Đề tài Research the foreign direct investment of South Korea to Vietnam in recent years
DA NANG UNIVERSITY OF ECONOMICS
FACULTY OF INTERNATIONAL BUSINESS
SPECIAL TOPIC
RESEARCH THE FOREIGN DIRECT INVESTMENT OF SOUTH KOREA
TO VIETNAM IN RECENT YEARS
STUDENT: HỒ THỊ VUI
CLASS: 42K01.5
`
LECTURER: NGUYỄN ANH TUẤN
DA NANG 2019
Contents
INTRODUCTION .................................................................................................................................iii
1. Definition : ..................................................................................................................................1
2. Forms of FDI................................................................................................................................1
3. Factors promoting foreign direct investment.............................................................................3
4. Benefits of attracting FDI............................................................................................................4
1. Scale of FDI investment in Vietnam............................................................................................6
2. Investment structure by industry ...............................................................................................7
3. Investment structure by economic region..................................................................................8
4. Investment structure by investment partners............................................................................9
CHAPTER III SITUATION OF KOREAN DIRECT INVESTMENT IN VIETNAM .........................................11
1. Overview of Korean FDI............................................................................................................11
2. Economic relationship between Vietnam and Korea ...............................................................11
3. Scale of Korea FDI investment in Vietnam................................................................................12
5. The Impact of Korea’s FDI on the Vietnamese Economy..........................................................18
CHAPTER IV Proposals to attract more FDI capital into Vietnam .....................................................20
1. Experiences from other countries ............................................................................................20
References............................................................................................................................................25
i
LIST OF TABLES
ii
RESEARCH THE FOREIGN DIRECT INVESTMENT OF SOUTH KOREA
TO VIETNAM IN RECENT YEARS
INTRODUCTION
1. Necessity of the topic
Foreign direct investment is now taking place on a global scale with increasing
volume and pace of rotation. In addition to promoting domestic resources, taking
advantage of foreign direct investment is considered as a smart to shorten the time of
initial capital accumulation, creating a solid premise for economic development,
especially for developing countries. Therefore, FDI is considered as the "golden key"
to open the door of prosperity for nations. In recent years, the number of countries
investing in Vietnam has been increasing, especially Korea. This in addition to
creating favorable conditions for the country's development such as creating jobs for
workers, increasing investment capital for facilities ... also causes many disadvantages
and damages to the economy in the long term. Therefore, the purpose of the study is to
find out the impact foreign direct investment into Vietnam.
2. Research objectives:
To research the Korean direct investment activities in Vietnam in the recent years
3. Research tasks:
Firstly, clarify and deepen the importance of FDI in Vietnam.
Secondly, clearly state the status and impact of Korea's FDI in Vietnam.
Thirdly, propose some solutions to effectively use FDI capital and attract foreign
capital.
4. Research object:
The situation of Korean FDI inflows into Vietnam.
Space: from the perspective of the state
Time: study with data series from 2010-2018
5. Research Methods :
iii
Methods of data collection: journals, statistics, surveys, ..
Statistical methods, statistical analysis
6. Topic structure:
In addition to the preamble, table of contents, list of references, there are also the
following chapters:
CHAPTER 1: OVERVIEW
CHAPTER 2: OVERVIEW OF THE FOREIGN DIRECT INVESTMENT FLOWS
INTO VIETNAM
CHAPTER 3: SITUATION OF SOUTH KOREAN FOREIGN DIRECT
INVESTMENT INTO VIETNAM
CHAPTER 4: PROPOSALS TO ATTRACT MORE FDI CAPPITAL TO VIETNAM
iv
CHAPTER I OVERVIEW ABOUT FDI
1. Definition :
The World Trade Organization gives the following definition of FDI:
Foreign direct investment (FDI) occurs when an investor from one country (the host
country) acquires an asset in another country (the country that attracts the investment)
along with the right to manage that asset. The management aspect is what
distinguishes FDI from other financial instruments. In most cases, both the investor
and the property he or she manages overseas are business entities. In such cases, the
investor is often referred to as a "parent company" and the assets are called
"subsidiaries" or "branch companies".
=>Foreign direct investment is a form of long-term investment by an individual or
company of one country in another country by establishing a business or production
establishment. The foreign individual or company will take control of this business.
