To ensure sustainable development, Vietnam will need to strike a delicate balance between attracting foreign investment and fostering domestic capability.

Vietnam’s economy expanded at an average annual rate of 6.1% between 2012 and 2022, making it one of the region’s fastest-growing economies, according to the Vietnam News Agency. This robust performance was fueled by a steady inflow of foreign capital. With its strategic location, competitive labor costs, and supportive policies, Vietnam has become a favorite destination for foreign investors. The country’s export-oriented economy has flourished due largely to the contributions of multinational corporations. However, the country faces challenges related to overreliance on foreign capital and limited domestic value addition. By strategically leveraging foreign investment to enhance domestic industries and create high-quality jobs, Vietnam can achieve a more resilient and sustainable economic growth trajectory. The current state of FDI in Vietnam Vietnam has witnessed a strong influx of foreign direct investment (FDI) in recent years, reinforcing its status as a manufacturing hub and a prime investment destination in Southeast Asia. In 2023, new FDI approvals amounted to an impressive US$36.61 billion, a 32.1% year-on-year increase, according to the Foreign Investment Agency under the Ministry of Planning and Investment. The manufacturing and processing sector remained the dominant recipient of FDI, accounting for 64.2% of the total investment. Other key sectors attracting significant foreign capital included real estate, power generation and distribution, and finance-banking. Singapore took the lead as the largest foreign investor in Vietnam, with over US$6.9 billion, representing 18.6% of the total pledged FDI, followed by Japan and Hong Kong. While FDI has traditionally been concentrated in major economic hubs like HCMC, Haiphong, and Quang Ninh, there is a growing trend of FDI spreading to other parts of the country, including the Mekong Delta. Provinces such as Long An have seen significant FDI inflows, with over 1,300 projects worth more than US$11.2 billion registered by the end of May 2024. Notably, since the enactment of the Foreign Investment Law in 1988, the Mekong Delta has attracted substantial foreign capital, initially pulling in US$7.8 million, or 10% of the total projects nationwide. However, the region’s growth in foreign investment has slowed in recent years. Experts attribute this slowdown to inadequate logistics infrastructure, limited supporting industries, and a shortage of skilled labor, which have hindered the region’s ability to attract and retain foreign investors at the same pace as other parts of the country. The pull factor Vietnam’s ability to consistently attract substantial foreign capital has been a significant pull factor in its economic success. Inflows of FDI normally exceed 4% of the country’s GDP annually, placing Vietnam among the top ASEAN nations in terms of FDI as a percentage of GDP, according to a recent HSBC report. One of the main drivers behind this surge is Vietnam’s competitive cost structure. Combined with a favorable investment climate, this has made the country an attractive destination for global manufacturers. Analysts suggest that these factors have encouraged foreign companies to set up shop in Vietnam, using the country as a key export platform. Over the last two decades, Vietnam has transformed into a pivotal manufacturing hub, deeply integrated into global supply chains. The country’s export capabilities have seen an average annual growth rate of over 13% since 2007, with foreign-invested enterprises playing a crucial role in driving this export boom. South Korea, in particular, has been a significant investor in Vietnam, with Samsung emerging as a prominent example. The tech giant established its first smartphone factory in the northern province of Bac Ninh in 2008. Today, more than half of Samsung’s global smartphone production comes from Vietnam, with the company’s total investment in the country exceeding US$20 billion. Samsung’s early investment in Vietnam has created a magnet effect, attracting a growing number of tech manufacturers to come to the country. This trend gained significant momentum in 2023, with Chinese manufacturing companies notably increasing their investments, accounting for nearly 20% of new investment pledges. Compared to other Asian manufacturing hubs like Singapore, Thailand and Indonesia, Vietnam offers considerably lower labor costs, especially when compared to mainland China. This cost advantage is further enhanced by Vietnam’s robust labor force. The country’s strong performance in international education assessments, such as PISA, reflects a solid foundation in mathematics, reading, and science. In 2022, Vietnam ranked second in the region, showcasing a high-quality labor pool that is competitive with regional leader Singapore. Vietnam’s competitiveness also extends to energy prices. According to reports, electricity rates in Vietnam are among the lowest in Southeast Asia, ranking second only to Indonesia, with prices below US$0.10 per kilowatt hour. Additionally, diesel fuel is cheaper in Vietnam than many regional competitors, making it second only to Malaysia with prices under US$1 per liter. These cost advantages contribute to lowering operating expenses for foreign firms. The tangible benefits of Vietnam’s free trade agreements are evident in its better export performance and business operations. For example, the European Union-Vietnam Free Trade Agreement (EVFTA) has significantly boosted exports to the European Union, with shipments rising from 35 billion euros in 2019 to over 48 billion euros in 2023. Similarly, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) has opened up vast markets in the Asia-Pacific region, with Vietnam’s exports to member economies reaching US$100 billion in 2023. These agreements have not only increased trade volumes but also diversified Vietnam’s export portfolio, particularly in sectors like electronics, textiles and agriculture. Government policies, particularly tax incentives, have further strengthened Vietnam’s appeal to foreign investors. The country’s statutory corporate income tax rate of 20% is competitive within the region. Additionally, the availability of extended tax holidays and breaks has enabled many companies to reduce their effective tax burden, making Vietnam an even more attractive destination for foreign investment, as noted by HSBC experts. Looming obstacles Vietnam’s growing integration into global value chains has largely been characterized by backward integration, where domestic manufacturing primarily focuses on assembling products using imported components. This pattern is evident in the country’s low localization rates. For example, Vietnam’s home electronics industry has a localization rate of only 30-35% for components, while the automotive and motorcycle sectors achieve around 40%, mainly for motorcycles. Deputy Minister of Planning and Investment Tran Quoc Phuong highlighted a critical concern, saying, “Vietnam’s export growth is increasingly dependent on the FDI sector and this is a noteworthy issue.” This overreliance on the FDI sector makes Vietnam vulnerable to global market fluctuations and shifts in FDI policies. In the first two months of 2024, foreign-invested enterprises were responsible for 72.7% of Vietnam’s total export value, illustrating their dominant role in the nation’s export performance. However, this dominance has led to a limited contribution of domestic added value in exported goods. The reliance on imported components and technology has also hindered the development of local industries and stifled innovation. As a result, Vietnam’s economy remains susceptible to global supply chain disruptions and rapid technological advancements. A decline in foreign investment or a drop in global demand for Vietnamese exports could leave negative impacts on the domestic economy. To mitigate these risks and ensure sustainable economic growth, Vietnam must focus on building robust domestic capabilities and reducing its dependency on foreign-invested enterprises. Minister of Planning and Investment Nguyen Chi Dung emphasized the importance of cultivating a strong, self-reliant production base. By effectively leveraging foreign investment and expertise, Vietnam can integrate more deeply into global supply chains, enhance its competitiveness, and strengthen its economy against external challenges. Moreover, the introduction of a global minimum tax will add a new factor to consider in investment decisions. Beyond tax considerations, Vietnam must prioritize infrastructure development. Investing in digital trade platforms, reliable energy sources, and efficient transportation networks will be crucial for maintaining a competitive edge in foreign investment attraction.