Fueled by continuous growth, Vietnam continues to attract record foreign direct investment (FDI). The latest data from the Foreign Investment Agency (FIA) shows that FDI in Vietnam in the first five months of the year reached a four year high of US$16.74 billion.
This inflow represents a year-on-year increase of 69.1 percent.
Around 1,363 new projects were licensed with a total registered capital of US$6.46 billion in the January – May period, up 38.7 percent against the same period last year. Out of 19 sectors receiving capital, manufacturing and processing came on top with US$10.5 billion, accounting for 72 percent of total FDI. This was followed by real estate at US$1.1 billion and then by retail and wholesale with US$742.7 million.
Investment has been mainly driven by the US-China trade war.
Aside from this, Vietnam is committed to an ambitious investment plan to develop overall infrastructure in major industrial poles in the country, which will ease doing business and improve logistics. This, coupled with the recent entry into force of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the EU and Vietnam FTA (EVFTA) (expected to be officially approved in June) will provide significant opportunities for both inbound and outbound investment for the next few years.
Furthermore, it is likely that Vietnam will continue improving its legal framework to adhere to transparency requirements imposed by the aforementioned agreements, especially in relation to Intellectual Property Rights (IPR) protection. Hong Kong leads all FDI investment at US$5.08 billion, accounting for 30.4 percent of total investment in the first five months of the year. South Korea and Singapore come in at second and third, followed by China and Japan.
An important point to note is that China has been increasing its investment in Vietnam rapidly. Over the years, it has become the seventh largest investor in Vietnam. In 2018, it moved up to fifth and is now fourth. This can partly be attributed to the US-China trade war, but some analysts say that China is also pushing investment through Hong Kong as Vietnam becomes more cautious about Chinese investment.
Hanoi retains its title of being the most attractive destination for foreign investors with US$2.78 billion of total FDI registered or 16.6 percent. This is followed by Binh Duong province at US$1.25 billion.
North Vietnam is rapidly consolidating its position as a main industrial hub for the electronics and heavy industry, thanks to the presence of global conglomerates like Samsung, Canon, and Foxconn and for the automotive industry (the first Vietnamese carmaker Vingroup established its factory in Haiphong last year), which are stimulating the development of a reliable supply chain in the area.
The first deep-sea port in North Vietnam, Lach Huyen port, opened its first two terminals, which can accommodate big vessels – thus avoiding stops to Hong Kong and Singapore in international freight transport, saving about one week in shipments. Binh Duong and Ho Chi Minh City, in South Vietnam, are the main industrial hubs, specializing in textile, leather, footwear, mechanics, electricity and electronics, and wood processing.
South Vietnam has also been the main destination for renewable energy investment projects, in particular solar power plants. In the future, while the southern region will maintain its attractiveness, investments in solar plants is expected to gradually shift to the central and northern areas. During the Jan-May period, the foreign invested sector produced US$70.4 billion from exports – a five percent year-on-year increase that accounts for 70 percent of the country’s total export turnover. As of May 20, there were 28,632 FDI projects with a total registered capital of US$350.5 billion.
The rise of Vietnamese firms
Vietnamese firms invested nearly US$183 million in 69 projects overseas in the same period, showing that local firms were also becoming more internationally competitive. This investment focused on science and technology, banking, and the IT sector. Spain, US, and Cambodia attracted the largest share of Vietnamese investment. In this year’s Forbes Global 2000 list, four Vietnamese firms are named, including Vietcombank, BIDV, Vingroup, and VietinBank – showing just how far Vietnamese businesses have come.
Meanwhile, a recent report by DBS Bank states that Vietnam’s economy could become bigger than Singapore’s by 2029 if it sustains its growth trajectory. Vietnam’s government expected GDP to expand to at least 6.8 percent this year.
Increased exports to US
As the US-China trade war continues, Vietnam has become one of the fastest growing sources of American imports in the first quarter of the year. If this keeps up, Vietnam could surpass the UK as one of the biggest suppliers to the US, according to Bloomberg.
Imports from Vietnam to the US jumped 40.2 percent in the first three months over the same period last year. During the same time American imports of Chinese goods dropped by 13.9 percent.
Three top sectors receiving FDI
According to the FIA report, manufacturing and processing, real estate, as well as retail and wholesale are the top three sectors for FDI in Vietnam.
Manufacturing and processing
Manufacturing and processing continues to account for the major portion of FDI.
Vietnam’s Ministry of Trade sees supporting the industry as key to boosting socio-economic development. The government wants to restructure the industry to support domestic production and increase localization rates. Industry experts say that Vietnam has benefited due to companies moving manufacturing to Vietnam as costs in China started to increase. The US-China trade war has accelerated the process.
As the sector matures, the stakes for industry players will increase as Vietnam solidifies its position as a manufacturing destination. Challenges remain, with the development of supporting industries lagging – developing supply chains and suppliers are not as easy as in China, while Industry 4.0 concepts are behind larger economies.
However, the government is keen to change this, and the strong growth in the first five months of the year show that concerns are not expected to throw the sector off track.
Furthermore, as numerous investors are tapping into Vietnam, cost of labor is likely to increase. In this scenario, it is paramount that companies implement appropriate retention policies to avoid or mitigate turnover.
Vietnam’s continued FDI growth
Vietnam is expected to continue to maintain robust FDI investment. The country has been attracting FDI in virtually all sectors, making it an all-rounder for investors. Its challenge will be to manage its growth responsibly along with government reforms.
However, as the market matures, the government has begun prioritizing ‘high-value’ FDI, such as in advanced technology and manufacturing, tourism, and high-tech farming. In addition, the government is also prioritizing adequate training for the working population to meet requirements for important sectors.
Thankfully, the conditions for Vietnam to emerge as a regional economic force are ripe. With the US-China trade war showing no signs of abating, Vietnam’s free trade agreements, cheap labor, and young working population provide a powerful concoction for it to thrive.