Monday, 23 September 2024 — In this webinar, Dr Thi Hang Banh examined key trends in Vietnam’s foreign direct investment (FDI) landscape. She also discussed how the US-China trade war has presented opportunities for Vietnam and the challenges the country must overcome to capitalise on this momentum for its long-term economic development.
VIETNAM STUDIES PROGRAMME AND ASIA COMPETITIVENESS INSTITUTE AT THE LEE KUAN YEW SCHOOL OF PUBLIC POLICY JOINT WEBINAR
The Vietnam Studies Programme of the ISEAS–Yusof Ishak Institute and the Asia Competitiveness Institute at the Lee Kuan Yew School of Public Policy (LKYSPP) co-organized a webinar titled “Trade War Catalyst: Understanding Trends in Foreign Direct Investment in Vietnam”. The webinar was presented by Dr Thi Hang Banh, a Research Fellow at the Asia Competitiveness Institute.
Dr Hang noted that the US-China trade war has led to a significant reallocation of the supply chains of multinational companies, with Vietnam emerging as a major beneficiary of this shift. Large companies have either relocated or expanded their production to Vietnam to avoid US tariffs on Chinese goods. From 2017 to 2022, Vietnam experienced the largest increase in market share among the US’s top 15 import partners, gaining almost 2%, while China’s market share decreased by over 4%. These trends further highlight Vietnam’s growing role in the global supply chain.
Turning to Vietnam’s economic landscape, Dr Hang highlighted the country’s impressive average annual growth rate of over 6%, even during economic downturns such as the 2008 global financial crisis and the recent COVID-19 pandemic. Vietnam has also demonstrated remarkable resilience and a swift recovery capacity. In 2011, the country officially achieved middle-income status, and its consistent rise in GDP per capita reflects significant progress.
Since 2005, there has been a shift in the composition of Vietnam’s GDP by industry, with a decrease in agriculture and an increase in the industrial and services sectors. The share of the state sector has also decreased, while the private and FDI sectors have grown, emphasizing the increasing role of private and foreign investment in Vietnam’s economic growth. The country has also made significant strides towards higher-value sectors, particularly in electrical machinery and equipment, which has been its top export sector since 2010. In 2022, this sector alone contributed over US$140 billion to exports. Over the past two decades, Vietnam has reduced its reliance on resource-based industries, although it still depends on low value-added manufacturing sectors such as apparel and footwear.
Vietnam’s success in attracting FDI can be attributed to three key factors: its strategic location, various free trade agreements (FTAs), and favourable government policies. These advantages have led to a significant influx of FDI over the past few decades, demonstrating international confidence in the country’s economic stability and potential for returns. The southern key economic zone, which has been the largest and earliest FDI destination in Vietnam, has received approximately US$200 billion, accounting for 42.7% of the total FDI. The northern economic zone follows closely behind with US$132 billion as of 2023, representing 28.42% of the total FDI.
East Asian economies, including South Korea, Japan, Taiwan, Hong Kong, and China, are the main foreign investors in Vietnam, making up 55% of the total accumulated FDI. South Korea holds the largest share with 18%, equivalent to US$81 billion in investments. The majority of FDI has been channelled into manufacturing and processing, accounting for 60% of total investment. Other key sectors include real estate (15%) and electricity, gas, and water supply (9%). Dr. Hang emphasized the increasing FDI inflows into computer and electronic manufacturing from global tech giants such as Samsung and LG, indicating Vietnam’s transition from low-cost manufacturing to more advanced production capabilities.
Dr Hang also examined the role of the US-China trade war as a catalyst for FDI in Vietnam. She argued that foreign companies’ relocation to Vietnam is driven not only by trade tensions but also by Vietnam’s comparative advantages over China, including lower labour costs, more favourable trade conditions due to an extensive network of FTAs, and a more stable trade environment.
Analysing FDI from Vietnam’s main investors since the trade war, Dr Hang noted a rise in Chinese investment, indicating a strategic move by Chinese firms to shift production. Singapore has emerged as the top investor in Vietnam, surpassing traditional investors like South Korea and Japan. However, US investment in Vietnam remains relatively low, highlighting the need for further engagement to strengthen economic ties.
Despite these positive developments, Dr Hang pointed out several challenges that could hinder Vietnam’s long-term growth and competitiveness. One key issue is attracting FDI into higher value-added sectors. Currently, the majority of FDI is focused on manufacturing, which supports industrial growth and job creation but limits Vietnam’s ability to move up the value chain. In comparison, China has attracted a larger share of FDI in activities such as research and development (R&D), design, logistics, and services. From 2013 to 2023, China received 11.36% of its FDI in R&D and design, compared to 3.56 per cent in Vietnam.
Infrastructure and workforce also pose challenges for Vietnam. Ports, roads, and logistics need to be upgraded to meet increasing demand, and the Vietnamese labour force suffers from low productivity, an aging population, and a shortage of skilled workers. Other obstacles include regulatory barriers and the need to adapt to rapidly changing environmental regulations to remain competitive.
Dr Hang concluded by emphasizing the importance of continuing to improve infrastructure, administrative procedures, and tertiary education in order to strengthen Vietnam’s role in global supply chains and trade. She also highlighted the need for the adoption of green manufacturing practices and the evolution of Vietnam’s labour market, focusing on skills development, wage growth, automation, and artificial intelligence.
During the Q&A session, Dr Hang addressed a range of topics, including Vietnam’s over-reliance on FDI, potential impacts on US-Vietnam relations if Trump wins the US election, the resilience of Vietnamese economic zones in the face of climate change, labour union reforms, the effects of the global minimum tax, and Vietnam’s competitive position compared to other ASEAN countries in terms of FDI attraction. She also discussed how foreign investors have responded to recent domestic political developments in Vietnam.