Authors: John Walsh, Krirk University, Trung Quang Nguyen and Burkhard Schrage, RMIT Vietnam
Foreign direct investment in Vietnam continues to increase from $11.57 billion in July to $12.8 billion in August 2022, signaling the country’s post-COVID-19 recovery. This growth is partly due to Hanoi’s continued efforts to provide a safe and welcoming environment for foreign businesses through Special Economic Zones (SEZs) – ensuring businesses have access to local labor under favorable conditions. .
There is a new impetus to invest in Vietnam due to the disruption of supply chains due to China’s zero COVID-19 policy, the threat of Chinese aggression towards Taiwan, and Beijing’s strengthening ties with Russia. Taiwanese electronics manufacturing giant Foxconn plans to expand its presence in the country, with the first ever Apple Watch and MacBook manufacturing project in Vietnam. Yet South Korea remains the country’s largest investor and Samsung Electronics remains its most important trading partner.
Companies are expected to show interest in Vietnam now that the government is preparing “eagles nests” – SEZs in which to do business is easier for foreign companies. This will help address Vietnam’s overreliance on China for imports and the United States for exports. The diversification will improve Vietnam’s large trade imbalance with Washington after recording a trade surplus of US$69.7 billion in goods with the United States in 2020 – a figure that exceeds that of its neighbours.
Companies arriving in Vietnam can expect to find hardworking, cheap labor and an increasingly high standard of living for their international executives, especially in Hanoi and Ho Chi Minh City. Vietnam still struggles to find skilled workers in a country where parents want their children to attend university rather than vocational school. There is also a lack of good quality small and medium enterprises to join Vietnam’s supply chains, infrastructure outside major cities is often of poor quality and air pollution kills thousands of people each year. .
Despite these challenges, the Vietnamese government has pledged to make many eye-catching promises regarding digitalization, technology and innovation and to achieve net zero emissions. But it is unclear whether these promises can be kept within the desired timeframe.
Vietnam’s connectivity with other countries stems from its desire to become a more active global citizen. Although it started the connectivity process later than its ASEAN neighbours, Vietnam is catching up with its neighbors in the number of free trade agreements it has signed. Hanoi has joined almost all bilateral, multilateral and transnational organizations and agreements to which it is eligible.
Vietnam’s drive to boost connectivity is also about national security. Engaging with other nations enables Vietnam to conduct complex negotiations on issues for which international law is not yet sufficient, such as river management and rights to deep water resources and territory. Vietnam’s vast diaspora provides another form of global connectivity, although there are often complicated political differences between those living inside and outside the country.
Despite Vietnam’s success in attracting investment, it will always have limited capacity to absorb infrastructure and trade projects. Vietnam faces competition from other countries trying to attract their own foreign investment. Countries like the Philippines, Indonesia, and Bangladesh also have a large labor force, which provides them with competitiveness through low labor costs.
Vietnam’s SEZ-style approach has succeeded in lifting hundreds of millions of people out of poverty in China. It refers to designating specific areas of land in which the legal conditions are different from those in the country of origin – usually those that benefit foreign capital over local labor. These areas have better infrastructure, utilities and telecommunications and include retail, leisure and healthcare facilities tailored to business owners. SEZs bring together foreign direct investment projects, allowing companies to reduce transaction costs by working together and sharing complementary resources and capabilities. SEZ-related incentives encourage companies to obtain specific rather than general benefits.
The Vietnamese government is also quite consistent in enforcing the rule of law. Investors know what to expect given that the current political system looks set to continue for the foreseeable future. But the government must take immediate action to ensure high-quality public services for businesses and citizens. The lack of technical capacity of many government employees remains problematic and the government’s ambitious cyber and digitization strategies have yet to fully materialize.
The government has taken steps to improve the quality of skills and qualifications of the workforce, especially in STEM disciplines. Foreign universities are encouraged to open courses to enhance local management, creativity and innovation. Skills development will make it easier for locals to obtain work from foreign companies, encouraging some to start their own business ventures to participate in regional and global value chains. Fostering the growth of these companies is important because, despite corporate governance reforms, Vietnamese companies rarely offer meaningful competition to foreign companies.
The measures implemented by the Vietnamese government have been successful over the past decades, although climate change raises concerns about the economic sustainability of its development model. Hanoi is committed to using the fruits of foreign investment to improve social development and equality, but the speed at which this happens remains problematic.
A new model of public administration is needed to attract and retain talented people in the civil service to help Vietnam meet the complex political and economic challenges of the future.
John Walsh is Associate Dean and Director of English Language Programs at the International College of Krirk University, Thailand.
Trung Quang Nguyen is director of the management department of RMIT University of Vietnam.
Burkhard Schrage is a senior program manager in the management discipline at RMIT Vietnam University.