More and more foreign businesses are choosing Vietnam as an ideal destination for investment and are opening numerous manufacturing plants. The reasons why Vietnam attracts many investors include its knowledge-based labor market, low investment costs, political stability, and an improving legal environment. Let’s explore more detailed information in today’s article.
The economic landscape of Vietnam in recent years
In recent years, Vietnam’s GDP has grown at a rate of 6-7% annually since 2016, maintaining a stable growth rate for several years. However, due to the impact of the pandemic, the economic situation slowed down in 2021. Nevertheless, foreign direct investment (FDI) has generally grown rapidly and steadily since 2011. By 2019, this figure exceeded 16 billion USD.
In the first five months of 2024, it reached 11.07 billion USD, an increase of 2% compared to the same period in 2023. With its strategic location, Vietnam maintains its competitiveness and connectivity in the global supply chain, becoming a country with impressive foreign direct investment in Southeast Asia. Some objective reasons for Vietnam’s achievements include:
Vietnam is an “alternative” choice to China in production and supply
The primary reason for this is Vietnam emerging as an alternative choice to China. Foreign companies are choosing wholesale Vietnam to complement their China operations, leveraging lower-cost production facilities in a different market. To illustrate, a China-based mobile phone manufacturer might decide to open a component manufacturing plant in Vietnam to reduce costs of raw materials and labor while maintaining a stable supply.
Vietnam’s population situation
Vietnam is a country with a young population, making it an ideal candidate for labor market participation. By 2030, the middle class is projected to reach 95 million people, with a per capita GDP of $7,000 by early 2035.
Development has now become more balanced across regions beyond Hanoi and Ho Chi Minh City. Notably, Vietnam has a high female labor force participation rate, surpassing that of countries like the United States and Singapore.
Political climate
Vietnam’s stable political climate and friendly diplomatic approach create a reliable business environment, fostering robust growth for enterprises. After four decades of peace, Vietnam has emerged as one of the most politically stable and consistent nations, making it a preferred destination for investors.
In recent times, Vietnam has been hailed as a bright spot in ASEAN due to its political stability and sustainable economic growth. The strong leadership of state agencies has ensured a secure and stable socio-political environment.
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Open borders with simplified procedures
Vietnam’s swift and effective response to the 2021 pandemic has bolstered investor confidence in the country as a relatively safe place to do business. Despite facing significant challenges, the economy has fully reopened, and flights have resumed, demonstrating Vietnam’s resilience and strong economic potential in the face of the pandemic. Countries from across the continent are investing in Vietnam, including Singapore, Japan, South Korea, and Taiwan. Among them, Singapore is the leading investor in Vietnam .
Key factors attracting foreign investment to Vietnam
Economic boosting agreements
Signed agreements have played a crucial role in promoting cooperation between Vietnam and other countries, thereby facilitating the country’s opening and integration.
Free Trade Agreements
Since becoming a member of the World Trade Organization (WTO) in 2007, Vietnam has been a dedicated global trading partner. With its participation in 17 Free Trade Agreements (FTAs), Vietnam stands as one of Southeast Asia’s most open economies. Recent agreements have significantly contributed to attracting foreign investment, such as:
- The Regional Comprehensive Economic Partnership (RCEP).
- The European Union Vietnam Free Trade Agreement (EVFTA).
- The UK-Vietnam Free Trade Agreement (UKVFTA).
In addition to the aforementioned agreements, Vietnam’s bilateral and multilateral Free Trade Agreements have attracted a wide range of other countries, including Australia, Brunei, Myanmar, Cambodia, Canada, Chile, China, Indonesia, Japan, Laos, Malaysia, Mexico, New Zealand, the Philippines, Singapore, South Korea, Thailand, the United Kingdom, European Union member states, and Eurasian Economic Union member states.
Vietnam is also negotiating potential future agreements with Israel (Vietnam-Israel FTA) and the European Free Trade Association, comprising Switzerland, Norway, Iceland, and Liechtenstein (Vietnam-EFTA FTA). This demonstrates Vietnam’s ongoing commitment to opening its economy and fostering economic growth.
Double Tax Avoidance Agreements
Beyond trade agreements, Double Taxation Agreements (DTAs) have been effective in eliminating double taxation by defining tax exemptions or reductions. This presents a significant advantage for foreign businesses seeking to invest in Vietnam. As of 2020, over 80 countries and territories have signed DTAs with Vietnam. These agreements have eliminated double taxation by specifying tax exemptions or reductions on Vietnamese taxes for residents of the signatory countries.
