The role of FDI in Vietnam's socio-economic development
Foreign direct investment (FDI) has played a crucial role in catalyzing Vietnam’s socio-economic development and its economic integration into the global scene since it started transitioning to a market-oriented model three decades ago. Easing restrictions for foreign investors encouraged a substantial mobilization of overseas capital into the strategically located economy. Investors were drawn to Vietnam’s enormous untapped potential promising high returns, along with a cheap workforce and high endowment of natural resources. A seismic shift in Vietnam’s economic structure from agriculture to industry, since the 1986 Doi Moi economic reforms were implemented, spurred a massive movement of workers from one industry to the other, encouraging the emergence of private domestic and foreign enterprises.
Accession into the World Trade Organization in 2007 marked another turning point, helping lead to an almost three-fold jump in FDI that year compared to the levels in 2006. The inflows facilitated the development of Vietnam’s key export-oriented manufacturing industries, helping stabilize the economy, bring rampant inflation under control and lift living standards. Lauded as one of East Asia’s new economic tigers, Vietnam has achieved the second-fastest growth rate per capita worldwide since 1990, behind only China. A surge in government revenues through strong exports and higher average household incomes have enabled transformative social development over the last two decades. Notably, the proportion of people living below the national poverty line has plummeted, and access to health, education and basic infrastructure has significantly improved, drastically reducing mortality rates, advancing learning outcomes and improving the quality of life.
Vietnam’s labor-intensive industries, namely the manufacturing and processing sectors have up until now been the biggest beneficiaries of FDI. Cheap labor has diminishing advantages, however, becoming increasingly weaker as a driver of growth. Sustaining growth at advanced stages of development demands a new model based on improving productivity and creating jobs that add higher value. Vietnam’s exports are largely concentrated in low-value added products compared to China and other ASEAN countries (Indonesia, Malaysia, the Philippines and Thailand). Through the acquisition of advanced technology into high-value added areas, the government aims to diversify the economy and sustain annual growth rates of 6.5%–7.5% by boosting total factor productivity—which is essentially the efficiency of labor and capital inputs combined.
Attracting FDI to high value-added activities is integral to the government’s vision of boosting economic growth to new levels, with an ambitious target of ultimately breaking through the middle-income trap. This year, FDI is expected to account for around 70% of export turnover; a preliminary estimate shows that exports accounted for 93.6% of GDP in 2016. Featuring as a key goal in the government’s latest five-year socio-economic development plan for 2016–2020, boosting levels of FDI in high value-added sectors such as high-tech and environmentally-friendly projects will be critical to achieving social and environmental goals, including expanding health coverage, reducing unemployment and the poverty rate, extending access to clean water in rural and urban areas, and better managing pollutants.
Prospects for attracting more FDI to high value-added activities
In a bid to attract FDI into high value-added areas, the Ministry of Planning and Investment, in collaboration with the World Bank, is currently drafting a new five-year FDI strategy for 2018–2023. The strategy’s primary aims will be to lure more investment into high-tech industries than labor intensive ones and focus on the quality of investments in four priority sectors: manufacturing, services, agriculture and travel. Moreover, strengthening the capabilities of local enterprises will be crucial to facilitating linkages with foreign firms and strengthening participation in global value chains.
In the near term, priority will be given to industries with fewer opportunities for competition, which include the manufacture of automotive and transport equipment, and the development of environmentally friendly technologies (water conservation, and solar and wind energy). In the longer term, the focus will be on cultivating advanced skills in pharmaceuticals and medical equipment manufacturing, education, health, financial services, Fintech and the IT sector. Investment incentives are being designed to lure capital into regions with high potential in these sectors, such as the Tay Ngyuen region.
The government’s push to extend trade and investment liberalization through free-trade agreements should also help boost and streamline investment from partners, as reduced tariffs make exports more accessible. Among notable trade agreements include one with the EU and another coined the Regional Comprehensive Economic Partnership (RCEP). RCEP is a deal between the ten Association of Southeast Asian Nations (ASEAN) nations, and six Asia-Pacific heavyweights (China, India, Japan, South Korea, Australia and New Zealand). Vietnam is trying to diversify not the only the type of foreign investment, but also the partners from where FDI is sourced, especially from outside Asia.
