Foreign direct investment (FDI) remains an important economic sector for Vietnam, but the country has to compete fiercely with other nations in FDI attraction.

Vietnam achieved an economic growth rate of 7.08% in 2018, the highest growth since 2008. The FDI sector has continued to play an important role in the economy. The sector accounts for over 70% of the import-export turnover, 20% of the gross domestic product (GDP) and 15% of the budget revenue. FDI enterprises have created jobs for 3.6 million direct workers and 5-6 million indirect workers.

This is the ground for Vietnam to continue further improvement of the business environment to attract more FDI enterprises, especially amidst the forecast that many FDI enterprises will leave China for another country in the ASEAN. However, Vietnam will have to compete fiercely with other ASEAN countries like Indonesia and Thailand, and even India, a non-ASEAN country.

Necessary condition

There are many studies to identify the factors that FDI enterprises will consider for investment in a country. Some main factors are the labor cost, workers’ skills, tax incentives, infrastructure, political stability and the economic growth potential.

In Vietnam, the central Government and local authorities have offered many incentives to attract the South Korean group Samsung, such as land rent exemption and reduction, corporate income tax reduction and construction of infrastructure facilities to Samsung’s factories. The low labor cost in Vietnam is also a factor attractive to Samsung as well as other investors. The average salary of a Vietnamese worker is US$216 (about VND5 million) per month, lower than the average salary in India (US$257), Indonesia (US$314), Thailand (US$378) and China (US$470).

The Sino-U.S. trade war may not end in the near future. Therefore, many international as well as Vietnamese analysts think that there will be a wave of relocation of FDI production facilities from China to ASEAN countries or India. The question of most interest is what country will be their destination.   

The case of Samsung may make many people highly optimistic about the prospect of relocation to Vietnam, where the Government is ready to satisfy almost all the preferences requested by the group.  However, this is the case of a global company which has relocated its entire system as well as its supply chain, including subsidiaries and satellite companies, to Vietnam. So, how come with the case of FDI enterprises operating independently in different areas? The author thinks that incentives in tax and labor are merely a necessary condition to an FDI enterprise.

Sufficient condition

The sufficient condition to attract an FDI enterprise is that the enterprise must be part of the value chain of the industry of its operation so that it can minimize the cost of inputs as well as outputs. This remark is drawn from the differences of FDI enterprises in Vietnam versus those in Indonesia, Thailand and India.

FDI enterprises from Japan, South Korea and Singapore have the largest investment capital in Vietnam, and the manufacturing and processing industries and real estate hold the lion’s shares of their investments. Meanwhile, Japanese enterprises are also the biggest foreign investor in Thailand, but their main investment area is automobile and consumer electronics manufacturing. In India, the U.S. and the UK are the biggest foreign investors and they operate mainly in information technology, finance and banking services. In Indonesia, Singapore, Hong Kong and China are the biggest foreign investors, mainly in real estate.

So, there is a marked difference in FDI in many countries, and the difference hinges on the value chain wherein FDI enterprises are participating. Consequently, if there is a relocation of FDI enterprises from China to Vietnam, it would occur in some specific industries and areas, and would not come as a wave with domino effects as expected by many people.

SGT