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Vietnam: Attracting clean foreign direct investment (FDI) for sustainable development

Updated on May 19, 2016
Time to rethink before it is too late
Time to rethink before it is too late

Introduction

In recent weeks, the mass fish death crisis along the coasts of Central provinces in Vietnam has attracted attention of almost any person in Vietnam and even the international media. The social media and traditional media in Vietnam have been inundated with rumors, news and opinions about the possible causes, consequences, and potential links between economic activities of FDI companies in the nearby Vung Ang Economic Zone, particularly Formosa – a Taiwan-based plastics corporation – and the tragic environmental disaster, raising concerns about environmental protection in the era of rapid economic growth and urbanization.

FDI in Vietnam by countries
FDI in Vietnam by countries

FDI in Vietnam by sectors

Like other developing countries, Vietnam has relied heavily on FDI to develop its economy, boost exports, speed up technology and know-how transfer and facilitate international cooperation. As of April 2016, Vietnam has successfully attracted more than 20,905 projects with a total registered capital of USD 288 billion. FDI inflows into Vietnam came from South Korea, the biggest investor in Vietnam, accounted for 16.7% of total investment capital, followed by Japan (13.6%), Singapore (12.6%), Taiwan (31.5%) and BVI (6.8%). More than half of total FDI capitals into Vietnam went into the field of processing and manufacturing (58.2%), and the rest went into real estate projects (18%), power, gas and water production and distribution (4.4%), and accommodation and catering (4%).

While FDI projects made great contribution to Vietnam’s economy such as contributing more than 21.7% of total social investment capital and paying more than USD 13 billion in taxes, they also posed threats and placed enormous strain on Vietnam’s environment quality and natural resources which should be addressed to promote sustainable development in Vietnam. According to the Brundtland Report, sustainable development is “development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” Although economic growth to help improve living conditions and meet the needs of present generation is an urgent issue for many developing countries, preserving resources for future use is also of equal importance. Therefore, it is crucial that Vietnam establishes short-term and long-term goals and strategies to attract clean FDI for sustainable development.

Air pollution
Air pollution

Adverse effects of FDI on the environment

Pollution

One biggest concern regarding the relationship between FDI and environment problems focuses on the idea of “pollution haven” hypothesis. The hypothesis states that companies in developed countries have the incentive to move their production to developing countries to take advantage of the lax environmental regulations and reduce their operation costs. In developing countries, the focus is more on economic growth to improve the life of the current generation; therefore, many countries are willing to open their doors to welcome FDI projects at the expense of their environment and the well-being of their future generations. In addition, due to ineffective law enforcement and weak legal structure in these countries, companies can easily get away from punishment for violating environmental laws. Within this context, instead of improving current technologies, finding ways to become more environmentally friendly and addressing institutional and legal failures, these companies just simply “export” their pollution to other places in the world.

Loss of Biodiversity

FDI projects also cause negative impacts on biodiversity. For example, in Vietnam, in order to expand its industrial parks to accommodate growing manufacturing demands, many forests have been destroyed, and hundreds of species of flora and fauna lost their natural habitats. In addition, myriads of new foreign-invested resorts, hotels and theme parks opening along the beaches, at the mountaintop and even inside designated natural preservation zones have remarkably altered the eco-system of the area, resulting in significant biodiversity loss.

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Resource depletion

Many foreign companies move to developing countries to make use of the cheap natural resources there. It is often very difficult to completely assess the value of environmental assets. For example, the sea contains various resources (fish, sand, salt, oils and other mineral in the deep sea), plays many different roles (reservoir of resources, climate regulation, transportation route, etc.) and provides other benefits for different industries and human activities. Because it is very difficult to take into account all of these factors when monetarizing environmental value, most of the time, environmental resources are undervalued, and corporations are very quick to recognize this fact. In addition, the value attached to natural resources also reflects the local government and people’s preference. Since in developing countries, people often prefer present economic gains over long-term well-being, environmental values are even further underestimated, inviting over-exploitation and wasteful use of resources. Around the world, resource depletion is a very imminent issue.

