Frontiers in sustaining foreign investment inflows to Vietnam

Last month, Vietnam received its first billion-dollar foreign investment project of the year, a $1.07 billion injection from South Korean semiconductor giant Amkor.

The significant investment was formalized at the Vietnam-Korea Business Forum, coinciding with Prime Minister Pham Minh Chinh’s official visit to South Korea.

This new capital infusion elevates the total investment at Amkor Technology Vietnam’s manufacturing, assembly, and testing facility for semiconductor materials and equipment in Bac Ninh province to $1.6 billion.

Consequently, the total registered adjusted capital has risen to nearly $10.8 billion, marking an almost 20 percent increase in the first seven months of the year compared to the same period last year. These developments highlight Vietnam's continued appeal to foreign investors, even as global competition intensifies.

Over the past 20 years, Vietnam has developed into a major manufacturing base deeply integrated with the global supply chain. Exports have averaged a 13 per cent annual growth rate since 2007, primarily driven by foreign-invested enterprises.

Vietnam has also consistently maintained its position as the third-largest recipient of foreign direct investment (FDI) in ASEAN.

Besides the recent investment by Amkor, Bac Ninh, a key FDI hub in the country, also hosts Samsung’s major production center.

Samsung, which established its first phone factory in the northern province of Bac Ninh in 2008, now conducts more than half of its global smartphone production in Vietnam, with cumulative investments exceeding $20 billion.

The success of these early movers has encouraged other tech giants to invest in Vietnam’s manufacturing capabilities.

Vietnam’s advantage in attracting foreign investment

According to HSBC's recent report, the surge in multinational corporations’ (MNC) interest in Vietnam is due to various factors, including competitive costs and FDI-friendly policies.

Manufacturing wages in Vietnam are lower than in China and other peers, despite the population’s solid general education, evidenced by Vietnam’s high PISA scores.

Other costs, such as energy needed to operate factories, are also competitive.

Vietnam ranks second-lowest among its peers regarding electricity prices for businesses. However, recent changes making electricity price adjustments more frequent could impact the current dynamics. Meanwhile, diesel, widely used in industrial sectors, maintains a similar competitive edge in terms of prices.

Vietnam also has made significant progress in establishing various economic agreements with major trading partners, such as the EVFTA and CPTPP. These developments have facilitated and encouraged foreign investment, with the OECD recognizing Vietnam as increasingly open to FDI.

Part of the favorable investment environment can be attributed to proactive government support through the tax system. Vietnam’s 20 per cent statutory corporate income tax rate gives it a competitive position relative to its peers. Some firms have leveraged lengthy tax breaks and holidays to reduce the effective rate further.

These factors have played a crucial role in attracting investment and integrating Vietnam into the global value chain (GVC). Vietnam’s GVC participation rate has sharply risen over the years, now comparable to that of Singapore.

UOB's mid-year economic outlook for Vietnam indicates that foreign investors remain largely optimistic about Vietnam's prospects, despite political shifts.

"We remain positive for the second half of the year as the FDI data suggests that businesses continue to view Vietnam as a key investment destination in the medium and long term amid the global supply chain restructuring," said Suan Teck Kin, executive director of Global economics and market research at UOB Group.

He noted that the increase in both realized and registered FDI flows will further boost domestic activities in the coming quarters, including construction and employment.

Challenges ahead

To sustain robust investment inflows, Vietnam must climb the manufacturing value chain and increase the domestic value-added content in its goods.

Despite the sharp rise in consumer electronics exports, Vietnam’s share of global integrated circuit exports has grown at a slower pace.

Although workers have a solid educational foundation, the current lack of skilled technical workers has led to challenges in developing semiconductor manufacturing capabilities. This has prompted the government to expand its semiconductor workforce in the coming years.

The shortage of specialized workers is also affecting other sectors, such as maritime transport and logistics.

Beyond expanding and improving vocational education nationally, initiatives to promote foreign companies’ engagement with the domestic economy could help broaden the benefits of increasingly complex FDI inflows.

For instance, US-based chip firm Synopsys recently signed an agreement to collaborate with students and lecturers of Vietnam National University – Ho Chi Minh City on semiconductor design, training, and research.

Encouraging signs of more complex manufacturing knowledge and processes entering Vietnam have emerged. In 2022, Samsung established an R&D center in Hanoi to further develop manufacturing capabilities while commencing production of certain semiconductor components.

Meanwhile, Apple has increased its investments in Vietnam, allocating product development resources for the iPad.

Factors beyond tax considerations, such as infrastructure quality, will need to be proactively addressed as the Global Minimum Tax is implemented across jurisdictions.

Measures such as further leveraging digitalization to streamline trade processes, securing reliable and green energy, and facilitating goods transport through better infrastructure are likely to impact MNCs’ investment decisions in the coming years.