2. Forms of FDI
2.1. Classified by investment nature
a. Investment in operating facilities
Operating facilities investment is a form of FDI in which the parent company invests
in procurement and establishes new business facilities in the host country. This form
increases the volume of investment.
b. Merger and acquisition
Mergers and acquisitions are forms of FDI in which two or more FDI enterprises are
merging with one another or one of these enterprises (either operating in the host
country or abroad) acquires one FDI enterprises in the host country. This form does
not necessarily lead to an increase in the volume of investment.
2.2. Classified by the nature of capital flows
a. Stock capital
Foreign investors may purchase shares or corporate bonds issued by a domestic
company at a level large enough to have the right to participate in the company's
management decisions.
b. Reinvestment capital
FDI enterprises can use profits earned from past business activities to make additional
investments.
c. Internal debt transactions
Between branches or subsidiaries in the same multinational company may lend to each
other to invest or buy shares, corporate bonds of each other.
2.3. Divided by the motive of the investor
a. Capital to search resources
These are capital flows aimed at exploiting cheap and abundant natural resources in
the host country, exploiting labor resources that may be low in skills but low in price
or exploiting abundant skilled labor resources. This type of capital also aims to exploit
brand-name assets in receiving countries (such as famous tourist destinations). It also
aims to exploit the intellectual property of the receiving country. In addition, this form
of capital also aims to scramble for strategic resources to avoid falling into the hands
of competitors.
b. Capital to search efficiency
This is a source of capital to take advantage of low input costs in receiving countries
such as cheap raw material prices, cheap labor costs, prices of production factors such
as electricity, water, communication costs, transportation, cheap business premises,
preferential tax rates, legal conditions, etc.
c. Capital to search the market
This is a form of investment to expand the market or keep the market from being lost
by competitors. In addition, this form of investment also aims to take advantage of
economic cooperation agreements between host countries with other countries and
regions, taking the receiving countries as a springboard to penetrate into regional and
global markets. .
3. Factors promoting foreign direct investment
2
3.1. Differences in marginal productivity of capital among countries
The marginal difference in productivity (the number of extra outputs a manufacturer
can produce as a result of an additional unit of production factor) of capital between
countries. An excess country often has lower marginal productivity. A country that
lacks capital often has higher marginal productivity. This situation will lead to the
movement of capital flows from the surplus to scarce places to maximize profits.
Because the production costs of surplus countries are often higher than those of capital
shortage countries. However, this does not mean that all activities with high marginal
productivity are invested in production by enterprises but also important activities,
which are vital for enterprises to produce whether that activity gives low marginal
productivity.
3.2. Product cycle
For most businesses involved in international business, the life cycle of these products
consists of three main stages: the new product stage; maturity of products;
standardized product stage
3.3. Special advantages of multinational companies
Multinational companies have unique advantages (such as basic competencies) that
allow them to overcome cost constraints abroad so they are willing to invest directly
abroad. When choosing investment locations, multinational companies will choose
where the conditions (labor, land, politics) allow them to exert the aforementioned
specific advantages. Multinational companies often have a great advantage of capital
and technology investing in countries that have available raw materials, cheap labor
costs and often a potential consumer market ... We easily realize the benefits of this.
3.4. Market access and reduced trade conflict
Foreign direct investment is a measure to avoid bilateral trade conflicts. For example,
Japan is often complained by the United States and Western European countries
because Japan has a trade surplus and other countries have trade deficits in bilateral
relations. In response, Japan has increased its direct investment in those markets. They
manufacture and sell cars and computers in the United States and Europe, to reduce
3
exports of these products from Japan. They also invest directly in third countries, and
from there export to North American and European markets.
3.5. Exploiting experts and technology
It is not that FDI only goes from the more developed to the less developed. The
opposite is even stronger. Japan is a country actively investing in the US to exploit a
team of experts in the US. For example, Japanese car companies have opened car
design departments in the US to employ American experts. The same goes for
Japanese computer companies. Not only does Japan invest in the United States, other
industrialized countries have similar policies
3.6. Access to natural resources
For raw materials, many multinational companies seek to invest in countries with
abundant resources. Japan's first major wave of foreign direct investment in the 1950s
was for this purpose.
4. Benefits of attracting FDI
4.1. Supplement to domestic capital
In theories about economic growth, the capital factor is always mentioned. When an
economy wants to grow faster, it needs more capital. If domestic capital is not enough,
the economy will want both foreign capital, including FDI.
