Nguyen Mai, chairman of the Vietnam Association of Foreign-Invested Enterprises (VAFIE), told reporters that a resolution issued by the Politburo this month set new criteria for foreign direct investment (FDI) and seeks to deal with possible problems caused by foreign investment.

The main decision-making body of the Communist Party of Vietnam has ordered government bodies to be selective in licensing FDI, focusing on quality, efficiency, advanced technologies, and environmental friendliness.

Many foreign investors use little or outdated technology. Vietnam thus runs the risk of facing environmental pollution and becoming other countries' technology landfill if it does not select projects wisely, experts warned.  

In one of the worst environmental disasters caused by an FDI company, Taiwanese steel maker Formosa, which runs an $11-billion steel plant in the central Ha Tinh Province, polluted more than 200 kilometers (125 miles) of coastline in April 2016, killing more than 100 tons of fish and devastating the environment, jobs and economies of four provinces.

The number of foreign firms which use advanced technology and management and are environment-friendly needs to rise by 50 percent between 2018 and 2025 and double by 2030, the resolution said.

Another problem is the low amount invested by many foreign firms. A survey by the Vietnam Chamber of Commerce and Industry (VCCI) found that the percentage of FDI companies with capital of less than VND5 billion ($215,000) had risen from 29.6 percent in 2015 to 37.7 percent last year.

The more such small firms enter the country, the harder it would be for local small and medium-sized enterprises to join the global supply chain since they have to compete with the foreign firms, the VCCI pointed out.

The resolution targets FDI of $30-40 billion a year in 2021-25 and $40-50 billion in 2026-30, and disbursement rates of at least 66 percent and 75 percent.

Another major FDI issue is the competition with domestic firms. Huynh Phuoc Nghia, an international business and marketing faculty member at the University of Economics Ho Chi Minh City, said foreign firms could link up to dominate the local market. 

This is why the Politburo’s resolution targets the rate of use of local components in manufacturing to rise from the current 20-25 percent to 30 percent by 2025 and 40 percent by 2030, he said.

Vietnam should not continue to rely on its low costs and tax incentives to attract FDI since that way it would attract only low-tech projects which harm the environment, he added.

The resolution also seeks to reduce transfer pricing fraud by FDI firms. An estimated 52 percent of foreign firms report losses but still expand every year in Vietnam, some even at rapid speed, according to the Ministry of Finance.

This has naturally raised concerns about abuse of transfer pricing to evade taxes. Transfer pricing is an accounting practice that represents the price that one division in a company charges another division for goods and services provided.

Mai said all these criteria are to improve FDI quality, which is among the most important factors in increasing the economic growth.

Vietnam has been attracting FDI for over three decades now, and the combined value topped $334 billion as of August last year.

In the first eight months of this year FDI disbursement rose 6.3 percent year-on-year to $11.96 billion, according to the Ministry of Planning and Investment.

But FDI commitments fell by 7.1 percent to $22.63 billion.