CHANGING SECTOR AND SIZE OF FOREIGN INVESTMENT COMPOSITION

PCI FOREIGN DIRECT INVESTMENT SURVEY

2.1 CHANGING SECTOR AND SIZE OF FOREIGN INVESTMENT COMPOSITION

Looking at broad sectors in 2019, about 61 percent of the 1,583 PCI-FDI Respondents engage in manufacturing. Less than 1 percent of firms are involved in agriculture/aquaculture (11 firms) or natural resource exploitation such as mining (4 firms). Twenty-eight percent of FIEs engage in some form of services. Within these broad sectors, however, there is a great deal of diversity. No single industry dominates foreign investment activity. Digging a little deeper by studying the two-digit sector codes in Figure 2.2, we can see the most popular manufacturing activities are fabricated metals (involving 9.2 percent of operations), rubber and plastic (7.2 percent), computers and electronics (6.7 percent), textiles (4.8 percent), and garments (3.16 percent). The biggest service sector activities are wholesale/retail (9.4 percent) and finance and insurance (5.25 percent).

At first glance, sectoral shares have remained broadly stable over time, as we show by tracking changes in industrial patterns represented by respondent FIEs back to 2016. Nevertheless, there are three changes worthy of note. First, businesses producing computers and electronics rose from 2.73 percent in 2016 to 6.7 percent today. If we combine this sector with electronic equipment, the share of firms has nearly doubled over the last four years to nearly 9 percent of operations. Over the same period, the share of firms engaged in garment production has declined from 6 percent in 2016 to only 3.2 percent today. These trends represent a noticeable enhancement of the more technologically sophisticated production in Vietnam that may have been boosted by shifts in global value chains caused by US tariffs on China.⁴³

Another interesting trend, related to Vietnam’s rise into middle income status and growing energy needs, is the tremendous growth of firms operating in energy provision. In 2016, these firms represented only 1.3 percent of the national sample, but their share has quickly grown to over 4 percent in 2019. Foreign investors have expanded into a number of energy-related industries, including coal, water, and a host of renewable energy sources, such as wind, electricity, and even biomass waste.⁴⁴ These investments have been encouraged by Vietnamese authorities through generous tax incentives in order to help meet their estimates for Vietnam’s changing energy needs. The National Electricity Development Plan estimates that the country will increase its usage from 47,000 MW today to 130,000 MW in 2030.⁴⁵

43 Malesky, Edmund and Layna Mosley. 2019. “Labor Upgrading, Trade Agreements and Export Market Opportunities: E v i d e n c e from Vietnam.” Presented at the 2019 Annual Meeting of the International Political Economy Society, San Diego, CA, November 14th. <http://laynamosley.web.unc.edu/files/2019/07/20190812_MM_TariffsUpgrading_Final3_ejm.pdf>

44 http://ven.vn/vietnam-attracts-foreign-investors-in-renewable-energy-40679.html

45 Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ). 2016. Vietnam Power Development Plan for the period 2011 – 2020: Highlights of the PDP 7 Revised, Hanoi, Vietnam. <http://gizenergy.org.vn/media/app/media/legal%20documents/

GIZ_PDP%207%20rev_Mar%202016_Highlights_IS.pdf>

A related trend can be observed in Figure 2.3, where we plot the average employment size of PCI-FDI respondents.⁴⁶ In the 2017 and 2018 PCI Reports, we observed that while the number of investors was increasing, the average size of employment and investment capital of the operations was decreasing.⁴⁷ This was true for both PCI data and results from the General Statistical Office (GSO) Enterprise Survey. In 2019, for the first time since 2012, this trend has appeared to halt. In the past year, the mean respondent size is 191 employees, representing an increase of 13 employees per firm above 2018. Although the overlapping 95 percent confidence intervals indicate that this increase is not statistically significant and the average employment size is still below that of 2017, the halt of the decline provides some optimism.

Figure 2.2 Change in Sectoral Composition of FDI over Time

2.40 4.99 1.26 1.26

5.85 11.51 3.59 1.33

8.52 2.86

4.32 3.33 2.13

2.73 12.18 2.13

7.25 4.13 2.06 0.67

3.39 5.99 2.66 2.73 0.13 0.60

0 5 10 15 Edu/Healths/Labour services

Others Services Professional Services Real Estate Financial/Insurance Wholesale/Retail Construction Electricity/Gas/AC M: Other M:Furniture M:Motor Vehicles M:Machinery M:Electronic Equip.

