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There were the previous researches that confirmed the linkage between foreign direct investment (FDI), capital formation (GFCF), trade openness (OPEN) and economic growth (GDP) tends to be positive. Some reasons of assertions are:
First, FDI supplies long-term capital with new technologies, managerial know-how and marketing capabilities which, in turn, increase economic growth by diffusing technologies, operating employments, augmentting managerial skills, and fostering innovations (Asiedu, 2002). FDI pushes economic growth in a host countries by increasing volume as well as efficiency of investment (Romer, 1986; Lucas, 1988; Baro & Salai-I-Martin, 1995).
Second, the level of GFCF is likely to influence FDI and economic growth as well. Neo-classical growth model opine that in a capital shortage economy, the marginal productivity of investment is increased in the short-run when additional capital is injected in the form of long-term investment like FDI, and this increased productivity influences economic growth in the long-run (Romer, 1986).
Third, the level of OPEN is likely to affect the flows of foreign capital in terms of risk-return relationship. Countries that reform institution and eliminate tariff and non-tariff barriers will create the advantages for business activities of foreign investors (Coase 1937, Williamson 1975). Liberal trade regime is likely to provide an appropriate environment conducive to learning that must go along with the human capital and new technology infused by FDI (Balasubramanyam et al., 1996). The endogenous growth theories also emphasize that a more open trade policy framework encourages allocative efficiency of investment by reorienting factors of production to sectors that have comparative advantages in trade; thereby promotes economic growth (Solow, 1956; Balasubramanyam et al., 1996).
From 1986, Vietnam opened her economy to attract foreign invest in order to accelerate economic growth. Vietnam Government also lifted restrictions on capital and profit repatriation gradually and opened up industrial sector for foreigners to participate investment. The government also regulated the preferred policies such as import duty exemptions for export processing industries, tax holiday schemes for undertaking investment in priority sectors and low development areas, etc… Therefore, Vietnam attracted a big amount of foreign invest capital. From 1986 to 2019, Vietnam attracted US$161.098 billion worth of FDI with the annual growth rate is about 6.9%. About 80 countries and territories invested in Vietnam, with Asian countries accounting for almost 70% of the projects and European countries claiming 20%. FDI at present accounts for 50% of Vietnam’s industrial output and 70% of her manufactured export sales. In some industries, the ratio of export revenue of foreign players is as high as 100%. Cell phones set an example of that.
But, there are the weaknesses that the Government and the economy should admit such as:
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Investment in transport infrastructure in Vietnam does not match the pace of industrial development and urbanization. The urban transport system relies heavily on roads but they are frequently congested, especially in industrial zones and ports. Meanwhile, airways and waterways are lack of connection and aren’t really developed. Therefore, the logistic fee in Vietnam is the highest in the world, equivalent to nearly 21% of the GDP. In this respect, Vietnam has lower competiveness against other countries in the region.
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The second bottleneck is supporting industries. In the beginning, Vietnam did not pay due attention to supporting industries development but rushed to heavy industries. As a result, the country only contributes to assembly, the phase with the lowest added value in the value chain of FDI enterprises. Vietnam don’t have enough to be able to join the global supply chain. The rate of local suppliers of input materials for FDI enterprises is small and tends to decline. As case of Samsung, though Samsung contributes a large share to Vietnam’s GDP, the income of Vietnam gains from the group’s smartphone production is very low. The smartphone are made completely in Vietnam, but Vietnam only supplies cases and connection cables together labor while the remaining parts are provided by other FDI enterprises.