Rise and Fall of Foreign Direct Investment in Vietnam and its Impact on Local Manufacturing Upgrading

Abstract

The doi moi reforms in 1986 initiated private sector development and opened the economy to foreign direct investment (FDI). In relative terms, Vietnam became a large recipient of FDI by the middle of the 1990s. However, FDI seemed to peak in 1997 and has since been fluctuating at a much lower level. This article questions what the impact has been of the internal and external changes on the flow and composition of the FDI to Vietnam and further asks how the inflow of FDIs has affected the development of the private manufacturing sector. Other sectors than manufacturing have attracted large shares of FDI. Within manufacturing, much has gone to highly protected import-substitution industries. At least some of the wanted effects appear not to have materialised, particularly when one looks for linkages and transfer of technology. On the other hand, FDI's contribution to exports has developed fast. Policy changes are still taking place and are also needed. Although more FDI is now going into manufacturing, it still appears uncertain whether Vietnam by the means of FDI will be able to follow in the footsteps of the neighbouring second generation newly industrialising countries.