FDI not such a boon

University of Virginia study finds benefits of FDI for local citizens not as great as thought.

A new study has found that rising foreign direct investment (FDI) in one province in Vietnam is associated with a slight decline in living standards for local households if they don’t have a family member employed by a foreign enterprise, with only modest gains for households who do have a family member working for a foreign enterprise.

The Department of Economics at the University of Virginia investigated the effects of FDI on income distribution and absolute living standards in Vietnam, using census data from 1989 to 2009. In theory, FDI competes with domestic capital for domestic workers, pushing down the income of domestic companies and raising the incomes of domestic workers, shifting the mix of tasks performed in the economy in the direction of increased skill intensity and being more or less skill-intensive than domestic businesses with demand for labor.

The study found that a rise in local hiring by multinationals is associated with slightly reduced living standards, slightly less so for a household with very low education levels, and with small improvements if the household itself has a member who takes one of the foreign companies’ jobs.

“Workers hired by foreign firms see very minor increases in living standards,” the study found. “This could be offered as a word of caution to policy makers who would hope that opening the door to increased FDI would in and of itself be a powerful anti-poverty program in Vietnam.”

Despite the limitation of the study’s geographic detail to one province only, the result is nonetheless far from the expectations of many people that FDI would lift Vietnam upwards, as it has contributed more than 20 per cent to GDP growth since 2010.

Companies setting up plants in Vietnam, such as Samsung Electronics, are transforming the country into a manufacturing hub for electronics goods, including smartphones.

The South Korean electronics giant moved into the rice paddies of Bac Ninh province in northern Vietnam and began rolling out smartphones eight years ago. The investment has been a windfall for businesses in Bac Ninh, with almost 2,000 new hotels and restaurants opening between 2011 and 2015 according to the provincial statistics office, helping raise the province’s per capita GDP to three times the national average.

“Samsung’s investment has created a breakthrough that spurred economic growth not only in Bac Ninh but the country,” according to Mr. Nguyen Phuong Bac, Head of a Bac Ninh socioeconomics institute. “It has hastened the country’s industrialization.”

Moving from rice paddies to production lines has given farmers higher wages, social security benefits like pensions and sick leave, and job security. Bac Ninh is now the country’s second-largest export center, after Ho Chi Minh City, after being one of the poorest in Vietnam 20 years ago.

“Samsung’s workers with a high school certificate have seen their annual incomes go up from about $1,000 in 2008 to about $5,000 now, which is nearly three times higher than the country’s average,” Mr. HyunWoo Bang, Vice President of Samsung Vietnam, told VET.

Last year, disbursed FDI in Vietnam rose 9 per cent to a record $15.8 billion, and committed FDI increased 7.1 per cent to $24.4 billion.

by Duy Anh / VET