Vietnam has favorable fundamentals to attract FDI capital flows.

Ngoc Lan

Favorable fundamentals give Vietnam the position of a very good FDI destination, surpassing other ASEAN countries…

Up to now, attractive factors play an important role in attracting investment and helping Vietnam integrate deeply into the global value chain, according to the report “Vietnam at a glance – FDI” published by HSBC Global Research on August 8.

According to the report, amid intensifying global competition to attract FDI, questions have been raised about whether Vietnam can maintain the strong investment inflows since joining the World Trade Organization (WTO) in 2007.

Clearly, the global investment landscape has shifted in the wake of developments such as the implementation of the Global Minimum Tax, and adapting to this investment landscape is likely to become more complex. However, taking a step back and taking the time to reassess Vietnam’s fundamentals that have attracted a range of foreign companies to the country in the first place can help paint a picture of the country’s still-attractive FDI prospects.

FAVORABLE PLATFORMS

Over the past 20 years, Vietnam has emerged as a major manufacturing hub and deeply integrated into the global supply chain. Exports have increased by more than 13% annually on average since 2007, dominated by foreign-invested enterprises.

Until now, FDI capital flows have mainly come from South Korea, most notably from Samsung. Since Samsung established its first phone factory in Bac Ninh province in 2008, more than half of its global smartphone products have been manufactured in Vietnam, with a total investment capital of more than 20 billion USD.

The efforts of these early entrants have encouraged other major tech companies to invest in Vietnam’s manufacturing capacity. In 2023, leading Chinese manufacturers stepped up investment in Vietnam, with nearly 20% of newly registered FDI originating from mainland China.

The growing interest of multinational corporations in Vietnam stems from many factors, including competitive costs and FDI support policies. Compared to labor costs in Asia, manufacturing wages in Vietnam are lower than in China and other countries, although Vietnamese people have a solid level of general education, as shown by Vietnam’s high PISA survey results, an international student assessment program that examines the knowledge and skills of 15-year-old students.

Other costs, such as the energy required to run factories, are also competitive in Vietnam. When comparing electricity prices for businesses, Vietnam is the second lowest compared to other countries, although recent changes that have shortened the time frame for electricity price adjustments may affect the current situation. Meanwhile, diesel, which is widely used in industry, shows a competitive advantage in price.

In addition, Vietnam has made significant progress in establishing various economic agreements with its trading partners, such as the EU-Vietnam Free Trade Agreement (EVFTA) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). These developments have supported and facilitated foreign investment, making Vietnam increasingly open to FDI, according to the OECD.

Part of the reason for the favorable investment environment can be attributed to the government’s active support through the tax system. Vietnam is competitive with other countries thanks to its statutory corporate income tax rate of 20%. Some businesses can take advantage of extended tax breaks and exemptions to further reduce their effective tax rate.

To date, attractiveness factors have played an important role in attracting investment and helping Vietnam integrate deeply into the global value chain. In fact, Vietnam’s participation in the global value chain has increased sharply over the years, currently comparable to Singapore. However, the increase in integration has mainly occurred through more backward linkages. Vietnam is currently positioned as a hub for importing complex intermediate inputs for final assembly, as evidenced by the low localization rate in the electronics industry.

MAINTAINING STRONG INVESTMENT FLOWS

To maintain strong investment flows, the HSBC report points out that it is important for Vietnam to move up the manufacturing value chain and increase the domestic value added in these goods.

Compared to the strong growth in consumer electronics exports, Vietnam’s share of global integrated circuit (IC) exports has grown at a slower pace. Despite a well-educated workforce, the shortage of technically skilled workers has hampered the development of semiconductor manufacturing capacity. This has prompted the government to seek ways to expand the semiconductor industry’s human resources in the coming years.

The shortage of skilled workers also affects other sectors, such as logistics and maritime transport. In addition to expanding and improving vocational education at the national level, more initiatives to support and encourage foreign companies to participate in the domestic economy can help increase the benefits of increasingly sophisticated FDI flows. For example, US-based chipmaker Synopsys recently signed a cooperation agreement with students and faculty at Ho Chi Minh City National University to work on microchip design, training, and research.

Encouragingly, there are signs that more sophisticated manufacturing know-how and processes are trickling into Vietnam. In 2022, Samsung set up a research and development center in Hanoi to expand its manufacturing capacity and began producing some semiconductor components. Meanwhile, Apple has also increased its presence in Vietnam, allocating product development resources to the iPad.

Factors beyond tax considerations, such as the quality of infrastructure, also need to be actively addressed in the context of global minimum taxes being implemented in many countries. Measures such as leveraging digitalization to streamline trade processes, ensuring reliable and green energy, and facilitating the movement of goods through improved infrastructure are likely to influence investment decisions by multinational corporations in the coming years.