Foreign Direct Investment will grow in Vietnam

In terms of Foreign Direct Investment inflow, Vietnam benefits more than any other country from the ongoing US-China trade war because of three important strengths that have promoted investment from multinational corporations and seen an increase in some exports.

The most important strength is that of lower wages of workers at factories in Vietnam, which are just half of that compared to China, although the productivity of human resources in the two countries is very much similar. Another factor is that Vietnam has a geographical location which is closer to the supply chain in Asia, which is also very convenient for the production of high-tech products. The other important strength is that multinationals tend to invest more in Vietnam because of less risk of higher tariffs on exports to the US.

Vietnam is currently an attractive investment country and is seeing a significant increase in investment following Antony Blinken’s visit to Vietnam along with the largest-ever delegation of leading US companies. This advantage of Vietnam has not diminished since the visit to India in April of Tim Cook, CEO of Apple Corporation, that sparked many speculations about Apple’s intention to build new factories in India.

Because investment in India does not have the same starting point as “China + 1”, an investment strategy that has boosted Foreign Direct Investment inflow into Vietnam over the last decade and increasingly more since the US-China trade conflict broke out. Accordingly, from 2018 to 2022, the share of China’s exports to the US decreased by about 13 percent, from 69 percent to 56 percent of total exports from Least Developed Countries (LDC) in Asia to America. Vietnam has captured about half of China’s declining export market share, thereby increasing Vietnam’s share of exports from LDCs in Asia to the US from 6 percent in 2018 to 13 percent in 2022.

Besides, the attraction of Foreign Direct Investment capital of some countries in the region such as Malaysia and Indonesia has increased sharply in the last two years, which is a positive sign for Vietnam. But although Vietnam’s capacity has not yet extended to higher value-added industries, such as data centers and cloud computing, Malaysia has started with the assembly of electronic products to develop this technology and has been successful. Therefore, Malaysia’s experience will help Vietnam in accessing Foreign Direct Investment inflow to develop new technologies.

However, in 2021, more than 100 countries, including Vietnam, agreed to the proposal of the Organization for Economic Cooperation and Development (OECD) to apply a Global Minimum Corporate Tax (GMT) of 15 percent from 2023. Currently, Vietnam is preparing to implement the minimum tax by next year, and about 70 companies in Vietnam may have a tax rate increase if the new tax is applied. At the same time, a number of emerging markets in the region are said to be working on alternative supports, where some additional tax revenues will be channeled into a business support fund to subsidize some of the production costs of such companies, such as subsidized electricity prices, supporting new factory construction costs, and support housing for workers. This is being planned in order to offset the burden of paying higher taxes by companies.

It is unlikely that the GMT will hinder Vietnam’s Foreign Direct Investment inflow as tax incentives are not the main attraction of this capital inflow. Factors such as political stability, favorable business environment, workforce quality and low wages, along with infrastructure, all play a more important role. Moreover, Vietnam will have alternatives to the GMT tax when it is finally implemented. Hence, Vietnam will continue to be a leading destination for Foreign Direct Investment capital inflow, especially for multinational companies looking to produce goods for export and those looking for production base to replace their China base in the near future.

Saigon Investment