M:Computers/Electronics M:Fabricated Metals M:Basic Metals M:Rubber/Plastics M:Chemicals M:Paper Products M:Wood Products M:Leather M:Garments M:Textiles M:Food Processing Mining Agriculture/Aquaculture 2016

5.35 5.69 1.08 0.51 5.12 1.59

9.78 3.41 2.90

9.44 0.91

3.24 3.13 2.56 5.80

7.00 3.98

6.66 3.19 1.88 1.54 2.67

4.21 4.95 2.96 0.11 0.34

0 5 10 15 Edu/Healths/Labour services

Others Services Professional Services Real Estate Financial/Insurance Information/Communication Wholesale/Retail Construction Electricity/Gas/AC M: Other M:Furniture M:Motor Vehicles M:Machinery M:Electronic Equip.

4.26 6.43 0.76 0.57 5.35 1.85

10.18 4.71 3.31

8.34 0.83

3.06 3.12 2.48 6.94

7.83 2.42

6.94 4.07 2.04 1.27

2.10 3.76 4.20 2.80 0.19 0.19

0 5 10 15 Edu/Healths/Labour services

4.81 6.52 1.52 0.95 5.25 2.15

9.37 3.54

4.24 5.95 1.14

2.97 2.53 2.03 6.65

9.18 2.72

7.15 4.11 1.84 1.46 2.53

3.16 4.81 2.34 0.06

1.01

0 5 10 15 Edu/Healths/Labour services

Share of Respondents (%)

Source: Author’s calculation based on General Department of Taxation classification in PCI Sample Frame. “M” de-notes manufacturing sector.

46 See Figure 2.35 in the Appendices for a full breakdown of firms using the PCI’s eight-point scale.

47 See section 3.1, “The Shrinking Private Firm” in Malesky, Edmund, Phan Tuan Ngoc, and Pham Ngoc Thach, 2018. The Vietnam Provincial Competitiveness Index (p98-102)

Figure 2.3 Downward Trend in Average Employment Size Halts

150 175 200 225 250 275 300

Mean Employment of FDI Respondents (Workers)

2012 2013 2014 2015 2016 2017 2018 2019

Source: PCI-FDI Question A10, “What was the employment size of your firm (this year)?” Range bars represent 95 Percent Confidence Intervals.

Figures 2.4 and 2.5 disaggregate firm average size by sector to study where the firm growth may be coming from. Currently, labor intensive manufacturing sectors, such as furniture, leather, garments, and textiles provide the greatest average employment with over 400 workers per company. More technologically sophisticated manufacturing in wood products, computers, electronic equipment, and motor vehicles occupy the next largest tier with firms employing between 270 and 400 individuals. On the other end of the scale, we observe service sector operations in sales, construction, and finance and insurance that appear to have really small operations measured by employment size.

Observing growth rates in Figure 2.5 demonstrates that the greatest average employment growth is occurring in wood products, textiles, and energy provision, with companies in these sectors growing to meet expanding international demands and rising levels of domestic energy consumption. There is also a noticeable employment decline among firms in several industries, especially in wholesale/retail and information and communication services, which saw 48 percent and 37 percent average employment declines since 2016. These trends may be due to increasing automation in many manufacturing and service outlets.⁴⁸

48 Organization for Economic Cooperation and Development (OECD). 2019. Multi-dimensional Review of Viet Nam Suggestions for an integrated, transparent and sustainable economy “Viet Nam 4.0.” Paris, France, p124.

Figure 2.4 Average Firm Employment Size by Sector in 2019

5 28

34 43

57 60 61 63

81 90

132 134

142 182

202 210

221 228

243 272

333 354

368 435

591

694 699 0 50 100 150 200 250 300 350 400 450 500 550 600 650 700

Mining Wholesale/Retail Others Services Construction Financial/Insurance Edu/Healths/Labour services Electricity/Gas/AC Information/Communication M:Chemicals M:Machinery M:Fabricated Metals Professional Services M:Basic Metals M:Paper Products M:Rubber/Plastics Real Estate Agriculture/Aquaculture M:Food Processing M: Other M:Motor Vehicles M:Electronic Equip.

M:Computers/Electronics M:Wood Products M:Textiles M:Garments M:Leather M:Furniture

Mean Workers per Firm

Source: PCI-FDI Question A10, “What was the employment size of your firm (this year)?” Sector based on General Department of Taxation classification in PCI Sample Frame. “M” denotes manufacturing sector. Dashed line represents overall 2019 average employment per firm.

