APPD 664-665

External Equilibrium Exercise: Foreign Direct Investment Case

Figure 1.

Foreign direct investment (FDI) data in figure 1 suggests that Bolivia had the highest FDI in comparison with Bangladesh and Uganda, although it has a cyclical trend over the last 30 years. With more recent data, figure 2 represents also FDI of Vietnam, which has been the highest among these four countries since 1988. Figure 2 suggests a very high level of FDI provided to Vietnam in the last 10 years. Thus, we can assume that the economy of Vietnam was growing to be more stable and sustainable since early 1990s, which attracted more foreign investment.  

Figure 2.

However, the trend of FDI to Vietnam was in decline since 1996. Recent data from World Bank (1998) indicates that foreign investment inflows of Vietnam have fallen by around 60 percent in 1998 and maybe further in 1999. New commitments are falling even more sharply -- new licenses for foreign investment fell from $8.5 billion in 1996, to $4.0 billion in 1997 and $1.8 billion in 1998. 

In addition, the impact of the recent economic crisis in South-East Asia is changing the nature of foreign investment flows in Vietnam. More than half of foreign investment in 1998 came from outside Asia. This reflects the sharp decline in Asian investment. Large investors like Thailand, Malaysia and Hong Kong (China) invested little in 1998. Only Japan, Taiwan (China), Singapore, and Korea continued to invest, even if at lower levels than before. Total investment as a share of GDP fell sharply from 29 percent in 1997 to 19 percent in 1999 (see table 1), due in large part to a precipitous drop in foreign investment. Almost all components of investment were down in 1999. 

The analysis of World Bank also indicates that after an average inflow of US$2 billion a year during the period 1995-1997, FDI of Vietnam fell to US$800 million in 1998, and to around US$600 million in 1999. According to the World Bank, the decline in FDI commitments had started as early as in 1996, and the low commitments in 1999 are likely to keep inflows of foreign investment down in the near future. Vietnam's attractiveness to export-oriented foreign investment has been reduced due to slow domestic reforms and increased competitiveness in other Asian countries. Thus, there have been many challenges for Vietnam in order to recover and attract high level of FDI.

        Source: World Bank staff estimates

Data Source: 
- 1999 World Development Indicators - The World Bank 
- World Bank Vietnam.

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