INTRODUCTION
On January 1973, Paris Agreement was signed, declaring termination
of United State Military’s presence in Vietnam. It’s an important politic
prerequisite for Japan to set up diplomatic relation with Democratic
Republic of Vietnam on September 21
st
1973.
Two years later, however, American’s failure in Vietnam War forced
it to change its strategies in the South East Asia and created a power blank,
is considered a favorable international factor encouraging Japan to expand
its influence out to all over the South East Asia. In such background, Japan
put forth Fukuda theory, formally confirming Japan’s post- Vietnam War
foreign policies in the South East Asia. According to Fukuda theory,
together with consolidation and expansion of multi-lateral co-operative
relations with ASEAN countries, Japan continues to reach out to Indochina
countries (including Vietnam) for relations through economic assistance in
order to help the 3 Indochina countries to reconstruct themselves after the
wars.
On October 1975, Japan signed Agreement on Non- refundable aid of
49 millions USD in favor of Vietnam, and opened Japanese Embassy in
Hanoi. On December 1976, it was the first time in the two countries’
history of relationship, a delegation of Japanese officials from all fields of
industry, services, investment, finance, trade, forestry and transportation
lead by Mr. Arita – a diplomatic official , visited Vietnam.
But it’s possible to say that Fukuda theory’s idea about economic
assistance for Indochina countries, including Vietnam was not doable until
Vietnam enters its way of “Innovation” and economic reform. However,
Japan had basic approaching steps to Vietnamese market, although the
United State had not abolished its embargo against Vietnam. Japan was not
vigilant of US embargo in expanding economic- commercial relations with
Vietnam. They did not come late in both areas of Investment and Trade as

firm in another country (the host country).
The International Monetary Fund’s Balance of Payments Manual
defines FDI as “ an investment that is made to acquire a lasting interest in
an enterprise operating in an economy other than that of the investor, the
investor’s purpose being to have an effective voice in the management of the
enterprise ”.
The United Nations 1999 World Investment Report (UNCTAD,
1999) defines FDI as “ an investment involving a long – term relationship
and reflecting a lasting interest and control of a resident entity in one
economy (foreign direct investor or parent enterprise) in an enterprise
resident in an economy other than that of the foreign direct investor (FDI
enterprise, affiliate enterprise or foreign affiliate). The term “ long – term ”
is used in the last definition in order to distinguish FDI from portfolio
investment, the latter characterized by being short – term in nature and
involving a high turnover of securities.
The common feature of these definitions lies in terms like “control”
and “controlling interest”, which represent the most important feature that
distinguishes FDI from portfolio investment, since a portfolio investor does
not seek control or lasting interest. There is no agreement, however, on
what constitutes a controlling interest, but most commonly a minimum of
10 per cent shareholding is regarded as allowing the foreign firm to exert a
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significant influence (potentially or actually exercised ) over the key
policies of the underlying project . For example, the US Department of
Commerce regards a foreign business enterprise as a US foreign “affiliate”
if a single US investor owns at least 10 per cent of the voting securities or
the equivalent. Both equity and debt- financed capital transfers to foreign
affiliates are included in the US Government’s estimates of FDI.
Sometimes, another qualification is used to pinpoint FDI, which involves
transferring capital from a source country to a host country. For this

foreign organization, individual, which is responsible for business
outcomes. This type of enterprise is established in the form of company
limited.
2.4 Other Forms
2.4.1Export Processing Zone
It is the zone, which is separated from the territory by natural or
artificial hedge and operates according to specific rules. Enterprises operate
mainly to process goods for export. Goods are exempted from export duties
and subject to other incentives regarding taxes, levy.
2.4.2Build- Operate- Transfer (BOT)
It is investment form implemented on the basic of a written document
signed between the foreign investor with competent governmental agency
to build infrastructure projects. In this type of investment, the investor
constructs the project in such a long time enough to retrieve investment and
proper profit. Then they will hand over the whole structure to Vietnamese
Government without collecting any sum.
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2.4.3Concentrated Industrial Park
It is industrial Park set up by the Government, with determined
border, geography, specializing in industrial production, services
supporting industrial production, without residents.
3.The Effects of Foreign Direct Investment
FDI involves the transfer of financial capital, technology and other
skills (managerial, marketing, accounting, and so on) as we have seen so
far. This process gives rise to costs and benefits for the countries involved,
the investing country (the source of the investment) and the host country
(the recipient or the destination of the investment). It is not clear, however,
what costs are borne and what benefits are enjoyed by the two countries, at
least not quantitatively.
3.1The Provision of Capital

