Revisiting Exports and Foreign Direct Investment in Vietnam

• Author: Nguyen Anh DUONG,Vo Tri THANH
• Date: 01 June 2011
• Published date: 01 June 2011
• DOI: http://doi.org/10.1111/j.1748-3131.2011.01187.x

Revisiting Exports and Foreign Direct

Investment in Vietnam

Vo Tri THANH† and Nguyen Anh DUONG

Central Institute for Economic Management

Since 1986, Vietnam has undertaken various reform measures in the trade and foreign investment

area. This paper finds significant contributions of world trade, and competitiveness and liberaliza-

tion effects to Vietnam’sexpor t growth overthe period 1997–2008. Vietnam’s exports became more

competitive and better complementedthe impor t demand of Vietnam’str ade partners.In addition,

dynamic comparative advantage became evident in many products, but significant room remains

for improving export competitiveness. Foreign direct investment (FDI) inflows also increased and

helped stimulate Vietnam’s exports. FDI inflows have increased in both the short- and long-term,

yet are only of a limited magnitude. This necessitates more effective measures to enhance the

linkages between FDI and domestic enterprises.aepr_1187112..131

Key words: CMS decomposition, export competitiveness, FDI policy reform,spillover impact,

trade liberalization

JEL codes: F14, F15, F21

1. Introduction

The Doi Moi (Renovation) in 1986 started a period of more fundamental changes in

Vietnam, particularly in resource allocation,tr ade restrictions,and macroeconomic man-

agement. The Sixth Party Congress in 1986 officially rejected the rationale and legitimacy

of the central planning model, and declared Vietnam’s move toward a somewhat mixed

market economy, with an emphasis on broadening opportunities and choices for every-

one. Thus, the Doi Moi started Vietnam’s transformation from a centrally planned

economy into a market one with a socialist orientation.

In such a process, together with establishing and strengthening market institutions

and promoting private sector development, Vietnam has embarked on proactive inter-

national economic integration. Specifically, the country has enhanced economic

cooperation with all countries and territories, particularly the major economies. Trade in

general and exports in particular have been expanded, while foreign investment tended

to increase and helped fill the domestic savings–investment gap and the technology gap

of an economy at a low development level. The paces of export and foreign investment

expansion and, accordingly, economic growth, were generally fast in times of deepening

economic integration.

†Correspondence:Vo TriThanh, Central Institute for Economic Management, 68 Phan Dinh Phung

Street, Ba Dinh District, Ha Noi 10000, Vietnam. Email: votrithanh@mpi.gov.vn; votrithanh98@

yahoo.com

doi: 10.1111/j.1748-3131.2011.01187.x Asian Economic Policy Review (2011) 6, 112–131

© 2011 The Authors

Asian Economic Policy Review © 2011 Japan Center for Economic Research

112

This paper attempts to revisit the roles of exports and foreign direct investment (FDI)

in Vietnam’s new development context. In doing so, the paper starts by reviewing the

reforms in trade and foreign investment policies. The analysis of Vietnam’s export com-

petitiveness follows using both trade indicators and trade decompositions.The paper then

investigates the importance of FDI in light of the spillover effect on Vietnam’s enterprises.

On that basis, the paper draws some conclusions and identifies measures through which

the contributions of FDI and exports to Vietnam’s economy can be improved.

The remainder of the paper is structured as follows. Section 2 reviews the reforms

Vietnam has made in the trade and foreign investment area over the period 1986–2009.

Section 3 discusses Vietnam’s export performance over the past decades, as well as

Vietnam’s export competitiveness using different trade indicators and a decomposition

via the constant-market-share (CMS) approach. Section 4 then analyzes the link between

FDI and exports. Section 5, finally, summarizes the key findings in the previous sections

and recommends key policy measures to enhance the rolesof FDIand expor ts inVietnam.

2. Vietnam’s Reforms in Trade and Foreign Investment, 1986–2009

Despite the ideological change toward Vietnam’s economic model in 1986, bold and

effective reform measures only began a couple of years later. During 1988 and in early

1989, Vietnam adopted a radical and comprehensive reform package. Key measures were

undertaken toward domestic reform, seeking to enhance competition and the freedomof

choice for all economic units and measures. The state-owned enterprises (SOEs) were

permitted to have autonomy in production and business activities,independent account-

ing, and to use revenues to finance expenditures, with no loss of compensation from the

State. In late 1987, Vietnam abolished controls on domestic trade and enhanced the

autonomy of SOEs. Since 1989, structural reforms – such as SOE reform,banking reform,

and the promotion of private sector development – have also been implemented. Until

1996, economic reform focused mainly on agricultural reform, price reform, exchange

rate reform (a drastic devaluation of the Vietnamese dong and the unification of exchange

rates), budget reform, SOE reform, and private sector development. The wide range of

areas that underwent reform and the numerous measures undertaken in each area show-

cased the comprehensiveness of Vietnam’s reform in this period.

Despite slowing down in 1997–1999 due to impacts of the Asian economic-financial

crisis, economic policy reforms got back on track since 2000, with an acceleration of SOE

reform and private sector development. The legal framework for the market economyhas

been improved further. The Enterprise Law in 2000 enforces the freedom to do business,

while the later version in 2005 regulates enterprises of all ownership forms in Vietnam.

Similarly,the Investment Law, which came into effect in July 2006,marked a major step to

improving the investment environment, aiming at creating a more level playing field for

all. The regulations on production factor markets have been gradually improved. The

Labor Code also went through various amendments thereby enhancing the flexibility of

the labor market, promoting production, and improving the people’s lives. Similarly, the

Vo Tri Thanh and Nguyen Anh Duong Revisiting Exports and FDI in Vietnam

© 2011 The Authors

Asian Economic Policy Review © 2011 Japan Center for Economic Research 113