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Positives in place

Released at: 10:02, 15/09/2016

Positives in place

Mr. Dustin Daugherty, Associate, ASEAN Business Intelligence at Dezan Shira & Associates, explains to VET’s Linh San why there is every reason to believe that Vietnam will continue to see significant FDI growth in the years ahead.

by Linh San

What are your thoughts on FDI in Vietnam this year?

Vietnam has continued to see record levels of capital inflows as a variety of new investors seek to gain first mover advantages ahead of the recently inked TPP and EU-Vietnam Free Trade Agreement (EVFTA). Complementing new players, Vietnam retains a strong share of Chinese capital outflows, facilitated by sustained wage inflation in mainland Chinese production and a subsequent desire to pursue “China plus one” production models. In addition to the TPP and the EVFTA, which have captured the interest of Western investors, Vietnam’s participation in ASEAN has promised and continues to promise sustained investment as a multitude of non-tariff barriers are reduced under the ASEAN Economic Community.  

The traditional investment hubs of Hanoi and Ho Chi Minh City have retained a substantial portion of capital inflows in 2016. Many cities such as Hai Phong and Da Nang, however, have seen marked increases in investment in the recent past. With growth projected to remain over 5 per cent well into the future, there is every reason to believe that Vietnam’s main and emerging cities will see significant growth in the years ahead. 
 
What sectors are attracting foreign investors in Vietnam at this time? 

In the immediate term, garments, footwear and other low value added sectors will attract foreign investors in Vietnam as the substantial wage inflation in China has driven investors towards Vietnam due to its low costs and high degree of stability. Given the comparatively low levels of urbanization seen in Vietnam, coupled with the underdeveloped nature of many second-tier cities, there is little indication that Vietnam will lose out to other destinations in the near to medium terms. 

In the medium term, electronics, education, healthcare will be attractive. While low value added production has been the cornerstone of Vietnam’s economy, recent investments by the likes of Samsung and LG show the success of government incentives and are a vote of confidence from some of the world’s largest electronics manufacturers. With strong government support for these industries continuing into 2016 it is likely that Vietnam will continue to expand its capacity to host such investments in the years to come. 

As seen with other economies within Southeast Asia, Vietnam has begun to dedicate a substantial portion of disposable income towards education. Not only does this result in high test scores and bode well for the future of the country, it also presents significant opportunities for investors in these fields.

In the medium to long term consumer goods (from a sales standpoint) will lure foreign investors. Given Vietnam’s proven ability to plan ahead it is never too soon to think about future opportunities. Running parallel to Vietnam’s ascent up the value chain will be Vietnamese wages and household incomes.

As Vietnam moves further and further away from a wage-based comparative advantage, the country’s consumer base will begin to emerge. While limited to basic needs such as utilities and transportation in the status quo (projecting growth of 13.1 per cent and 7.52 per cent growth, respectively, in Q1 2016), Vietnam is likely to see substantial increases in demand for a variety of goods in the years ahead. While competition is limited at the moment in fields such as clothing and dining, the fact that brand loyalty has not been established in these fields makes Vietnam a prime target for foreign expansion.

Joining the TPP is expected to open up opportunities for Vietnam to attract foreign investment from TPP member countries. Can you tell us more about these potential opportunities?

The most apparent benefit of the TPP is its tariff reductions. Under the agreement Vietnam will be able to export its goods to TPP signatories free from tariffs or at a great discount compared to non-members. As Vietnam is the poorest country within the TPP the agreement is likely to increase its advantage as a supply center compared to other low costs production hubs such as Thailand, Bangladesh, and even India.

As Vietnam attempts to move up the production value chain a significant obstacle will be intellectual property protection. Fortunately, with built-in commitments and an independent dispute resolution body, the TPP is again likely to increase Vietnam’s stature vis-à-vis its regional competition. 

Vietnam is likely to gain not only in terms of its ability to supply consumers in Western countries but also their governments. The notable absence of Vietnam from the US’s list of permitted State suppliers is set to be reversed as the TPP is implemented. 

As a complement to its counterparts in the TPP that have lowered barriers to trade as a result of the TPP, Vietnam has agreed to limit the imposition of foreign investment restrictions in certain sectors and to withdraw current limitations in others.

What could go wrong in Vietnam and consequently affect future FDI?

The benefits that Vietnam offers - low wages and subsequent high integration into global commerce - make the country uniquely exposed to dips in demand or investment from its trading partners. In the coming year elections in the US and the unfolding aftermath of Brexit are key issues to watch, as they will have a major influence on the future of demand from both these markets. That being said, the passage of the TPP and the EVFTA put Vietnam in a much better position than countries that are currently undergoing negotiations on similar agreements. 

What other comments would you care to make about FDI into Vietnam?

Vietnam combines low costs with unparalleled levels of political stability. With elections out of the way and the TPP and the EVFTA signed, Vietnam will increasingly have the political and financial resources to pursue upgrades to infrastructure and education in order to sustain growth.

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