The most critical issue about the relationship between FDI and Trade
is whether they are complements or substitutes. In other words, to what
extent do production and sales by subsidiaries in a foreign market replace
or help to increase exports to the same market? One reason we should
believe that FDI and trade are substitutes is that they are two alternative
modes of entry, as we have seen.
3.6The Effect of FDI on Productivity
Productivity is likely to rise and unit cost likely to decline if :
+ FDI is export- promoting and the products of the subsidiary are
destined for the large world markets.
+The underlying conditions and policies allow the installation of
plants designed to achieve full economies of scale.
3.7. FDI and Technology
Technology diffusion plays a central role in the process of economic
development. The interaction between FDI and technology is considered to
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be of great and critical importance in the discussion of FDI. Indeed, the
transfer of technology has perhaps become the predominant issue around
which discussions of MNCs and their dealings with developing countries
evolve.
3.8FDI and Training
Foreign investors, much as they dislike to spend on the training of
locals, realize that such expenditure may be crucial for the success of their
investment. Therefore, expenditure on training becomes part of the initial
investment and another sunk cost.
3.9FDI and Inter – Industry Linkages
FDI can influence the economy of the host country via inter- industry
linkages. To the extent that foreign subsidiaries establish links with local
suppliers for locally- produced material and parts, FDI can help to provide
local firms with increased opportunities that in turn affect their

4.Role of Foreign Direct Investment in Vietnam
FDI emerged as an important economic phenomenon in the course of
economic development worldwide in 1950s- 1960s. However, all economic
phenomena have its head and tail.
4.1 For Investors
4.1.1Positive Effects
Most investing countries are developed industrial ones, with strong
economic capabilities, or some new industrial countries with rather high
standard of development, so factors developing production extensively loss
gradually, as a result, fund is abundant in the country and they find way to
bring the fund overseas to invest.
FDI is the most important element helping the investor countries
overcome aging situation of products. This is one of best solutions to help
domestic industries at their sunset. Through FDI, the investors can transfer
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machines, technologies that are now not advanced in their countries to the
invested countries in order to expand the product’s life span, while
continuing to develop dawn industries with high tech products in their
countries. This is a phenomenon complying the objective rule in
international fund transfer process.
Besides, FDI also help the invested country build up stable material
supply market with low price by exploiting plentiful materials from
invested countries, helping the invested country to expand its economic
power and raise prestige in international area.
The increasing trend of integration makes FDI becomes the most
effective measures to penetrate and occupy market. Through building of
production plant and consuming overseas, the fund exporter countries will
expand consumption market and avoid the protective tariff.
4.1.2Negative Effects
FDI does not only produce positive effects but also adverse ones on

Although FDI is carried out in host country, but actually, this funding
source is directly managed and used by the investors for their specific
purposes in the legal framework of the host country. Final objective of the
investors is profit maximization, so they only invest in high profitability
industries, favorable regions. As the result, the development gap between
different regions increase, leading to widen rich- poor gap.
FDI enterprises often have advantages regarding capital, technology,
and management experiences compared to domestic ones. Therefore, home
enterprises are often less competitive, consequently, they are likely to go
bankrupt or operate perfunctorily. In long- term view, decrease savings rate
and domestic investment will make the invested country become more and
more depend on the investing countries.
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When FDI projects come into operation, deficit of payment balance
will increase because foreign currency amounts is transferred overseas in
the form of returning profit, loan interest, material cost, etc. Which are
much larger than FDI capital transferred by the investors to invested
country.
Technology transfer through FDI is still limited. Many investors do
not follow regulations of the host countries, leading to minor technology
transfer, backward technologies, environment polluting technologies and
technology’s price is often higher than common international price.
In brief, FDI always has its duplicity, benefits bought in by FDI to two
sides are great, especially to developing countries as Vietnam, FDI is the
push for Vietnam to take advantage of favorable objective conditions
created by the investors to develop economically and socially. It is why the
countries encourage FDI activities.
Contribution of FDI for Vietnam’s Economy
*FDI companies contributed 13.3% to the GDP, 35% to the industrial
output, 23% to export, 25% to total State Budget revenues in 2004 but

