Creating Policy Space For Development: Explaining Vietnam’s Dramatic Shift in Foreign Direct Investment Strategy

Abstract

Developing countries today face unprecedented challenges to their economic development aspirations. The last two decades have witnessed the proliferation of multilateral rules on trade such as those embodied in the World Trade Organisation, which many view as having a policy-constraining effect on states in the developing world. ‘Climbing the ladder of development’ also requires ever increasing levels of technological knowledge as existing industries are upgraded through higher technologies. Yet, the barriers to technological upgrading grow higher for developing countries, much due to huge spending of global corporations to stay on top of the value chain. In the face of such challenges, some developing countries such as Vietnam has embarked on an economic development strategy reminiscent of now-developed countries such as Taiwan and Singapore, which relies heavily on the inducement of Foreign Direct Investment (FDI), By employing such an approach, the Vietnam state has seemingly transformed itself from being home to largely labour-intensive to increasingly higher-technology manufacturing especially in Information and Communication Technology (ICT) industries. The core question posed in this study is: Why did the Vietnam government actively pursue dramatic increases in inward FDI from the late 1990s? My central argument is that the Vietnam state has used FDI as a means to rapidly increase the technological capabilities of the private sector. In this sense, Vietnam is similar to the examples of successful East Asian countries mentioned above. However, Vietnam’s approach is also driven by domestic political rationales involving the need to weaken the link between the party state and inefficient state-owned enterprises. At the same time, the state is promoting the development of the private sector through creating policy space for technology transfer from multinational corporations. By examining the motivations and mechanisms utilised by the Vietnam state in bringing about a dramatic increase in technology-intensive FDI, I seek to contribute to two debates: (1) the opportunities for developing countries to employ industry policies under conditions of globalisation, and (2) the transferability of the developmental state model to today’s developing countries.