4.2. Acquire technology and management know-how
In some cases, capital for growth despite lacking can still be mobilized partly by
"austerity policy". However, technology and management know-how cannot be
achieved by that policy. Attracting FDI from multinational companies will provide a
country with the opportunity to acquire technology and business management know-
how that these companies have accumulated and developed over the years and with
great expenses. However, the dissemination of these technologies and management
know-how to the whole country to attract investment also depends heavily on the
country's absorbing capacity.
4.3. Join the global production network
4
When attracting FDI from multinational companies, not only enterprises with
investment capital from multinational companies, but even other domestic enterprises
having business relations with such enterprises will also participate too. regional labor
division process. Therefore, the country attracting investment will have the
opportunity to join the global production network to facilitate exports.
4.4. Increase the number of jobs and labor training
Because one of the purposes of FDI is to exploit the conditions to achieve low
production costs, foreign-invested enterprises will employ many local workers. An
increase in the income of a part of the local population will contribute positively to
local economic growth. In the process of hiring, training of occupational skills, which
in many cases is new and progressive in developing countries that attract FDI, will be
provided by enterprises. This creates a skilled labor force for the country to attract
FDI. Not only ordinary workers, but also local professionals also have the opportunity
to work and be fostered professionally in foreign-invested enterprises.
4.5. Large budget revenue
For many developing countries, or for many localities, taxes paid by foreign-invested
enterprises are an important source of budget revenue.
5
CHAPTER II
OVERVIEW OF FOREIGN DIRECT INVESTMENT
FLOWS INTO VIETNAM
If Vietnam wants to achieve its goals of industrialization and modernization
(industrialization and modernization), the most important issue is to mobilize and use
foreign direct investment effectively. In recent years, the Government of Vietnam has
always attached great importance to attracting investment from abroad. The
Government continuously improves the investment environment, facilitating domestic
and foreign enterprises, in which attaching special importance to the implementation
of the law-making program.
1. Scale of FDI investment in Vietnam
According to data of Foreign Investment Agency, from 1988 to October 20, 2017, 63
provinces and cities of our country have received 24,397 FDI projects of 128 countries
and territories, with registered capital (there are also effectiveness) 312.9 billion USD,
realized capital is 169.05 billion USD.
From 1991 to now, realized FDI has increased rapidly:
- 1991 - 2000 reached 19,462 billion USD, an average of 1.95 billion USD / year.
- 2001 - 2010 reaching 58,497 billion USD, equaling 3 times the previous decade;
on average 5.85 billion USD / year.
- 2011 - 2016 reached 84 billion USD, equaling 4.55 times in the period of 1991
2000 and 1.43 times 10 years earlier; on average 12 billion USD / year.
In 2016, the foreign invested economic sector contributed about 19% of domestic
revenue and 19% of GDP; accounting for over 50% of industrial output value, in
which oil and gas, electronics, smartphones, mobiphone, electronic components,
animal feed, drinks,... Have a much higher proportion; accounting for nearly 72% of
total export turnover of which the main product is manufactured goods with high
added value, trade surplus of about 25% of export turnover of this sector, not only to
6
offset the trade deficit of enterprises in countries but also created a trade surplus of
nearly 3 billion USD.
Foreign direct investment projects licensed in period 1988 - 2018 by Year and Items
Number
projects
1237
of Total registered capital Implementation
capital
(Mill. USD)
19886.8
15598.1
16348
(Mill. USD)
11000.3
11000.1
10046.6
11500
2010
2011
1186
2012
1287
2013
1530
22352.2
21921.7
24115
2014
1843
12500
2015
2120
14500
2016
2613
26890.5
37100.6
36368.6
15800
2017
2741
17500
Prel. 2018
3147
19100
Table 1 Vietnam’s foreign direct investment projects in period 2010 - 2018
(General statistics office of Vietnam)
2. Investment structure by industry
Sectors that attract foreign direct investment in Vietnam include agriculture,
manufacturing, real estate, ... The sectors which have been expanded and diversified
over time.