In addition to these agreements fostering cooperation between Vietnam and foreign countries, another significant attraction for foreign companies investing in Vietnam is the abundant labor pool and optimal costs. Foreign businesses can easily hire a quality workforce at competitive costs. This factor has made Vietnam one of the most attractive destinations for foreign investment.
Abundant labor resources in Vietnam
With a population of over 97 million spread across 330,000 square kilometers, Vietnam remains an agricultural country, with urban centers accounting for only 35% of the population. The minimum wage varies significantly by region, as determined by the government. The lowest minimum wage is $0.67 per hour and $140 per month in the lowest-paid region, while some other regions have a minimum wage of $0.97 per hour and $202 per month.
For companies considering investing in Vietnam, carefully selecting a suitable business location is crucial. The chosen location should align with the company’s industry. Through conducting research, businesses will discover opportunities for significant cost optimization in Vietnam. Clearly, Vietnam is one of the countries with the most potential in terms of a workforce at affordable rates compared to the rest of the world. Given the current development of Vietnam’s workforce, foreign companies should consider factors to attract and retain talent.
A favorable legal and political climate for investment
The legal environment encompasses factors such as the political climate, policies, environmental laws, and the complexity of regulations. Depending on the business sector, enterprises must comply with administrative procedures, permits, fees, and taxes. Vietnam’s regulatory framework and commercial laws, as well as government oversight, can pose some challenges for foreign businesses.
However, Vietnam’s legal environment is improving, with new reforms introduced annually to facilitate business operations. The Vietnamese government has taken steps to enhance policy consistency, financial transparency, and disclosure standards. These efforts aim to mitigate challenges in customer due diligence and Know Your Customer (KYC) processes and encourage foreign direct investment in Vietnam.
A growing domestic market
Currently, Vietnam’s business environment is considered quite stable, with clear laws, intellectual property protection, and a conducive environment for production and business activities. In addition, the domestic market is growing rapidly with a young, fast-growing population, creating a large consumer base for a variety of products and services.
As the economy develops, the middle class is expanding, driving demand for high-quality products and services and creating a promising market for foreign businesses.
Convenient location
Vietnam’s prime geographic location in Southeast Asia provides easy access to a vast market. Its robust infrastructure, including modern ports, airports, and transportation networks, facilitates the efficient movement of goods and services within the region. Vietnam’s geographic location provides a significant advantage in terms of global supply chain integration, especially for manufacturing industries.
The country’s strategic position, combined with competitive labor costs and favorable trade policies, has attracted numerous foreign companies to establish manufacturing facilities. This enables Vietnam to efficiently participate in global trade and access regional markets.
Some industries are invested in Vietnam
Vietnam is a nation with a diverse range of developing manufacturers and industries, undergoing a transition from agriculture to high-tech manufacturing. Many industries have become more prominent thanks to government incentives. In 2023, total investment reached nearly $36.61 billion, an impressive 32.1% year-on-year increase. Recently, new registered capital reached almost $20.19 billion, growing by 62.2%. Additionally, the total number of registered projects reached 3,188, a 56.6% increase.
As in previous years, the manufacturing industry led with a total investment of over $23.5 billion, accounting for 64.2% of total registered capital, increasing by 39.9% compared to the previous year. The real estate sector ranked second with a total investment of nearly $4.67 billion, accounting for over 12.7% of total registered capital and increasing by 4.8%. Other sectors such as electricity production and distribution, finance, and banking ranked third and fourth, respectively, with total registered capital of $2.37 billion and nearly $1.56 billion.
In the first six months of 2024 alone, Vietnam’s FDI reached $15.2 billion, up 13.1% compared to the same period in 2023. Nearly 1,538 new projects were registered with a total registered capital of $9.54 billion, an increase of 46.9% in capital and 18.9% in the number of projects compared to the same period last year.
While there is not enough data to evaluate all industries in Vietnam, it is predicted that the manufacturing sector will remain a leading sector, attracting significant FDI. With these FDI results in the first half of 2024, experts forecast that total FDI for the year could reach up to $40 billion. This will contribute significantly to Vietnam’s economic growth.
Conclusion
With its favorable political climate, abundant labor force, supportive legal framework, and strategic geographic location, Vietnam has become an attractive destination for foreign investment. As a result, foreign direct investment in Vietnam is expected to continue growing. By effectively leveraging foreign capital and proactively promoting exports, Vietnam is strengthening its global economic position. Platforms like Sourcevietnam will further enhance Vietnam’s export capabilities.
