Five Reasons Why Vietnam Becomes a Magnet for Foreign Investment

Five Reasons Why Vietnam Becomes a Magnet for Foreign Investment

Vietnam has become one of the most favored places for foreign direct investment (FDI) in Southeast Asia in recent years. Although the country is not immune to the global economic downturn due to COVID-19, its positive GDP growth in 2020 has cemented investors’ confidence in the market. As a result, just in the first nine months of 2021, Vietnam recorded US$22.1 billion foreign investment, 10.6% higher than the total FDI of 2020.

Many conditions have contributed to Vietnam’s bright economic prospect and its attractiveness to foreign investors. In this article, we explain five key reasons why Vietnam has bypassed its neighbors in Southeast Asia to become a magnet for FDI in the region.

1. Strategic location

Located at the heart of Southeast Asia, and along the coastline of the Pacific Ocean, at the crossroad of many major international shipping and trade routes, Vietnam is endowed with a strategic geographic location for doing business. Further, its proximity with China means companies considering relocation can stay close to their current suppliers and still can take advantage of China's supporting industries during the transition period. Vietnam is now one of the key drivers for foreign investment in a range of manufacturing sectors. As the operating costs in China continue to soar, more manufacturers consider shifting parts of their production line to Vietnam to reduce costs and diversify supply chains.

2. Healthy, rapidly growing economy that increasingly integrates with the global economy

Once among the poorest countries in the world, Vietnam nowadays has become one of the world’s fastest-growing economies, with an impressive average GDP growth rate of 6.5% over the 2010-2019 period. Vietnam’s GDP per capita has also increased to US$3934 per person per year in 2020. With decisive and effective measures to combat COVID-19, in 2020, Vietnam was one out of only three economies in Asia that recorded positive growth (2.9%) amid the global economic downturn, cementing its position as a safe and stable destination for investment.

Vietnam’s attractiveness also comes from its commitment to integrating into the global economy. In more than three decades of renovation and integration in the global economy, Vietnam has successfully established trade relations with over 230 markets and signed 15 free trade agreements (FTA). These include seven FTAs signed as an ASEAN member, four bilateral FTAs with Chile, Japan, Korea, and Asia-Europe Economic Union, and four multilateral FTAs namely the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the European Union-Vietnam FTA, the UK-Vietnam FTA, and most recently, the Regional Comprehensive Economic Partnership (RCEP). The wide range of FTA networks has created a favorable condition for foreign investors to access the market. Opportunities to expand export markets for Vietnamese export products are increasing.

3. Consistently improved business environment

The Vietnamese Government is fairly open and welcoming to foreign investment. To make the country more FDI-friendly, over the past thirty years, the Government has made significant progress to improve Vietnam’s business conditions through reforms. Since Vietnam’s Law on Foreign Investment was introduced for the first time in 1986, the law has been revised a number of times to narrow down the policy gap between foreign and domestic investment. The Law on Investment (LOI), first promulgated in 2005, was amended three times over the last 15 years before the newly revised LOI came into force earlier this year, with an aim to further simplify business administration procedures and facilitate foreign investment into the country. More sectors have been opened up to foreign investment, according to Vietnam’s Law on Securities. In 2020, Vietnam ranked 70th out of 190 economies in the world for ease of doing business, according to the World Bank’s annual ratings, up by 20 positions compared to 2010.

4. Developing Infrastructure

Recognizing the importance of efficient infrastructure for economic development, the Vietnamese Government has made a significant investment in expanding and upgrading its existing infrastructure system. According to Asian Development Bank (ADB), Vietnam is among the top in Southeast Asia in terms of infrastructure development, with average infrastructure investment taking up 5.7% of the GDP in recent years.

As of May 2021, Vietnam has 394 industrial parks (IPs) with a total area of 121,900 ha, up by 134 IPs compared to 2010. Of 394 IPs across the country, 286 are in operation. The number of industrial parks in Vietnam continues to rise as foreign investment pours in. Within Q1/2021, dozens of IP projects were approved across 13 cities and provinces of Vietnam, providing more industrial space for industrial activities, especially in the manufacturing sector, which receives the highest FDI in the country.

In terms of transportation, many projects are in progress. Funds are being put towards building and improving airports, ports, and expressways by the Government. With modern and new infrastructure being built across the country, not only do investors can benefit from easier and quicker transportation, but they also can take advantage of the development infrastructure in Vietnam by working with the Government in Public-/Private- Partnership projects.

5. An Ample workforce with competitive labor cost

Vietnam’s young, hard-working, easy-to-train labor force has always been a key driver for FDI in the country. As of 2020, out of the population of over 97 million, Vietnam has over 54 million people in the working-age. The minimum monthly wages vary across the national regions but range from US$132 to US$190. Vietnam’s wage level compares favorably to its competitors in Southeast Asia. Malaysia’s minimum monthly wages range from US$270 to US$295, Thailand’s from US$248 to US$265, and Indonesia’s from US$120 to US$298. Vietnam’s minimum wages are even competitive with its less-developed neighbor Cambodia, which has a minimum wage of around US$190 in its garment, textile, and footwear industries.

In recent years, China’s rising income level and wages have eroded its cost competitiveness for low-value-added manufacturers and spurred many multinationals to relocate to countries with lower labor costs.

Against this backdrop, with a population of over 97 million, of which almost 60% are under the age of 35, Vietnam’s abundant labor supply has allowed wages to remain competitive. However, Vietnam still has a long way to catch up with its regional peers in labor productivity.

These are just some of the reasons why you should invest in Vietnam. Beyond that, the country also ranks high on the radar of foreign investors thanks to its political stability, competitive incentive schemes, and vibrant and expanding consumer market. Investors interested in learning more about the market and/or setting up an operation in the country kindly contact us at info@oneip.vn for further support.

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