Why Is FDI Booming in Vietnam?

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Vietnam’s economic journey stands out as a tale of resilience and growth amidst global challenges. Over the past three decades, this Southeast Asian nation has undergone a remarkable transformation, transitioning from poverty to establish itself as a lower-middle-income country. Key to this progress has been Vietnam’s implementation of impactful economic reforms, propelling it into a leadership position in global investment and development. Despite facing numerous hurdles, including the sweeping effects of the COVID-19 pandemic, Vietnam’s economy has shown exceptional resilience. From achieving an impressive 8 percent annual growth rate in 2022 to grappling with a downturn in 2023, Vietnam has exhibited remarkable adaptability in navigating through volatile times.

Central to Vietnam’s economic narrative is the substantial influx of foreign direct investment (FDI), which has played a crucial role in driving growth and fostering development across various sectors. The period from 2002 to 2023 witnessed Vietnam’s remarkable economic expansion, underscoring the significant impact of strategic investments and forward-thinking policies.

Over 35 years, Vietnam’s registered foreign direct investment (FDI) has experienced remarkable growth, surging from US$2 million in 1988 to a staggering US$550 billion by the end of 2023. The current foreign investment landscape in Vietnam is characterized by billions of U.S. dollars fueling economic growth.

Japan stands out as the largest investor, with 4,917 projects and an investment increase from $11.57 billion (July 2022) to $12.8 billion (August 2022). 2023 has been a stellar year for foreign direct investment (FDI) in Vietnam. Despite global economic headwinds, Vietnam attracted a staggering US$36.61 billion in FDI, representing a 32.1% year-on-year increase and exceeding initial projections. The country’s strategic focus on high-tech sectors, including agriculture, manufacturing, services, and travel, further enhances its appeal for international investors. Also, Vietnam boasts over 36,000 active FDI projects with a total fund of $441 billion. Notably, 57% of these funds have been disbursed, reflecting the robustness of the foreign investment landscape in the country.

The Evolution of Foreign Direct Investment (FDI) in Vietnam: A Three-Decade Journey

In 1988, Vietnam embarked on a transformative economic journey with its inaugural FDI project in the southern province of Ba Ria – Vung Tau, marking the inception of foreign investment in the country. However, initial years witnessed a cautious approach from foreign investors, resulting in a gradual inflow of projects and capital.

By 1991, a paradigm shift occurred as FDI growth gained momentum, initiating the first significant wave of foreign investment. This period saw a surge in projects and capital value, attracting industry giants such as Taiwanese footwear producers PouChen and Feng Tay, along with Japan’s Honda, all contributing to Vietnam’s burgeoning manufacturing sector.

The momentum faced a setback during the 1998 Asian financial crisis, leading to a temporary cold spell in the FDI market, which persisted until 2002. The resurgence came in 2006 with Vietnam welcoming billion-dollar projects from American chipmaker Intel and South Korean steel manufacturer Posco, setting a new FDI record of US$10 billion and inaugurating the second major FDI wave.

In 2008, Vietnam experienced unprecedented FDI inflow, reaching a peak of US$72 billion, boosted by the construction of Samsung’s first factory in Bac Ninh Province. However, the global financial crisis later that year temporarily disrupted FDI disbursement, which hovered around US$10-11 billion, significantly lower than the committed amounts.

The subsequent period from 2015 to 2019 marked the third significant wave of FDI, characterized by consistent growth rather than abrupt spikes seen in the 2005-2008 period. The onset of the COVID-19 pandemic in early 2020 momentarily halted cross-border investments, leading to a decline in FDI.

Over the past three decades, South Korea, Singapore, and Japan have emerged as the top contributors to Vietnam’s FDI landscape. Surprisingly, the United States did not secure a position in the top 10 contributors. However, with the upgrade of Vietnam-U.S. relations to a Comprehensive Strategic Partnership in early September, expectations rise for a forthcoming fourth wave of FDI, with an anticipated capital injection from the world’s largest economy.