7
Foreign direct investment projects licensed by kinds of economic activity (Accumulation
of projects having effect as of 31/12/2018) by Kinds of economic activity and Items
Number of Total registered capital
projects
27454
491
(Mill. USD)
340849.9
3455.7
TOTAL
Agriculture, forestry and fishing
Mining and quarrying
108
4903.8
Manufacturing
13306
195911.4
Electricity, gas, stream and air conditioning
supply
119
23092.8
Water supply, sewerage, waste management and
remediation activities
70
2658.7
10091.1
12025.6
3603.6
4340.9
1970.9
78078
Construction
1593
734
1884
458
142
142
Accommodation and food service activities
Information and communication
Education and training
Human health and social work activities
Other service activities
Table 2 FDI projects licensed by kinds of economic activity (General statistics
office of Vietnam)
3. Investment structure by economic region
Foreign investment capital invested in Vietnam is unevenly distributed among
provinces. The investment is concentrated in big cities such as Ho Chi Minh City,
Hanoi, Da Nang and provinces with developed economies. This increases the local
budget, concentrates labor resources, creates jobs, and increases income for people.
8
Foreign direct investment projects licensed in 2018 by province by Cities, provincies and
Items
Number
projects
3147
of Total registered capital (Mill.
USD)
WHOLE COUNTRY
Red River Delta
Ha Noi
36368.6
14833.5
7547.8
3135.4
1155
640
Hai Phong
116
Northern midlands and mountain
areas
102
1423.1
North Central area and Central
coastal area
16
364.7
479.8
375.4
487
Da Nang
30
Quang Nam
15
South East
29
Binh Duong
130
48
1481.1
2299.9
6237.6
2588.1
707.7
Dong Nai
Ba Ria - Vung Tau
Ho Chi Minh City
Mekong River Delta
1060
140
92
Table 3 FDI projects licensed in 2018 by cities, provinces and items (General
statistics office of Vietnam)
4. Investment structure by investment partners.
The source of investment capital from countries to Vietnam is more and more
plentiful to the investing countries. Investment countries are mainly developed or
developing strongly in the international market and have close relationship with
Vietnam. Previously, Japan was the country with the largest investment capital in
9
Vietnam, including ODA and FDI. However, in the past decade, South Korea started
to rise and ranked first in terms of total FDI inflows into Vietnam.
Foreign direct investment projects licensed in 2018 by main counterparts by Main counterparts
and Items
Number of projects
Total registered capital (Mill. USD)
Japan
440
8944.5
7320.5
5249.9
3252.6
2531.7
1885
Korea Rep. of
Singapore
1071
228
Hong Kong SAR (China) 174
China. PR
408
42
43
40
88
British Virgin Islands
Australia
609.1
France
590.1
United States
555.4
Table 4 FDI projects licensed in 2018 by main counters (General statistics office of
Vietnam)
10
CHAPTER III
VIETNAM
SITUATION OF KOREAN DIRECT INVESTMENT IN
1. Overview of Korean FDI
Korea has investment projects in all regions of the world with projects in 185
countries and territories. In particular, focusing on China countries (total registered
capital reached 83.3 billion USD including Hong Kong), United States (76.5 billion
USD), Vietnam, Australia, Netherlands, Canada, Indonesia, ...
Regarding investment, Korea invested mainly in manufacturing industry (USD 122
billion of registered capital); mining (85 billion USD); finance and insurance (US $ 41
billion); wholesale and retail (33.7 billion USD); real estate business (26.3 billion
USD); professional, scientific and technical services (20.4 billion USD); construction
(9.9 billion USD); IT (7.1 billion USD); transportation (5.5 billion USD),
accommodation and catering services (5 billion USD), ...
Table 5: Korea's FDI capital flows into the nations
2. Economic relationship between Vietnam and Korea
11
Vietnam and Korea are two Asian countries. The two countries established diplomatic
relations on December 22, 1992. Over the past years, Korea has always ranked in the
top 5 countries with the largest economic relations with Vietnam. The two countries
have set up a Korea-Vietnam Intergovernmental Committee on Economic, Scientific
and Technical Cooperation to promote bilateral economic cooperation. The two sides
signed a number of important agreements such as: Agreement on economic and
scientific cooperation (February, 1993), Agreement on encouragement and protection
of amended investment (September 2003),… In addition, in the past 10 years, South
Korea assessed that Vietnam had basically built a cluster infrastructure to develop a
number of industries along the product chain such as electricity, electronics, textiles ...
