| To support a mixed import-substitution and export-oriented industrialization strategy, Vietnam in transition aggressively pursues a system of discriminatory non-transparent tax and trade incentives for foreign direct investment (FDI) in designated priority industries, geographical regions, and preferred form of organization, specifically in joint venture with state-owned enterprises (SOEs).; In this thesis, I apply an integrated cost-benefit analysis to evaluate the impact of the tax and trade incentives on the financial, economic, and distributive performance of four industries. The industries are grouped in three categories representing the pattern of FDI in Vietnam: cement in industry category 1 (import-substitution heavy industry); vegetable oils in category 2 (import-substitution labor- and material-intensive manufacturing industry); leather shoes and clothing in category 3 (export-oriented labor- and material-intensive industry).; Two major findings emerge. First, tax incentives positively affect the financial outcomes of projects but do not change the marginal behavior of foreign investors, whereas trade protection contributes significantly to shaping the observed trend and pattern of FDI in Vietnam. The study also finds that the current institutional setting for investment imposes substantial “hidden costs” on firms; the quantifiable “hidden costs” (e.g., the delay in tax and tariff refunds, and relatively high rent and utility costs), alone, exert significant negative impact on the financial performance of export-manufacturing firms. Second, import-substituting heavy industries are economically wasteful, while export-manufacturing labor- and material-intensive industries are economically and socially beneficial for Vietnam.; To capitalize on the country's comparative advantages, Vietnam must shift from the current mixed industrialization toward an export-oriented manufacturing-based industrialization strategy. Multiple “hidden costs” must be removed. While Vietnam needs to establish a regionally favorable fiscal regime, the system should be neutral across sectors and ownership and be based on efficient tax administration. If incentives are unavoidable, especially for footloose export-manufacturing industries, they must be transparent and carefully monitored. The existing trade protection is inefficient; even if revenues are the primary goal, the government should focus on less distorting taxes such as value-added tax. |