FDI policies in Vietnam: Shortfalls and opportunities
Recently, there has been a shift in the preferences of multinationals to relocate operations from China to Vietnam, because of Vietnam’s low labor cost advantage—which it has not only over China, but also other regional players including Thailand and the Philippines—and somewhat less complex regulatory apparatus. Vietnam’s increasingly favorable tax and financial incentives have made it a hot spot for low-cost manufacturing. However, its cheap labor advantage has diminishing returns for an economy that is past the early stages of development and needs to restructure to high-value added sectors.
Cultivating a highly skilled workforce will be crucial to attracting FDI to high value-added sectors, as one of Vietnam’s primary shortfalls in terms of attracting FDI to high-value areas is a lack of skilled workers. In this regard, it trails far behind China, Singapore, Malaysia and Thailand. Reports indicate an acute skills gap as international firms in the technical, professional and managerial spheres find a mismatch in the skills needed and those of Vietnamese workers. A framework for skills development and training workers aligned to the economy’s long-term vision will be essential to luring FDI into high-tech industries.
Vietnam was the second most attractive destination for foreign investors among ASEAN countries in 2016, losing out to Singapore for the top spot. Vietnam’s business environment has significantly improved, propelling the country to number 68 out of 190 in the World Bank’s 2018 “Ease of Doing Business” report, a big jump up from a ranking of 82 just one year ago. While strides have been made in improving access to credit and electricity, and enhancing the tax system and procedures for enforcing contracts, Vietnam’s ranking is well below Singapore’s. Vietnam lags behind Singapore in every category of the index, signaling the need for faster progress in these areas to make it a bigger magnet for attracting FDI.
A complicated and unclear licensing environment, along with corruption, continue to impede investment, which helps explains Vietnam’s low ranking for starting a business. These are key areas of improvement; others include an improvement in trading across borders, protection of minority investors and resolving insolvency. Addressing these issues, together with upskilling the workforce amid a continued expansion in trade and investment liberalization, will be critical to attracting higher FDI inflows and keeping the economy on track to achieving its long-term vision.
Vietnam Economic Outlook
A surge in foreign investment inflows—amounting to USD 33.09 billion in the first eleven months of the year—is keeping the economy on a robust expansion path. Reports indicate that the processing and manufacturing sectors have been the biggest beneficiaries of the inflows. November recorded another month of stellar year-on-year industrial production growth, which hit the highest rate in close to three years, driven by a jump in manufacturing output. On the downside, the mining and quarrying sector contracted in November after expanding for the first time in 22 months in October, as the downturn in the oil and gas industry persists. Seeking to boost overall productivity and diversify the economy away from labor-intensive industries into high-value added sectors, Vietnam’s Ministry of Planning and Investment is currently formulating a new Foreign Direct Investment (FDI) strategy for 2018–2023, with assistance from the World Bank. The strategy will be specifically aimed at encouraging foreign investment into high-tech industries.
Vietnam Economic Growth
The economy is expected to grow at a strong pace next year, thanks to a record expansion in FDI inflows and a robust performance in exports. A weak banking sector, embroiled by a high proliferation of non-performing loans, and the ongoing boom in private sector credit continue to be downside risks to financial stability, however. FocusEconomics panelists expect the economy to expand 6.5% in 2018, which is up 0.1 percentage points from last month’s forecast, and 6.6% in 2019.
5-year economic forecasts on 30+ economic indicators for 127 countries & 33 commodities.
Author: Nihad Ahmed, Economist
Date: January 3, 2018
TagsFrance Forex Iran Venezuela Vietnam Infographic Unemployment rate Economic Growth (GDP) Emerging Markets Mexico Japan Exchange Rate Brazil Turkey TPP Ukraine Australia Major Economies Investment OPEC Tunisia Russia Trade Brexit Eurozone Gold Oil Banking Sector Energy Commodities Consensus Forecast Colombia China Base Metals Commodities Inflation Portugal Canada Bitcoin Euro Area Italy UK precious metals Sub-Saharan Africa Spain Healthcare Agricultural Commodities G7 India Eastern Europe Africa Commodities Cryptocurrency Germany IMF USA Company News South Africa Asia United Kingdom Greece Precious Metals Commodities Nordic Economies oil prices Argentina MENA European Union United States Latin America Housing Market
Angola's economy is expected to return to growth next year, supported by improving domestic demand dynamics and ris… https://t.co/2mVYcehJIL
1 hour ago
3 hours ago
As of this month, Cameroon has been included in our aggregated regional SSA forecasts. Find out more: https://t.co/J6UhL4HDEf
3 hours ago
The UK and EU finalized negotiations on the withdrawal agreement. How could this impact the economy? Economist Oli… https://t.co/WmQUbXSSrs
4 hours ago
4 hours ago
- How and when will the next financial crisis happen? - 26 experts weigh in
- China and Africa: A partnership under the spotlight
- The conditions are ripe for a Global Financial Crisis 2.0
- Uncertainty, instability and fear haunt a generation of Argentinians
- 5 things: Brazil's economic downturn and what to expect going forward
- 5 things: What to expect for Mexico's economy in 2019
- Emerging Market Currency Crisis: Everything you need to know
- Which ASEAN countries are most exposed in the event of a U.S.-China trade war?