Especially when the two countries signed a bilateral trade agreement in May 2015,
the implementation of this agreement will surely lead to more quality and deeper trade
and investment cooperation. For example, Vietnam's commitments on investment
services and activities to Korean companies under VKFTA. In addition, Korea and
ASEAN also signed the first commitment package of the ASEAN-Korea Free Trade
Agreement
Korea's invested enterprises mainly focus on manufacturing industry, employing a lot
of labor and the main exported products. Taking advantage of cheap labor is still the
goal of many foreign investors when investing in Vietnam. Korea's FDI capital flows
into automobile, motorbike, electronics, civil and export products.
South Korean investors invest in Vietnam mainly in the form of 100% foreign
invested capital accounting for about 80%, followed by joint-venture enterprises
accounting for about 15% and the remaining is contractual contracts business
cooperation,...It is possible that Korean investors are very careful when investing in
partners, and they are very careful in choosing business forms, fields of investment,
and locations.
3. Scale of Korea FDI investment in Vietnam
Korean investment projects generally perform well, with large average capital scale,
higher than the national average (over 40 million USD) and mainly focusing on
12
material production. Korean investment projects mainly focus on areas with relatively
good infrastructure. The proportion of dissolved projects in Korea is relatively low
(about 10%), because Korean investors are very careful in conducting surveys and
research before deciding to minimize risks before went into operation.
According to GSouth Korea is currently the largest foreign investor in terms of both
the number of projects and the total investment capital out of the 112 countries and
territories investing in Vietnam. Accumulated to October 2016, the total registered
investment capital of Korea from Vietnam reached over 50 billion USD with 5,593
valid investment projects. Korean FDI enterprises play an important role in Vietnam's
economy by creating jobs for 70,000 workers and contributing about 30% of the total
export value of Vietnam. Korean businesses are doing business methodically in
Vietnam and are considered as serious, highly effective investors and also have many
contributions to Vietnam.
For example, Korea was the country with the most direct investment in Vietnam in
2015, accounting for 24% of the total investment capital in 2015 with various large
and small projects across most localities in the country. Next is Japan, Taiwan,
Singapore,...which are also countries that are expected to have large FDI inflows into
Vietnam in the following years.
13
45000
40000
35000
30000
25000
20000
15000
10000
5000
39159.9
37719.3
33185.2
28704.4
18613.3
16185.5
11079.2
10893
8132.5
6809.4
0
Total registered investment capital
Table 6 Total register investment capital 2015 (General statistics office of Vietnam)
As of November 2015, total Korean FDI accounted for 31.6% of total FDI into
Vietnam. If counting the project of Hyosung Group (US $ 660 million, invested
through Turkish entity), Korean FDI accounts for 34.9% of total FDI in Vietnam, 4.1
times higher than Japan; 6.2 times Taiwan and 6.8 times Singapore (but the traditional
FDI partner ranks 2.3.4 of Vietnam).
4. Structure of Korean direct investment capital into Vietnam
4.1. Investment structure by investment sector
14
10.60%
6.40%
18.50%
64.50%
Manufacturing and processing industry
real estate business
Contruction
Others
Table 7 Korea's FDI structure by sectors into Vietnam 2015 (General statistics office
of Vietnam)
According to Vietnam’s Foreign investment agency, in 2015, Korean projects were
implemented on 18/21 branches and fields; the leading industry is manufacturing and
processing with 2,566 projects with a total registered capital of US $ 24.03 billion
(accounting for 64.5% of total investment capital). Real estate business ranked second
with 82 projects with a total capital of US $ 6.99 billion (accounting for 18.5% of total
investment capital). Construction field ranked third with 579 projects, total investment
capital of US $ 2.4 billion (accounting for 6.4% of total investment capital)...
Among Korean investment projects, there are a number of large projects, focusing on
efficient industry, contributing positively to socio-economic stability and development
of colonized localities. In the automobile manufacturing industry, there is Vietnam-
Daewoo Automobile Company in Hanoi, registered capital of US $ 32.2 million, legal
capital of US $ 10 million, which is 100% owned by Daewoo since year. 1996,
effective, export products, Daewoo cars market share in Vietnam accounted for 15%;
The company has been profitable since 2000. In recent years, Korean-invested
enterprises have performed relatively well, although unavoidably difficult due to the
fierce competition and Vietnam. Currently committed to cutting taxes within the
framework of AKFTA. In addition, local raw materials and spare parts are not
sufficient. Supporting industries have not been fully developed, so most of the raw
materials and spare parts have to be imported; input costs are still high, the quota
15
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