Aug 12, 2013 | 10:30 GMT

5 mins read

Vietnam: Investment Trends Bode Well for the Country's Economic Future

Vietnam: Investment Trends Bode Well for the Country's Economic Future

Recent trends in foreign direct investment may be a good sign for Vietnam, which has struggled to attract investors since the global economy slowed down in 2009. In fact, FDI into Vietnam has recovered significantly in 2013, and it has been appropriated to areas that ordinarily do not receive much attention from investors. Investment diversity could help Vietnam maintain its status as the pre-eminent emerging economy in an increasingly competitive region.

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Vietnam was once one of Southeast Asia's most sought after investment destinations, but since 2009 Hanoi has been unable to reach its investment goals. Indeed, investment has declined sharply because of a sluggish global economy and domestic economic mismanagement. According to Vietnam's official statistics office, foreign direct investment fell from $71.7 billion in 2008 to $23 billion in 2009. This led the government to moderate its investment goals in subsequent years. In 2012, Vietnam received only $13 billion of its desired $15 billion to $17 billion in investment.

However, Vietnam received $11.9 billion in the first seven months of 2013, representing a 20 percent year-on-year increase. This brings Hanoi closer to its goal of $13 billion to $14 billion for the year. Notably, areas outside Vietnam's traditional investment destinations — southeast industrial zones such as Binh Duong and Dong Nai provinces and the Red River Delta region — have received more of this newfound investment.

Vietnam: Investment Trends Bode Well for the Country's Economic Future

Vietnam's Economic Regions

With $2.81 billion, Thanh Hoa province received more foreign direct investment than any other province or region in Vietnam, due in part to Japanese investment in the Nghi Son Refinery and petrochemical project. It was followed by Thai Nguyen province, where Samsung has a new mobile phone assembly plant. (Thirty-seven other areas previously had seen more investment than Thai Nguyen.)

By comparison, the Red River Delta and the southeast, which usually account for 70-75 percent of total foreign direct investment, saw 40 percent less investment. Meanwhile, for the first time ever, exports of value-added products such as mobile phones and electronic components and low-end goods, such as garments and shoes, outpaced more traditional exports, such as oil and minerals.

Capturing Investment

Vietnam owed its competitiveness to a large, young, cheap labor pool; favorable sea access to the global supply chain; political stability; and favorable policies toward foreign investment since the Doi Moi reforms. Currently, foreign investment plays a crucial role in Vietnam's transitional economy, accounting for nearly 60 percent of the country's total export revenue and 40 percent of its industrial output. It also has directly created more than 2 million jobs in a country of 89 million people.

But as the economy grew, the advantages afforded by low wages declined. Inflation and income increased, particularly in the country's traditional industrial zones. Vietnam's manufacturing wages rose to an average of $100-$150 per month, suggesting that its potential for low-end manufacturing may decline. By comparison, Cambodia's average manufacturing wages are $100 per month while Laos' are $80 per month.

Meanwhile, incomplete industrial chains exposed deficiencies in the investment structure. Despite an abundance of raw materials, Vietnam has an insufficient processing sector to support its primarily low-end manufacturing activities. The country was forced to import processing products, particularly fuel, chemicals and machinery, en masse. As a result, Vietnam's trade deficit soared alongside the rise in FDI; at its highest, it accounted for 22 percent of total export revenue. Moreover, most of the country's low-end manufacturing goods were not consumed domestically, a factor that limits the benefits of increased FDI.

Vietnam: Investment Trends Bode Well for the Country's Economic Future

FDI in Vietnam

A few factors aggravated Vietnam's problems. The most notable of these was the global economic slowdown, which led to declining demand abroad. Coupled with domestic financial turmoil, foreign direct investment into Vietnam fell as capital left the country.

Realizing that Vietnam may have been losing its investment appeal as manufacturers opted for cheaper opportunities in countries like Indonesia, the government implemented several reforms meant to stabilize the economy and attract business. While the reforms worked, albeit temporarily, Hanoi wants more foreign direct investment that better corresponds with its economic transformation — which involves restructuring the economy in different regions and sectors — and focuses on its industrial sector. The government is thus exploring new investment potential and attracting additional investment in high-tech and value-added goods. Specifically, Hanoi is hoping to capture the investment that is leaving China for other, cheaper countries.

Lingering Questions

The latest wave of foreign money that has favored Vietnam's less traditional investment destinations may help Hanoi achieve its economic goals. The emerging investment destinations, like the rest of Vietnam in previous years, were supported by their abundant labor forces and unutilized land — somewhat of a rarity in traditional investment zones. Relatively upgraded infrastructure within and among these investment destinations has enabled Vietnam to better transport goods and provide services. In Thai Nguyen, for example, a new airport was built for domestic transport, and a highway linking the province to Hanoi was completed earlier in 2013. Along the central coast, the newly constructed expressway and improved industrial zones surrounding Da Nang could further help Vietnam achieve its goals of creating high-tech and processing sectors in the region. Opportunities for infrastructure were created by incentives that local authorities offered to foreign investors.

Increased investment into value-added sectors could enable Vietnam to export more than mere low-end manufactured products. But as Vietnam is poised to move up the value chain, unskilled laborers and inadequate supporting industries will continue to hamper its push for more investment. Such complications accompany lingering questions over Hanoi's ability to maintain the country's long-term financial and political stability despite short-term solutions. Questions also surround its determination to further reduce the state's economic control and to liberalize the economy.

Nevertheless, Vietnam has proved resilient to hardship since its 1986 economic transformation. With its still relatively cheap labor, strategic location and renewed government action to address some internal structural problems and attract investment, Vietnam could maintain its pre-eminence in the region. 

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