the WTO, ASEAN, and BTAs with Korea and Japan. Recently, trade ministers of 12 member countries agreed to a draft of the TTP. Through implementation of such agreements, enterprises in Vietnam have had many opportunities to expand their market to partner countries. This has already created new investment opportunities in Vietnam for foreign companies. The fact that many countries among the twelve TPP members have highly developed processing and manufacturing sectors and source technologies such as the USA, Japan, Australia means that there are even stronger incentives to promote investment capital flows from these countries into the processing and manufacturing sector in Vietnam.
With regard to Japan, a leading nation in processing, manufacturing and supporting industries, Vietnam established a framework for comprehensive economic cooperation. Vietnam issued Prime Ministerial Decision No. 1043/QD-TTg dated 7/1/2013 on industrialization strategy of Vietnam within the Vietnam – Japan cooperation framework toward 2020, with a vision to 2030.
First, to meet the requirements of large-scale processing and manufacturing production the technical infrastructure of IZs and EZs must be continually improved . Unfortunately, state budgets are limited and due to the long payback period of technical infrastructure capital it has been difficult to mobilize private investment capital sources.
Second, to develop a strong local processing and manufacturing sector it is necessary to rely on the investment resources of large international industrial corporations. However, differences in culture and business philosophy remain barriers, and the competition among developing countries to attract such investments remains intense.
Third, the development of the processing and manufacturing sector requires the existence of support industries to supply necessary spare parts and materials. However, Vietnam's existing support industries are not yet of high quality. This is one of the main difficulties that Vietnam should overcome if she wants to develop a strong and comprehensive processing and manufacturing sector.
Fourth, industrial development creates environment protection challenges such as waste treatment from production and natural resource exploitation to supply raw material for production. Environmental protection requires investment on technology and capital. Therefore, for the sustainable development of the processing and manufacturing sector it is necessary for Vietnam to invest in waste treatment technologies, which requires mobilizing scarce capital.
Last, the processing and manufacturing sector requires skilled and responsible workers. However, according to an 2012 assessment of the World Bank, the quality index of human resources of Vietnam is only 3.79 on a 10 point scale, ranking 11th among twelve participating Asia countries. Therefore, improvement of human resources is a necessary condition for Vietnam to develop its processing and manufacturing industry.
Priorities and solutions
First, promote IZs and Ezs as key area for processing and manufacturing by concentrating on key and competitive industries such as: mechanical manufacturing, electronics and electrics, shipbuilding...
Second, form clusters of large-scale and specialized production projects, fostering close linkages among tenants in the clusters in some coastal IZs and Ezs located in favorable geographical location.
Third, develop the key processing and manufacturing zones in IZs and EZs in ways consistent with high levels of environment protection, socio-economic infrastructure development for sustainable development, and move toward creating a foundation for the establishment of an industrial city model.
First, continue to promote strong push to attract foreign investment. In particular, focus on attracting large industrial corporations having source technology in processing and manufacturing. For investment projects with large spillover effects, it is necessary to apply strategies to enhance investment incentives as those adopted by such countries as Malaysia, Singapore...
Second, perfect investment incentives for the development of supporting industries and promote cooperation between domestic supporting industry enterprises and foreign-invested processing and manufacturing enterprises to participate in global value chains.
Third, continue to increase state budget allocations and mobilize other funds to complete comprehensively the technical infrastructure of the coastal economic zones to facilitate investment in the processing and manufacturing sector, especially in the coastal economic zones which are being invested with large-scale and dynamic projects.
Renovate investment environment and State management mechanisms in some coastal EZs with superior investment incentives and convenient public services to attract investment to develop a number of key processing and manufacturing zones with regional linkages.
Fourth, focus on developing workers' technical skills as well as advanced skills based on strengthening the links between educational institutions and enterprises to transform the current competitive advantage from low-skill/low-cost labor into a competitive advantage based on high-tech workers, at appropriate cost.