- 75 Top Economics Influencers to Follow
- Emerging Markets Economic Outlook 2018 and 2019
- The Faces Behind Latin America’s Key Institutions
- 2019 Economic Outlook for the Top Oil Producing Countries
- Is your cup of coffee about to get more expensive going in to 2019?
- The Economic Implications of an Aging Global Population
- Can the Wisdom of the Crowds predict the results of the 2018 World Cup?
- Railway Mania: The Largest Speculative Bubble You’ve Never Heard Of
- From Riches to Rags: Have Cryptocurrencies Crashed for Good?
- Investment looks to Latin America, but forecasts are not encouraging
- Turkey: Erdogan has cemented his grip on power - now what about the economy?
- How can Latin America’s business environment benefit from technological change?
- Mexico: A look at the past, present and future as elections yield AMLO victory
- Italy’s New Populist Government and the Eurozone: Prelude to a Crisis?
- Latin America moves toward increased integration as U.S. protectionism grows
- How can Latin America increase productivity without affecting the quality of employment?
- How will Saudi Arabia's economy benefit from lifting the women's driving ban?
- Which countries are the most prepared for the upcoming digital revolution?
- India Under Pressure from the U.S. on Trade Policy
- The Story of Steel
- Latin America is the World Leader in eCommerce Growth Despite Serious Challenges
- What the TPP means for trade in Latin America
- Elections in Russia: Analysis and Implications
- Nearly a Third of Latin Americans Have No Right to a Pension
- A Look at Healthcare Models Around the World
- The Poorest Countries in the World
- Newly-elected Chilean President Sebastian Piñera faces a myriad of challenges - economic and otherwise
- The Economic Effects of Trade Protectionism
- Regional Disparity: The Dark Side of Inequality in Latin America
- Coal: The story of the world's most abundant fossil fuel
- Gold: The Most Precious of Metals (Part 3)
- Venezuela's Electoral Conundrum
- Trump's 1st Year: 95 Analysts Surveyed on U.S. Economy
- The Latest on China and What's in Store for 2018
- An in-depth look at the Eurozone’s booming economy and the challenges that lurk in the shadows
- Increasing poverty in Latin America takes a breather thanks to improving economic dynamics
- What will be the most miserable economies in 2018?
- Is Spain doing enough to address its high youth unemployment rate?
- Has Latin America gone far enough in reducing barriers to international trade?
- Commodities Outlook: Oil, Natural Gas, Coal, Lead & Tin
- 21 experts tell us what the future looks like for cryptocurrencies and blockchain
- Turkish lira plummets to all-time low on Erdogan’s monetary feud and tense U.S.-Turkey relations
- Copper: The first metal mastered by man
- The Mercosur-EU Free Trade Agreement: Obstacles & Opportunities
- Nigerian Economy Still Treading Water Thanks to Oil Sector
- Elections in Chile: What the results could mean for the economy
- QE’s Untold Story: A Chart That Fed Correspondents Need To Investigate
- Holland’s fragile one-seat majority government targets economic growth at the expense of fiscal sustainability
- South Africa: Economy at a tipping point?
- Latin American Commodities: What’s behind the increase in demand and prices?
- Is the UK really "shackled to a corpse"?
- Spain-Catalonia: 7 economic experts weigh in on how the situation will affect the outlook
- How well is Spain's labor market doing since the crisis?
- Which countries will have the highest and lowest inflation in 2017?
- How vulnerable is Latin America to economic crises today?
- Iron ore facts and common questions answered
- The bulging economic costs of obesity
- How much investment is needed to salvage Latin America’s crumbling infrastructure?
- A Look at the Potential Impact of Brexit on the Dutch Economy
- Emerging Markets Are Kicking Into Higher Gear In 2017
- Why is foreign direct investment in Latin America falling again?