some sort of democratic reform as the population becomes more affluent.
That means a more stable future for investors willing to jump in early now.
In the US, Vietnam still evokes images of campus protests and hazy 1960s
television images of war and chaos. Even though the U.S. signed a bilateral
trade agreement in 2001, Japan has a clear head- start on establishing good
relations with the country, and should be up to $10 billion in two-way trade
by 2007. And if these trends continue, Japanese brands and companies
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should have a significant advantage for the loyalty of Vietnamese
consumers for a long time to come.
1.2Actual Situation of Japanese Foreign Direct Investment in
Vietnam
After a lengthy investment spree in China, many of corporate Japan’s
biggest names are making inroads in one of the world’s few remaining
communist states: Vietnam.
Since last year, Vietnam has seen a spate of big investment projects by
prominent Japanese firms such as Yamaha Motor Company and Mabuchi
Motor Company, which invested US$48 million and $40 million,
respectively Nippon Sheet Glass Company’s $145 million joint- venture
factory with a local firm is also under construction, as is work on Canon
Company $70 million printer factory. Honda Motor Company has also
announced that it will pour $60 million into a local auto factory within the
next five years. Small and medium- sized Japanese Firms are also flocking
to Vietnam.
According to some analysts, in 2000, Vietnam ranked eighth among
destinations for Japanese investment. However, in 2005, Vietnam was in
fourth place, just behind China, India and Thailand. For Japan’s small and
medium- sized enterprises in particular, Vietnam was the second option,
just after China .
In 2005, Japan invested about $400 million in a record high of 97 new

Bank predicts that the country’s economy, buoyed by brisk foreign
investment and firm domestic demand, will grow 7.8% this year and 8%
next year. The investment pact between Japan and Vietnam took effect in
late 2004. Japan and Vietnam are also to open FTA negotiations late this
year, Japan is separately negotiating an FTA with the ASEAN as a whole.
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In another significant recent development, Vietnam and the US signed
a trade pact at the end of May, paving the way for Hanoi to realize its long-
cherished goal of becoming a member of the World Trade Organization
late this year. WTO membership, which obliges Vietnam to open its
markets wider to foreign competition and make its trade and investment
rules and regulations fully compatible with international norms, is expected
to further fuel Japanese and other foreign investment in the country.
China gained WTO membership almost simultaneously with its
hosting of the Asia- Pacific Economic Cooperation summit in late 2001.
Although it may be just a coincidence, Vietnam will host this year’s
summit of leaders from 21 APEC member economies in November, further
highlighting its higher profile in the regional economic arena. US President
George W Bush is expected to attend the political extravaganza.
Japan has also been Vietnam’s top aid donor since 1995. Japanese
official development assistance (ODA) for Vietnam totals nearly 100
billion Yen (approximately US$ 869.5 million) annually. Vietnam is now
one of the largest recipients of Japanese ODA money. Vietnam is also a
potential important supplier of oil and natural Gas for energy-resource-poor
Japan. Vietnam is the second-largest after Indonesia among the ASEAN
members in terms of population and also has geopolitical importance
because it borders China.
The bulk of Japanese ODA money for Vietnam has been provided in
the form of solt loans to finance infrastructure projects, and the rest in the
form of grants-in-aid and technical cooperation. Japan has also

the Ministry said.
The Ministry’s Senior Investment Consulting Expert- Mr. Kyoshiro
Ichikawa said Vietnam was working on a strategy to expand and restructure
investment regions for Japan, resulting in Japanese groups pumping capital
into the Vietnamese economy.
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Japanese Investors were also considering further investment in
Vietnam as a way to manage risks involved with investment in China, said
Mr. Kyoshiro.
Low investment costs and risks in Vietnam were also the major
reasons behind the increase in FDI by Japanese Investors, who have
reduced their focus on countries such as Singapore, Thailand and Malaysia.
Vietnamese investment benefits from the country’s competitive
salaries.
The average monthly salary for engineers in Hanoi is between $182
and $327, and between $312 and $329 for engineers in Ho Chi Minh City,
while engineers from shanghai and Bangkok earn an average of $400 per
month. Corporate income tax is 28% a year in Vietnam, lower than China’s
rate of 33% and Thailand’s rate of 30%. However, Japanese investors and
investors from other countries and territories must still carefully consider
investment in Vietnam, said Mr. Kyoshiro. Vietnam was still perfecting its
system of business law, and had to find solutions for complicated
administrative procedures, poor development of the processing industry
and a lack of highly professional management skills. To attract further
Japanese investment into the country, Vietnam should improve the legal
system based on the unified Law on Investment. Vietnam should also focus
on better coordinating work between relevant offices. To further develop
Vietnam’s business environment, Vietnamese authorities should develop
the nation’s infrastructure, including its electricity supply, road networks
and seaports facilities.

