Hanoi, Vietnam
August 21, 2002

Nearly 150 policy-makers, academics and journalists convened in Hanoi's Melia Hotel during August 16–17 for a wide-ranging exchange of views on the opportunities and challenges of foreign direct investment (FDI) and on the policy priorities for Cambodia, Lao PDR, and Vietnam. FDI has a key role to play in supporting these countries' economic transition to a market-oriented economy by nurturing management know-how and developing dynamic private enterprises. The global and regional experience with FDI was considered as a backdrop to a more detailed analysis of how the three Mekong Delta countries can attract and sustain higher levels of FDI. Several broad conclusions emerged from the conference:

1. While China was cited as the current main attractor for FDI in Asia, it was also recognized that China cannot have comparative advantage in everything, and a prosperous China will undoubtedly contribute to opportunities in the region.

2. On the factors driving FDI, there was a convergence of views. From the experience of countries in the region and from the vantage points of both source and host countries, it was generally accepted that FDI cannot flourish without political stability. It was equally clear that the existence of a large and growing domestic market, or an integrated regional market under the framework of AFTA, can be very helpful. Further, an open attitude toward global competition and a favorable investment climate are prerequisites, as is a relatively low cost structure, which must entail reasonably adequate infrastructure. There is also the need for a transparent and dependable legal framework and a simple investment approval process.

3. There were diverse views on how to maximize the benefits of FDI through enhancing technology transfers and spillovers. A few participants suggested that selective interventions based on anticipated trends of comparative advantage can be effective, but this would require careful industry-specific analysis and broad consultation with the private sector. Most believed that countries should rely more on comparative advantage, and that FDI that responds to global market forces holds promise, particularly FDI in export sectors.

4. On the possible pitfalls of FDI strategies, participants debated the relative merits of tax incentives. One view held that, because tax incentives for FDI are typical in the region, a country may not be able to avoid them. Yet others believed that over the medium term, the region is moving away from relying on these incentives as a means of attracting FDI. In the meantime, if incentives are unavoidable, they can be streamlined and designed so as to limit the drain on the budget and the potential for corruption. Across the region, closer cooperation to lower the level of incentives offered seemed to merit further consideration.

5. While the specific circumstances of each country differ, there are common elements in the strategy for improving the investment climate, not only for foreign investors, but also for the domestic private sector. These include: first, maintenance of a stable macroeconomic environment and sustained economic growth; second, a strengthening of the public finances in order to build infrastructure and skilled labor; third, tackling corruption and strengthening governance; and fourth, deepening the reform momentum, especially by pursuing open trade and investment regimes, importantly through AFTA and earliest possible accession to WTO. Furthermore, as FDI can fluctuate with global market conditions, it is important to manage macroeconomic policies prudently and flexibly to deal with these external shocks. Thus a key policy in this context is flexible exchange rate management.

6. For Vietnam, particular stress was put on a rigorous implementation of the USBTA and active preparations for entry to the WTO, as a means to further open market access for investors and to upgrade the legal framework. Equal emphasis was put on improving the business climate, by reducing the costs of doing business and leveling the playing field between the private and state sectors. Above all, transparency, predictability, and consistent application of policies are crucial. On a more practical level, simplifying licensing and approval processes would be equally helpful.

7. For Cambodia, there is a particularly urgent need to rebuild human capital, basic infrastructure, and the legal framework. Also, to increase budget revenues to help finance economic infrastructure, the relatively generous investment incentives are being rationalized; more generally, the revenue base is being broadened to avoid higher tax rates. More broadly, continued progress in strengthening the fiscal position and economic management will be essential.

8. For Lao PDR, prudent macroeconomic management is needed to ensure macro stability. With its rich endowment of untapped natural resources and a continuation of its liberal investment policy, Lao PDR is well placed to attract FDI. Streamlining approval procedures is important, and promotion of special economic zones may be a pragmatic first step to improving infrastructure for investors. Greater policy transparency, especially through increasing information flows, will be critical for boosting investor confidence.

For the conference papers, please check availability at www.imf.org/external/pubs/ft/seminar/2002/fdi/eng/index.htm.