Untreated waste water discharged directly to Thi Vai River
Untreated waste water discharged directly to Thi Vai River

Examples of “dirty” FDI projects in Vietnam

According to a research on environmental impacts of FDI enterprises in Vietnam by the Central Institute for Economic Management, 67% of FDI enterprises operating in Vietnam produced low value-added products, 14% of them using low and inefficient technologies, consuming a lot of energies and polluting the environment. There were only 0.2% of FDI projects (28 projects) operating in the field of waste water treatment. Regarding the implementation of environmental regulations, 45% of FDI enterprises have not used any low emission manufacturing methods, and 69% of them do not plan to apply these methods unless required by law.

Probably, one of the most notorious examples of “dirty” FDI projects in Vietnam is the case of Vedan Vietnam Corporation polluting Thi Vai River. For 14 years, the company secretly discharged untreated waste water into the river, almost killing the river. Since the river was so contaminated, no creature could live there and respiratory and intestinal diseases were very common among local people. Not until many shipping companies complained that they could no longer dock at the river because of the pollution that the authority intervened, uncovering the biggest environmental scandal at that time. The scandal fuelled so much public anger that Vedan finally agreed to pay the compensation claims of affected people for fear of being boycotted.

Dead fish along Central Coastal Vietnam
Dead fish along Central Coastal Vietnam

Since April 2016, the mass fish death potentially linking to the operation and waste discharge of companies in Vung Ang Economic Zone once again aroused public attention, fear, and rage over the environmental impacts of economic activities. Although the government has not officially confirmed the cause of the disaster, the local people have expressed their frustration towards Formosa Steel Corporation, whose discharge was believed to be blamed for the death of fish and pollution of coastal waters and demanded a thorough investigation into the case and proper punishment for the perpetrators. Since the event, more cases of water ways pollution have been discovered or come under closer scrutiny, calling for more stringent environmental laws and active government involvement. Several campaigns and demonstrations were organized showing that people care more and more about the environment and understand the roles of the environment in their life.

Should developing countries attract FDI at all costs?

There exists the environmental Kuznets curve hypothesis that believes that although economic growth initially harms the environment, at some point, increase in per capita income actually increases environmental quality. Various researches have been conducted on this topic; however, the conclusion is still far from conclusive. While there might be some evidence that a turning point might exist, we do not know when and how we can all get there. The relationship between economic growth and environmental quality is a simultaneous one: increasing economic growth worsens the environment, and a worsening environment actually slows down economic growth. For example, in the case of Vedan venture in Vietnam, although the company created more than 2,000 jobs and helped to consume many local products, it destroyed the livelihood of hundreds of local fishermen, increased healthcare cost and reduced living quality of local people, and damaged the waterways thus adversely affecting the water traffic and shipping business. In addition, the long-term cost was even higher and harder to estimate because the damage of Thi Vai River’s eco-system and the loss of biodiversity may take decades to finally recover.

Environmental Kuznets curve
Environmental Kuznets curve

Conclusion

Vietnam does not only need development; it needs sustainable development. It does not only need to attract FDI; it also needs sustainable-oriented FDI. This is easier said than done since multi-national companies have many choices: for example, if Vietnam refuses to accept their environmentally unfriendly projects, they can freely move to other places that are willing to let them stay such as Cambodia, Laos, Myanmar, African countries, etc. Therefore, in order to attract sustainable projects, Vietnam needs a long-term strategy to promote itself as an attractive investment destination and shows that it has far more to offer. One strategy Vietnam can adopt is to invest in its physical infrastructure and human capital to move up the value chain and compete in the global market. Besides, public awareness of environmental protection should be heightened and corporate social responsibility should also be emphasized to further strengthen the green movement among the people.

Nature is speaking. Time to listen and act.

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    • lions44 profile image

      CJ Kelly 14 months ago from Auburn, WA

      Fascinating hub. Great job. Shared.

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