Favourable conditions vital for FDI

Critical to the economic future of Vietnam is the continued attraction and development of foreign direct investment (FDI). Virtually every country has or will depend on the development of foreign direct investment. FDI can provide economic growth, employment, increased gross domestic product, and introduce new technology. It’s a considerable factor in the growth and stability of all countries.

Vietnam has had a relatively short period of FDI history. Essentially initiated with the implementation of the doi moi economic reform policies in the 1990s, the Vietnamese FDI experience was characterised by first experiencing robust FDI as it was considered the next Asian Tiger.  In the middle and late 1990s, economic factors such as high inflation, a volatile currency, and uneven economic growth dampened foreign investment interest, uncertainty over government policies abounded with foreign investment interests.

 Significant progress toward greater awareness of Vietnam’s commitment to attracting FDI occurred with the passage of the US-Vietnam Bilateral Trade Agreement (BTA) in 2001 and the US’ allocation of most favoured nation status to Vietnam which not only lowered tariffs from an average of forty to four per cent, but also required Vietnam to liberalise regulations and policies to stimulate trade between the two countries.  Both direct and indirect foreign investors, finding assurance in the agreement, increased foreign investment in Vietnam incrementally over the next five years.

Inclusion in the World Trade Organization (WTO) also provided Vietnam with an entry to virtually all foreign direct investors. Although Vietnam was and is required to continue to open its economy and provide greater overall transparency, inclusion provides international foreign direct investors additional assurance of Vietnam’s commitment to “foreign-friendly” political and economic policies. 

There are many factors which can promote or hinder FDI in any country.  Membership and participation in country-specific and worldwide trade agreements and related organisations, the political climate in the host country, including the regulatory and policy environment, the market size, probability of economic development, including wages and education of the workforce, as well as probability of future, consistent economic growth.

Vietnam’s geographical position makes it an idea investment destination with access up to 1.9 billion consumers Photo: Le Toan

In the case of Vietnam, FDI improved in 2013 with the General Statistics Office in Hanoi indicating the government had approved $13.8 billion of FDI, a considerable increase over 2012. Many projects such as Samsung Electronics’ $2 billion commitment to shift handset output to Vietnam have recently occurred as firms move production from higher-wage China. Other technology companies such as LG Electronics, Nokia and Intel have shifted manufacturing to Vietnam in a bid to secure lower wages in a stable economic and political environment and have made billion dollar investment commitments to Vietnam.

Such actions by large international firms are a testament to the ability of Vietnam to attract FDI. Although the simple explanation is that FDI will seek the lowest cost to maintain a cost advantage,  it is the favourability of the other factors that promotes one country over another. Essentially, economic and political stability and openness to FDI are the determining factors. 

Vietnam enjoys many advantages in the attraction of FDI. First and foremost, the geographical location of Vietnam provides the market access to 1.9 billion viable consumers, the highest penetration in the world. It is important as FDI seeks alternatives that supply chain restraints are taken into consideration and firms seek locations near to component production facilities. 

Additionally, Vietnam has significant resources that are being continually maintained and upgraded. The most important resource Vietnam has is the well-educated, youthful, and inexpensive workforce. Other significant resources include the coastline and infrastructure such as roads and port systems which provides tremendous intermodal transport potential.

In the foreseeable future, the economy of Vietnam appears to be suited to generating GDP growth of over 5 per cent a year. Even though this is less than previous years, such economic growth can promote a stable economic environment if inflation and production prices are closely controlled. GDP growth in Vietnam will provide an increasingly important consumer market for all types of goods and services, which attests to a market size which will increase over the short as well as the long terms.

The political climate of Vietnam can be generally considered stable for FDI interests. This simply means that the Vietnamese government is aware of the need and desires foreign invested capital. As regulations and policies are adapted to improve the investment environment, foreign direct investors will be increasingly attracted to Vietnam. Research has indicated that the transparency and ease of operating in the business environment of any country is vitally important to the determination of FDI. Of course, foreign firms committing direct investment to any country make significant long term financial commitments to a country, and expect that the political climate, if favourable, will be maintained. 

If one wants to consider the future of FDI in any country, one must consider the probability of future trade related agreements. This is certainly true for Vietnam, where FDI was shaped considerably by the BTA with the US and inclusion in the WTO. The psychological effects of such agreements on FDI commitments cannot be underestimated.

Therefore, to consider the future of FDI in Vietnam, consideration of the co-operation of ASEAN nations is critical. As ASEAN nations have historically been economic adversaries of China, China itself is branching out its FDI in ASEAN countries. As Japan has moved aggressively to promote ASEAN economic development through $8.2 billion of FDI, China recognised the need to follow Japan. In  2012, China invested $4.42 billion in ASEAN countries, up 52 per cent from the year earlier. 

The envisioned ASEAN Economic Community (AEC), with ten member states, primarily the ASEAN countries, will be softly implemented in 2015, according to the schedule. The AEC will allow the free flow of goods and services between member countries, FDI, as well as transport and energy, and skilled labour essentially forming one economic community. The AEC is essentially a regional Trans-Pacific Partnership.  Just the expectation of the probable and eventual implementation of both agreements can provide foreign direct investors with a favourable outlook on investment in Vietnam. If implemented, vital economic and policy changes will occur; the establishment of such policies allows FDI interests to push ahead with confidence of long-term viability and progress. 

As all countries in the world essentially compete for a finite amount of FDI, Vietnam must continue on a path favourable to FDI. The country must continue to promote economic growth, political stability, regulatory openness and policy reform. To date, Vietnam has made evidence of accomplishing these tasks, primarily through inclusion in trade agreements and regional and international partnerships. As the world economy continues to improve, there is no reason to believe that Vietnam will not continue to attract significant volumes of FDI if the country continues creating favourable circumstances for companies to invest.