Figure 2.5 Employment Growth by Sector since 2016

-52 -48

-37 -30

-26 -23

-20 -13 -13 -12

-10 -9

-5 -2

1 3

4 5

6 10

11 12

-60 -40 -20 0 20

Professional Services Wholesale/Retail Information/Communication Others Services M:Chemicals M:Machinery M:Computers/Electronics M:Basic Metals Construction M:Food Processing M:Fabricated Metals M: Other M:Garments Edu/Healths/Labour services M:Rubber/Plastics M:Motor Vehicles M:Leather M:Furniture M:Electronic Equip.

M:Paper Products Electricity/Gas/AC M:Textiles M:Wood Products

Average Employment Growth (2016-2019)

Source: PCI-FDI Question A10, “What was the employment size of your firm (this year)?” used to calculate labor growth between 2016 and 2019. Sector based on General Department of Taxation classification in PCI Sample Frame. “M”

denotes manufacturing sector. Dashed line represents overall 2019 average employment growth per firm.

Figure 2.6 demonstrates that the halting of the downward trend in business size also occurred this year in FIE investment size. Average firm capital, in inflation adjusted billions of VND, increased from 62.5 billion VND ($2.7 million USD) in 2016 to 72.6 billion VND ($2.3 million USD) in 2019. Again, this only demonstrates a plateau, as the size has not rebounded to figures recorded in previous years. According to Figure 2.7, the largest investors in our dataset by capital size are

involved in real estate with investments that are nearly three times the national average at 233 billion VND ($10.1 million USD). However, this figure should be treated with caution, as there are very few real estate firms among PCI-FDI respondents, which means that one or two firms can generate large aggregate swings. The next tier involves manufacturers of electronic services and providers of professional services, such as accounting, consulting, and legal advice. Average investment sizes for these businesses are 171 billion VND ($7.4 million USD) and 160 billion ($7 million USD). Manufacturers of furniture, other wood products, processed food, basic metals, textiles, computers, motor vehicles and fabricated metals all are above the mean investment size averaging between 93 and 120 billion VND ($4 to $5.2 million USD).

Figure 2.6 Average Investment Size Increases after 10-Year Low

50 55 60 65 70 75 80 85 90 95 100

Mean Investment of FDI Respondents (Billions of VND)

2012 2013 2014 2015 2016 2017 2018 2019

Source: PCI-FDI Question A5, “What was your firm’s actual (implemented) investment size (this year)?” Range bars represent 95% Confidence Intervals.

Figure 2.7 Average Investment Size per Sector

7 17

18 23

29 39

58 62

74 75 79 79 80

83 85

93 95

97 107

109 112 119 119

160 171

233

0 25 50 75 100 125 150 175 200 225 250

Financial/Insurance Wholesale/Retail Others Services Information/Communication Construction Edu/Healths/Labour services M:Machinery M:Leather Electricity/Gas/AC M:Garments M:Paper Products Agriculture/Aquaculture M:Chemicals M:Rubber/Plastics M: Other M:Fabricated Metals M:Motor Vehicles M:Basic Metals M:Computers/Electronics M:Textiles M:Food Processing M:Wood Products M:Furniture Professional Services M:Electronic Equip.

Real Estate

Mean Investment per Firm (Billions of VND)

Source: PCI-FDI Question A5, “What was your firm’s actual (implemented) investment size (this year)?” Sector based on General Department of Taxation classification in PCI Sample Frame. “M” denotes manufacturing sector.

Dashed line represents overall 2019 average investment per firm.

Figure 2.8 shows that the largest investment growth occurred among firms that manufacture garments, paper products, and fabricated metals.

Figure 2.8 Investment Growth by Sector over Time

-104

-57 -36

-31 -27

-25 -20 -20 -18 -17 -17 -14

-9 -8 -5 -5 -5 -3 -3

4 5 9

-150 -100 -50 0 50

Information/Communication M:Wood Products Wholesale/Retail M:Machinery Construction Professional Services M:Electronic Equip.

M:Leather Electricity/Gas/AC M:Motor Vehicles M:Food Processing Others Services Edu/Healths/Labour services M:Basic Metals M:Chemicals M:Rubber/Plastics M:Textiles M:Computers/Electronics M:Furniture M:Fabricated Metals M: Other M:Paper Products M:Garments

Average Investment Growth (2016-2019)

Source: PCI-FDI Question A5, “What was your firm’s actual (implemented) investment size (this year)?” used to calculate investment growth between 2016 and 2019. Sector based on General Department of Taxation classification in PCI Sample Frame. “M” denotes manufacturing sector. Dashed line represents overall 2019 average investment growth per firm.

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