Doing Business

An brief look at the FDI context in Hanoi

Trường Lăng

October 18, 2022

Doing Business

An brief look at the FDI context in Hanoi

Trường Lăng

October 18, 2022

Snapshot of Hanoi 

Hanoi is one of the two largest economic hubs in Vietnam, the other being Ho Chi Minh City. In 2021, Hanoi attracted over 201,000 businesses of all economic sectors operating in the city, accounting for 23.7 percent of the total number of operating enterprises in the country.

What makes Hanoi such an attractive market for enterprises can be attributed to three major factors: 1. Abundance of young, tech savvy, and highly skilled workers; 2. High concentration of middle class/consumers with high purchasing power; 3. Located near China, and surrounded by industrial cities such as Quảng Ninh, Hải Dương, and Hải Phòng. The combination of these factors create a suitable environment for industries related to tech, retail, service, real estate, manufacturing, to name a few.

FDI in historical context 

Hanoi has always been in the top 3 provinces attracting FDI in Vietnam in the 2016 – 2022 period (except for 2017), showing Hanoi’s attractiveness to foreign investors. FDI into Hanoi is mainly in the fields of trade – services and industry – construction.

Total number of project and total registered FDI capital  in top 10 provinces attracting FDI (cumulative in May 2022)

In the 2016 – 2019 period, FDI in Hanoi experienced a strong growth in both the number of registered projects and registered capital. The average CAGR in this period reached 31.9% and exploded in 2018 and 2019 with the registered capital reaching 7519.31 and 8454.69, respectively. In three years, from 2016 to 2018, Hanoi attracted roughly $14 billion of FDI, which is 2.25 times the FDI in the 2011-2015 period.

The strong growth during this period is explained by the emergence of large-scale production projects. Some high profile projects in this period include: Beerco’s $1 billion capital investment in Beverage Vietnam Co.Ltd; 2 projects by Nidec Group in Hoa Lac Hi-tech Park worth $400 million; Meiko Electronics Co.Ltd raised $200 million worth of capital; Terumo Vietnam Co.Ltd raised its capital by $133 million.

Total number of projects and registered FDI capital (million USD) in 2016-2022

Since 2020, registered FDI capital has decreased sharply due to the impact of the Covid-19 pandemic, but is showing signs of good recovery in 2022. In the first 5 months of 2022, Hanoi recorded $691.18 million in registered capital through 322 projects (equivalent to 45.34% of total registered capital in 2021). Experts expect that in 2022, Hanoi will continue to have a good recovery in FDI attraction.

The most notable project recently is Samsung’s $200 million R&D center. This will be the R&D center for the whole region, enhancing the role and position of Vietnam in the regional value chain of this MNC.

Contribution of FDI to the development of the city

According to Mr. Nguyen Duc Chung (former Chairman of Hanoi), FDI has had an important role in promoting economic growth, increasing total social investment and GDP growth, and increasing export value. These impacts create spillover effects in technology development, the level and capacity of production and management for domestic enterprises. In other words, FDI is the locomotive and the great driving force behind the economic development of Hanoi.

FDI projects have contributed greatly to the city’s budget. Budget revenue has increased steadily over the years, accounting for 12% – 13% of the city’s total revenue (data as of 2016).

Furthermore, FDI is an important channel for attracting capital for social investment. FDI capital accounts for a significant proportion (about 10-15% on average) in total social investment. This helps maintain the city’s high GRDP growth over the years (an average of 7.11%). 

Increased social investment from FDI has had a big contribution to Hanoi’s economic restructuring in recent years. The focus has shifted towards international standard services, the development of manufacturing technology, energy saving technology, and other high value-added products in the global value chain.

Regarding the industry sector, since 2006, FDI’s industry sector has surpassed state-owned enterprises and private enterprises as the leader in production value of the whole industry sector. By the end of 2010, the spread among Hanoi’s three industrial sectors: FDI, private enterprise, and state enterprise were 43.6%, 33.6%, and 22.8% respectively. In 2016, the respective figures are 45.5%, 43.8% and 10.7%.

FDI enterprises also contribute to the formation of a number of key industries of the city, such as electronics and computers, transportation vehicles, motor vehicles, electrical equipment, machinery and equipment, metal products, food and beverages, textiles…

Existing problems with FDI in Hanoi 

Scale of capital investment in FDI projects is small, capital investment from foreign investors is low 

In reality, the amount of foreign capital being brought in is limited because these investors can use land mortgages to borrow money from Vietnamese banks, and use the capital from houses and apartments buyers. They collect domestic currency and transfer abroad in foreign currency, increasing the trade deficit. This is a form of taking advantage of the host country’s currency, also known as “foreign projects, domestic funding”. 

Aside from investors and enterprises that strictly comply with regulations, some foreign investors register investment projects but do not implement them, remove their business addresses, have no business information, or any party to act as legal representatives for them in Vietnam. There are also a few cases of investors fleeing, enterprises do not operate at the registered location, do not carry out tax registration procedures, etc., resulting in a low percentage of contributed capital in actuality.

A large portion of enterprises operate inefficiently, or have tax liability; while some showing signs of transfer pricing

Through the audit and inspection process, the City Tax Department showed that aside from FDI enterprises incurring real loss, there are also enterprises doing dishonest declarations, leading to “false losses, real profits”. 

According to statistics, enterprises with continuous losses for many years are mainly concentrated in the following industries: production of spare parts for automobiles and motorcycles (including mechanical and electronic products…); manufacturing, assembling, processing of electronic goods; manufacturing and constructing of steel structures, among others. 

In fact, some enterprises, despite continuous losses for many years, are still able to increase their investment capital and expand production. This phenomenon allows the regulator to judge the loss statements of these enterprises as dishonest.

The number of high-tech projects capable of bringing added value accounts for only a small percentage

Many investment projects are for simple production stages, with old machinery and equipment to take advantage of cheap labor, abundant natural resources and domestic capital. The competitive advantage of low cost labor and many preferential investment policies have attracted large companies and corporations focusing mainly on assembly activities in the global value chains. Even though this has created a large growth in employment and exports, it has brought limited benefits for domestic enterprises, and has done little to connect domestic enterprises to the global value chains.

The collaboration between FDI enterprises and domestic enterprises is still limited 

Because of the limited collaboration, the impact on spillover, sharing and technology transfer has not been as expected. The main reason behind this is domestic enterprises being unable to meet international standards. This is caused by a lack of systematic information on domestic suppliers and supporting industries, as well as difficulties in gaining sufficient capital, experience, information, and marketing skills by domestic enterprises.

Risks to the environment

According to the Vietnam Environment Administration, in 28 northern provinces in 2017, 2018 and 2019, the rate of FDI enterprises violating regulations on environmental protection has been on the rise. Specifically, in 2017, 12 out of 27 enterprises had environmental violations, accounting for 44.5%; In 2018, there were 14 out of 25, accounting for 56% and in 2019 there were 13 out of 19, accounting for 68%.

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