Sustainable development impacts of investment incentives : A case study of the mining industry in Vietnam

By Vu Xuan Nguyet Hong, Ngo Minh Tuan, Ho Cong Hoa on March 5, 2009

Vietnam has seen impressive increases in foreign direct investment over the last two decades thanks to gradual improvements in the legal system and investment policy to create favourable conditions for foreign investors. Incentives available to enterprises investing in certain sectors and locations have become an integral part of Vietnam's investment framework. Using the mining and quarrying sector as a case study, this paper examines the impact of such incentives on shaping foreign enterprises' decision to invest in Vietnam. The study also assesses the role of investment incentives in encouraging socially responsible and environmentally sustainable performance in the mining industry. It concludes with a series of recommendations on how to ensure that incentive-induced FDI promotes sustainable development in Vietnam.

Key findings:

  • Most foreign enterprises in the mining and quarrying sector have enjoyed investment incentives provided by the Government of Vietnam in one way or another. Tax incentives have proven to be most lucrative. Investment incentives were considered an important factor, but not a prerequisite for the foreign enterprises' decisions to invest in Vietnam's mining and quarrying sector. An equal and transparent legal system was also seen as a crucial factor.

  • Current investment incentives have not been a primary influence on foreign enterprises' sustainable development behaviour in the mining and quarrying industry. Although current laws already stipulate that the State must encourage enterprises to be socially responsible and environmentally sustainable, these demands are not as strictly enforced as others.

  • In terms of economic sustainability, foreign enterprises in this sector outperformed domestic ones with regard to productivity, technology level, increased stable investment capital and contribution to the state budget. However the state budget losses due to tax incentives, especially corporate income tax incentives, were substantial, accounting for between 0.5 and 0.7 percent of industrial turnover of this sector for the period 2001-2006.

  • In terms of social sustainability, foreign enterprises have sought to maintain a reasonably high income for their employees compared to their domestic counterparts. However, enterprises have not paid active attention to the social welfare of their employees with regard to vocational training, health care insurance, social insurance, and contribution to trade unions and other social organizations.

  • In terms of environmental sustainability, foreign enterprises have not actively taken measures to prevent pollution during their production process. Environmental protection activities were mainly performed to satisfy current legal regulations, but did not demonstrate a proactive stance in improving environmental performance.

Key recommendations:

  • For Vietnamese investment incentives to influence enterprises to promote sustainable development, the State should consider linking sustainable development targets and conditions for incentive entitlement, in particular social and environmental conditions.

  • Post-investment inspection and monitoring by government agencies should be further strengthened to ensure that enterprises are honouring their commitments. The public should be involved in monitoring by requiring investors to publish their commitments and publicly recognizing companies that comply with or exceed their sustainable development goals.

  • The natural resource royalty system should encourage enterprises to conserve the non-renewable natural resources of Vietnam. An increase in royalties for minerals would not only limit exploitation, but also increase local state budget income to provide the necessary financial resources to restore the environment surrounding the exploited areas.

Report details

IISD, 2009