Factors behind an Upsurge in Foreign Direct Investment in Vietnam

Vietnam’s strategic geographic location as a manufacturing hub and its pivotal role in the “China +1” strategy highlight its significance in East Asia’s economic landscape. Vietnam provides a conducive environment for investment, thanks to its stable government, well-defined economic vision, fair policy control, minimal investment barriers, and attractive incentive schemes. The nation’s dedication to enhancing its business environment is apparent in its increasing rankings for ease of doing business, bolstered by a regulatory framework that emphasises efficiency and transparency. With a population of over 95 million, a growing middle class, and a services sector that contributes over 40% to its GDP, Vietnam offers a promising market for businesses. This is further supported by the rising consumer spending in the country. This combination of factors underscores Vietnam’s impressive economic growth and its potential for reliable investment returns on both regional and global levels.

Firstly, Vietnam’s active involvement in major global trade agreements, including the Regional Comprehensive Economic Partnership (RCEP), Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), and the EU-Vietnam Free Trade Agreement (EVFTA), has solidified its status as a sought-after destination for international trade. These agreements offer significant trade benefits, encouraging greater investment.

Since joining the WTO in 2007, Vietnam has demonstrated a strong dedication to fostering international trade partnerships. This membership has significantly improved the country’s global reputation and has also attracted a large number of foreign investors who are interested in a stable and business-friendly atmosphere. Vietnam’s integration with legal frameworks is evident through its membership in the WTO and its commitment to major global Intellectual Property Protection agreements. This demonstrates Vietnam’s alignment with international legal standards. This integration provides investors with a secure and regulated business environment.

Secondly, Double Tax Avoidance Agreements (DTAAs) are international agreements that aim to prevent the double taxation of income and assets between two countries. These agreements provide clarity and guidelines for taxpayers to determine their tax liabilities in each country, ensuring that they are not taxed twice on the same income. DTAAs also promote cross-border trade and investment by reducing tax barriers and providing a more favorable tax environment for businesses and individuals operating in Vietnam’s extensive network of Double Tax Avoidance Agreements with over 80 countries and territories is a crucial factor that attracts foreign investors. These agreements create a tax-friendly environment and encourage investments across borders, relieving the burden of double taxation.

Thirdly, businesses are actively considering other destinations due to the ongoing trade tensions and disruptions in China. Vietnam is considered a favorable choice for manufacturers looking to expand their operations and reduce risks by diversifying their options. Its close proximity to China provides a strategic advantage in this regard. Vietnam’s active engagement in international trade is demonstrated by its involvement in more than 18 Free Trade Agreements. With this extensive network, businesses gain unparalleled access to markets across APAC, ASEAN, Europe, and beyond.

Moreover, Vietnam’s focus on infrastructure development, as highlighted in its transport infrastructure master plan, demonstrates a proactive approach to bolster economic growth. Investments in motorways, high-speed rail routes, ports, and airports have significantly improved the country’s connectivity and logistics. The well-planned Investment Zones (IZs) and Industrial Parks (IPs) create a favorable environment for foreign investors. These zones provide a range of facilities, infrastructure, logistics, and tax incentives, which can greatly enhance production efficiency and boost profitability. As a result, businesses that depend on efficient transportation networks are being drawn to the area.

Lastly, Vietnam has a labour market that is both large and highly competitive, with around 60 million individuals. Vietnam’s dynamic workforce and competitive minimum wages compared to neighboring countries have positioned it as an attractive destination for industries in search of skilled and cost-effective labour. Moreover, Vietnamese government’s consistent efforts to attract foreign investors through a range of incentives, particularly tax incentives, are crucial. Investing in Vietnam is highly appealing due to corporate income tax incentives, preferential tax rates, and tax holidays.

To conclude, Vietnam’s journey in attracting Foreign Direct Investment (FDI) showcases a vibrant and adaptable economic landscape, influenced by strategic alliances, worldwide changes, and a dedication to cultivating an appealing investment climate. Given its strategic geographic location and important role in the “China +1” strategy, Vietnam is a crucial manufacturing hub in East Asia. With a stable government and a clear economic vision, Vietnam provides investors with a favorable environment characterized by fair policy control, minimal investment barriers, and robust incentive schemes. The nation’s commitment to enhancing its business climate is clearly demonstrated by the increasing rankings in ease-of-doing-business and the regulatory framework that emphasises efficiency and transparency. Therefore, Vietnam’s FDI landscape holds great promise as it forges stronger ties with major economies. The country’s journey has been characterized by success, allure, and untapped potential.

– S. M. Saifee Islam is a Research Associate at the KRF Center for Bangladesh and Global Affairs (CBGA).

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