Expectations on the "happy ending" between FDI and domestic enterprises

In the strategy of attracting new generation FDI, it is necessary to attach importance to the policy of linking FDI enterprises with domestic enterprises. Source: Internet.

Unable to “get married”?

Recently, taking the evidence to compare the connection in the relationship of FDI enterprises and domestic enterprises, representatives of the Chamber of Commerce and Industry of Vietnam (VCCI) used images of a 30 year acquaintance between a FDI “boy” and a Vietnamese enterprise “girl” that are still just at the level of “flirting”, but not “getting married”. Meanwhile, the link between FDI enterprises and domestic enterprises is very important in the context of Vietnam integration being deep to become a strong country for export. Representatives of VCCI also said that one of the goals that should be aimed for is the marriage between two businesses and “give birth” together, from which, domestic enterprises have the opportunity to develop stronger.

Prior to that, emphasis was placed on weak symbiosis and the so-called "predestined relationships" of FDI enterprises and local businesses, said Dr. Vu Tien Loc, Chairman of VCCI, in FDI projects in Vietnam. There are too few joint ventures when about 80% of FDI enterprises in Vietnam are 100% foreign invested enterprises. The proportion of domestic private firms providing goods and services to FDI enterprises is limited. According to the Provincial Competitiveness Index (PCI 2016) survey, only 14% of private enterprises have FDI clients operating in Vietnam, showing signs of improvement over time, but very slowly. From FDI companies, vertical link with local companies is very weak. According to statistics, only 26.6% of FDI inputs are purchased in Vietnam, of which a significant proportion is purchased from other FDI enterprises. FDI enterprises operating in the hi-tech sector tend to import inputs from their country of origin rather than using domestic private suppliers.

It is known that the indicators are directly related to the linkage, the transfer of technology between the FDI sector and domestic enterprises also showed that the relationship has not improved, is very low. Accordingly, Vietnam's technology absorption capacity is ranked No. 93, technology transfer between FDI enterprises and domestic enterprises ranked 89, depth of value chain in Vietnam ranked 106, education after training ranked No. 68. Vietnam must strive to reach the average index of 50 or lower in the coming time by improving the linkage. Thus, in the overall picture of FDI investment, the link between the FDI sector and domestic enterprises clearly has not had the bright colors as expected.

In this regard, Mr. Kim Heung Soo, President of the Association of Korean Businesses in Vietnam, said that the fact is that the majority of local businesses in Vietnam still cannot produce auxiliary products to meet the requirements of FDI enterprises. Therefore, the Government of Vietnam and FDI enterprises should make every effort to improve this situation.

More about the cooperation in the field of supporting industries, the representative of the Korean Business Association said that Vietnam is making great efforts to develop the supporting industry of Vietnam and nurture manufacturing SMEs. The memorandum discussed at the Vietnam-South Korea Summit in March this year also emphasized cooperation in this area.

Appreciate connection policy

In the coming time, many challenges are waiting for domestic enterprises to penetrate deeply into the global supply chain of large FDI companies.

Representatives of the Trade and Investment Working Group (VBF) commented that the major global markets for Vietnamese products have laws and standards that could pose a major challenge for businesses of Vietnam. In many countries, commercial buyers impose strict requirements on suppliers for working conditions in the factory, the impact of production on the environment, and even compliance with anti-corruption laws.

From the constraints leading to the lack of close connection between FDI and domestic enterprises, this relationship is a real affair and "fruitful", bringing many benefits to both parties. The opinion that in the strategy of attracting new FDI generation, it is necessary to attach importance to the policy of connecting FDI enterprises with domestic enterprises in order to overcome the spillover effects of FDI enterprises. At the same time, the supporting industry development policy is the foundation that needs to be further strengthened, thus enabling domestic enterprises to have enough potential to participate in the global value supply chain.

Regarding the fact that the number of FDI enterprises with 100% foreign capital makes up the majority of FDI enterprises, Prof. Nguyen Mai suggested: For some projects that Vietnamese enterprises have the capacity to enter into joint ventures with foreign investors, then encouraging them to implement the form of "joint venture enterprises" to pass on mutually beneficial cooperation in order to transfer technology, business management skills and raise the skill level of Vietnamese workers, engineers and staff.

On the side of enterprises, Minister of Planning and Investment Nguyen Chi Dung said that to strengthen the link between domestic and FDI enterprises, foreign enterprises should actively create conditions for Vietnamese enterprises to have an association step by step to participate in the value chain. With domestic enterprises, Minister Nguyen Chi Dung stressed that domestic enterprises must make efforts to renovate modern management thinking, access advanced technology, improve skills and labor skills, and increase capacity of production, product quality and competitiveness. "Along with enterprises, the Government must have practical measures to facilitate the linkage between domestic and FDI enterprises in an effective and accessible way," said Minister Nguyen Chi Dung.

Strong domestic supplier base is a competitive asset in the promotion of investment and is an important factor for maintaining FDI as well as improving value added in the country. Starting from this point of view, in order to strengthen linkages from FDI, experts from the World Bank have recommended not using a 100% localization rate as a target for linking FDI enterprises in Vietnam or localization policy, but instead a policy of good practice. Accordingly, it is necessary to base on the market and find ways to support FDI to maximize the economic efficiency of domestic production with a win-win scenario, and to clarify the role of the Ministry of Planning and Investment, Ministry of Industry and Trade, and other stakeholders in implementing the program of connecting FDI enterprises comprehensively.