accounted for 17%- 20% of total Vietnam’s export turnover. There are 10
Vietnamese items exported to Japan that account for large proportions in
2004- 2006, namely sea products, textile- garment goods, crude oil,
electrical wire and cable, wooden products, computer parts, shoes and
sandals, coal, handicraft fine arts goods and plastic products. Of these
items, just three items are crude oil, sea products and garments that
accounted for between 70% and 91% of Vietnamese export quota to Japan
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during this time frame. It’s useful to note that these items were allowed to
enter the Japanese market because the Vietnamese export represent a very
small proportion of Japanese market’s demand on these items.
For example: crude oil accounts for only about 1.8%-2%, sea products
is 2.8%-3% and textile-garment is 2.9% against Japanese quota of similar
goods.
Noticeably, since 1990s there was always a surplus in Vietnam’s
exports to Japan (about 170 million USD in 1999, 270 million USD in
2002 and 300 million USD in 2004), but the trade balance was 70 million
USD in deficit for the first time since 2004. The import increase was due to
the demand expansion for the material and equipment, which served the
expansion of manufacturing activities for domestic and export products.
In general, total trade amount between Vietnam and Japan will soar in
the near future with the implementation of the Agreement on investment
promotion and protection, and Vietnamese- Japanese Joint Initiative.
Figure 1
Export and Import in Vietnam(2000-2005)
Source: MPI
Unit: 1billion USD
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1.51
1.48

development and assistance to the poverty alleviation.
According to Ministry of Planning and Investment, Japan is the largest
donor of ODA to Vietnam and Japanese ODA to Vietnam accounts for
40% of total ODA pledged by the international donor.
For example: the Japan bank for international cooperation has
contributed 2.2 billion USD to the 3.7 billion USD ODA total provided by
the international financial organizations to Vietnam’s electricity sector.
Besides, the Government of Japan commit to lend Vietnam 634 million
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USD to promote socio-economic development and keep Vietnamese
economy firmly on a market oriented course.
Apart from economic relation, Vietnam and Japan have been
increased exchanges between senior officials, businessmen and local leader
of the two countries (especially a visit to Japan by Party General Secretary
Nong Duc Manh has laid a foundation, created a turning point and defined
orientation for Vietnam- Japan relations on the basic of trust cooperation
and long- lasting stability).
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Figure 2
Japan’s ODA to Vietnam(1995-2005)
Source :MPI
Unit :1 million USD
474
599
660
924
965
1008
1120
864

51.7
3
177.
3
192.
4
359.
1
381.
4
65.6
2
23.6
4
97.4
5
72 79.92
In 1994, Japan’s FDI increased up to 63 million Yen. In 1994, the two
countries’ relation is pushed forward thanks to settlement of Cambodia
problem and the fact that Vietnam’s decision of renovation is enhanced in
all areas. Therefore, total investment from Japan in 1996 reached 5.1
billion Yen with 43 projects. Although in 1994, the US abolished embargo
against Vietnam, together the increasing trend of stronger Yen, there was a
boom of investment from Japan in Vietnam with total number projects of
64 and total investment of 17.7 billion Yen. In 1995, there were 50
investment projects of Japan in Vietnam with total investment of as much
as 12 billion Yen. With such amount of investment, Japan became the third
largest investor following Taiwan and Hong Kong in Vietnam. In 1996,
Japan continued investment in Vietnam with total fund of 51.73 billion
Yen. Compared with that in 1995, Japan’s FDI in Vietnam increased

In 1990s, with about US $3.5 billion of FDI within 10 years, US $350
million per year on average, Japan’s FDI took approximately 4% of
Vietnam’s fund for capital construction. In this decade, Japanese investors
were interested in projects on natural resources exploitation because
Vietnam has plentiful of resources. The most favorite sectors of Japanese
investors were hotel and tourism, which made up 9.4% of total Japan’s
FDI, followed by 9.3% of petroleum and gases sector.
Thanks to the increase of total amount of Japanese investment in
Vietnam, foreign investment in Vietnamese economy was up over 30%. As
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