Two economies within one country?
VietNamNet Bridge - In the last 30 years, since the Foreign Investment Law took effect in 1987, foreign direct investment (FDI) capital to Vietnam increased from $0.324 in the first year to $24.373 billion in 2016. This has raised concerns about the ‘second economy’ in Vietnam.

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The phrase ‘two economies within one country’ was first heard at recent discussions about the pros and cons of FDI. The concern about ‘side effects’ caused by FDI comes from the increasingly high number of foreign invested enterprises (FIEs) which account for a high proportion in the indexes that measure the health of the national economy.

Some analysts warned that the weak connection between the domestic economic sector and FIEs may lead to the fact that the economy would be split into two independent zones – foreign capital and domestic capital, and foreign capital would hold the control.

Ho Quoc Tuan from Bristol University commented that the strong development of the foreign invested economic sector has not caused the ‘halo effect’, i.e., it does not help Vietnam improve technology and management skills as expected. 

In the last 30 years, since the Foreign Investment Law took effect in 1987, foreign direct investment (FDI) capital to Vietnam increased from $0.324 in the first year to $24.373 billion in 2016. This has raised concerns about the ‘second economy’ in Vietnam.

The failure of the automobile industry and supporting industries is a typical example.

Last year's important economic indicators all show the increasingly important role played by the foreign invested economic sector. 

FDI accounted for 23.4 percent of the total investment capital in society. The high percentage shows Vietnam’s heavy reliance on FDI. In Thailand, in 1988-1993, the period when the country attracted much FDI, the figure was 5 percent only.

As for the industrial production index, FIEs made up 50 percent of total value, while the proportion was very high in oil & gas, electronics & electronic parts, mobile components, animal feed and drinks. The foreign invested economic sector in 2016 also made up 72 percent of total export turnover.

Researchers from Fulbright University say the FDI sector is the best performing growth engine in the Vietnamese economy.

However, the imbalance in the development of the two economic sectors – Vietnamese and foreign invested – has raised concerns. When attracting FDI, Vietnam hopes  foreign investment would also help Vietnamese businesses develop. 

Joint ventures between Vietnamese and foreign investors were hoped to be a ‘glue’ that connected the two economic sectors which is the important factor creating the ‘halo effect’. 

Some research showed that in joint venture enterprises, the process of technology transfer goes more rapidly and productivity is higher.

Will the presence of FIEs make the domestic enterprises smaller? The answer, according Nguyen Mai, chair of the Association of FIEs, is ‘no’. However, it is still necessary to discuss how to take full advantage of foreign capital to develop the economy.


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Kim Chi

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