- Are Central Banks Nationalising the Economy?
- Bounty or burden? The impact of refugees on European economies is far from clear
- What’s the future of U.S.-Latin America trade relations?
- Taxes or cutbacks? Latin America's challenge of sustaining spending without causing debt to skyrocket
- Are uranium prices making a comeback?
- Taxing the Economy: Achieving a Delicate Balance
- How will Latin America’s upcoming lengthy election cycle affect the reform agenda and credit ratings?
- How will emerging market economies perform in 2017?
- Chilean Economy in Focus: Interview with Senior Economist of the Chamber of Commerce of Santiago
- CEOs Rank Top Economies for Growth Opportunities
- The Mobile Ecosystem & Latin America's Economy
- Prospects and Challenges for the Global Economy: Interview with Tim Cooper from BMI Research
- How will the Fed reduce its balance sheet & and how will the ECB end QE? - 19 economic experts weigh in
- Thoughts on "unwinding" QE from Frances Coppola
- The Fed and ECB at a crossroads: Unwinding QE
- Spain: The economy that continues to silence the critics
- Latin America: The Most Unequal Region in the World
- The History of OPEC: Has it been a Success?
- FocusEconomics Announces 2017 Analyst Forecast Awards Winners
- Latin America’s rising unemployment bucks nearly decade long trend
- Escape from the Central Bank Trap by Daniel Lacalle
- China's economic rebalancing act: What to look out for in 2017
- Driving Growth in Latin America: Challenges & Priorities
- Is the Global Economy Rebalancing?
- Commodity exporters face challenging times
- Recent Global Events Facilitate Mercosur-Pacific Alliance
- 23 economic experts weigh in: Why is productivity growth so low?
- Mexico's outlook as Trump nears 100-day mark
- Interview with Oxford Economics Senior Economist on implications of the possible outcomes of the French Presidential Election
- The anxiety of the small saver in a world of negative interest rates
- Brexit negotiations. Between Uncertainty and Urgency
- An Economic History of the EU from El Blog Salmón
- Baby Boomin': Implications of high population growth in Latin America
- Survey of International Economists Predicts a Le Pen Defeat in French Elections, Says Macron has Best Economic Plan
- Spain in a global context: developed economy with some challenges
- How much is crime costing Latin America?
- Predictions & Estimates from Economist Daniel Lacalle
- What economy will the new Dutch government inherit?
- “The data is not a true reflection of reality in India” Interview with Société Générale India Economist
- What are the prospects for Emerging Economies in 2017?
- What to expect in Asia for 2017
- Top Economics & Finance Blogs of 2017
- Latam to Resume Moderate Growth in 2017 but Important Risks Plague Outlook
- 4 Key European Elections That Will Impact the Economy in 2017
- How are security concerns and political chaos affecting Turkey’s economy?
- Global growth to edge up in 2017
- Set to breach targets again? Debt and deficit outlooks for Southern European Eurozone countries in 2016 & 2017
- What does Donald Trump mean for the U.S. economy?
- How will emerging markets perform in 2017?
- The economic impact of a break in U.S.-Philippines ties
- Trump election: Base metals surge due to infrastructure plan
- 5 updates on the Venezuelan economic crisis
- Canada: When your neighbor’s house is on fire…
- Short-term pain before long-term gain? A look at French labor reform and economic growth
- Asia: Unremarkable growth & unfulfilled promises?
- How India's latest monsoon is affecting the economy
- Innovation in Latin America: Potential Goes Untapped Due to Weak Economic Conditions
- Russian economy update in wake of OPEC deal announcement
- The Wisdom of the Crowds and the Consensus Forecast
- Can the peso predict the U.S. election results?
- There's no end in sight to the Venezuela crisis
- A Look at the European Union Political Calendar
- Survey of international economists shows uncertainty surrounding elections damaging U.S. growth prospects
- FocusEconomics partners with leading online statistics provider Statista
- China: Recent postive economic data may be papering over the cracks
- Sub-Saharan Africa's 2016 & 2017 growth rates
- The Italian Dilemma: Weak banks pose risk to already faltering domestic demand
- How much money do migrants from Latin America send home?
- The U.S.' (Not So) Mysterious Case of the Missing Men
- What to expect from the G20 economies by 2020
- The Pain in Spain: Robust GDP growth cannot mask the persistent structural deficit