Building on Vietnam’s favorable conditions for doing business, namely its strategic location, stable political system, ample workforce, and a relatively open environment for FDI, Vietnam has cemented its position as a safe and stable destination for investment. Its GDP growth in 2020 increased by 2.91 percent despite COVID-19.
The key to such an impressive performance was the government’s effective strategies in combating the pandemic. Further, with a solid vision for the future, Vietnam has also created a concrete foundation to bounce back stronger in 2021, with the amendment of a variety of important laws that help improve its business climate, in addition to the free trade network with the EU, the UK, and RCEP countries. The International Monetary Fund (IMF) forecasts that Vietnam would rebound to 6.7 percent and remain the only country with positive growth in five major economies in ASEAN this year.
Why Pick Vietnam as an Investment Destination?
Vietnam is a fast and emerging market with stable economic growth and governance. The top five sectors receiving investment were manufacturing and processing at US$12.73 billion followed by real estate, electricity production, wholesale and retail, science and technology, and others.
Why examine reasons why Vietnam is emerging as a preferred destination for investors.
Doing Business in Vietnam
Vietnam ranked 70 among 190 economies in the Doing Business 2020 report released by the World Bank. The country fell one spot from its position the previous year. Nevertheless, Vietnam’s overall score improved by 1.44 points, scoring a total of 69.8 points.
In the report, Vietnam ranked the best in the following areas of assessment – “Getting credit” and “Paying taxes”, ranking 25 among all the economies.
Vietnam’s performance was the weakest in “Resolving insolvency”, ranking 122 overall. In general, Vietnam improved in most areas, only declining in the overall score for “Resolving insolvency” for the second consecutive year.
Improvements in doing business
Building on efforts over the last few years, Vietnam has proactively improved its business and investment environment for foreign companies. Vietnam continues to be a magnet for attracting foreign direct investment (FDI). Despite the pandemic, Vietnam was one of the few countries to have recorded a net positive GDP growth of 2.91 percent.
In the Doing Business 2020 report, Vietnam made noteworthy improvements in making it easier for businesses to access finance and run day-to-day operations.
Vietnams Improving Governance
Vietnam has a relatively stable government that provides strategic direction and decides on all major policy issues.
The government has worked to improve business policies and labor laws, including Vietnam’s ranking in the World Bank’s Doing Business report.
It continues to prioritize infrastructure investment and does not shy away from looking at countries outside ASEAN to fuel its growth.
The government has also invested in industrial zones, and this investment is expected to increase as foreign investment pours in.
Improving Access to Business Credit
Vietnamese authorities have worked on improved access to credit information through data distribution from retailers. The government understands that the country’s credit information market is underdeveloped and lacks competition and has therefore pushed to bring changes.
In May 2019, the Vietnamese government released a draft decree – which replaced Decree 10/2010/ND-CP – relaxing requirements imposed on an organization when establishing itself as a credit information firm.
This will not only reduce service costs and increase transparency in the market but also diversify the pool of credit information available. The draft proposes to relax the requirement of credit institutions of having at least 20 commercial banks providing it exclusive information.
Further, the National Credit Information Centre of Vietnam (CIC) and the State Bank of Vietnam (SBV) officially launched a portal connecting borrowers and credit institutions in October this year. Borrowers can now easily choose credit packages and register loan needs at the appropriate credit institutions through the online portal. On the borrower connection portal, borrowers are allowed to view their own credit information and credit scores, helping them monitor their credit levels as well as prevent fraud.
Digitization, Streamlining Administrative Procedures
While Vietnam has made reforms in paying taxes and starting a business – these are still two aspects that Vietnam needs to continue to work on. The country still ranks low on the aspects of “starting a business” and “paying taxes”, ranking 115 and 109, respectively.
Moreover, the Doing Business report stresses the need for further digitalization and streamlining of administrative processes to boost the country’s business environment.
The government is already taking steps towards this and is speeding up the application of Industry 4.0 technology in the areas of business, cultural, and social life.
With the Vietnamese economy growing at a rapid pace, further reforms will undoubtedly improve the business environment in the country – attracting more investment and creating more jobs in turn.
Another major reform is the electronic system managing the tax payment process for businesses. Investing in upgrading the information technology infrastructure used by the General Department of Taxation has made paying taxes an easier process for most businesses.
In the past few years, it could take businesses two to three working days to complete their tax payment processes; however, with the upgraded online payment systems, the process is much faster and can be completed within a day. According to Vietnam Customs, around 99 percent of import and export tax payments were made online as of June this year.
Such digitalization not only brings efficiency and allows businesses and authorities to reduce administrative costs but mitigates risk exposure for businesses where they are not forced to offer bribes and facilitation payments. In Vietnam, the land administration, construction sector, and public administration are especially prone to corruption.
Jaques Morisset – the World Bank’s Lead Economist and Programme Leader for Vietnam – notes that there are several regulations and a lack of coordination across ministries when it comes to tax payment. For example, the same document and information are often needed multiple times for an application or payment.
In a bid to ease tax complications, the Vietnamese government has worked on various proposals to amend the current value-added tax (VAT), corporate income tax (CIT), and special sales tax regulations. The aim of the proposals is to clarify unclear tax issues and reduce the tax compliance burden for businesses with operations in Vietnam. The proposed regulations streamline the country’s tax system to align with international best practices.
Despite the negative socio-economic consequences of COVID-19, Vietnam is one of the few countries that recorded positive economic growth in 2020. As per the General Statistics Office (GSO) Vietnam’s GDP increased by 2.91 percent in 2020.
A key component of Vietnam’s 2020 economic growth has been the role of foreign capital in the country. FDI project value in the first 11 months of the year was estimated at US$17 billion, bringing the total accumulated FDI stock value to US$382 billion across 32,915 projects.
Across the global economy, the COVID-19 pandemic negatively affected trade through low demand, and supply chain disruptions. Despite these effects, Vietnam’s export and import turnover (goods trade) was US$543 billion, a 5 percent annual rise. Exports were particularly significant in this increase, with an estimated export value of US$281 billion.
Alongside this increase in export-import activity, the trade intensity of FDI also increased for the first time in ten years. Foreign firms played a significant role in the export and import of goods and services. In goods trade, for instance, the FDI sector accounted for 72 percent of total export turnover and 63 percent of import turnover. This most likely reflects FDI preference for trade-intensive sectors such as manufacturing and crude oil and positive effects from numerous trade agreements signed recently including the EU-Vietnam free trade agreement (EVFTA) and the UK – Vietnam FTA.
Vietnam’s growing economy, expanding middle class and a population of over 95 million have generated significant revenue from retail sales and consumer services.
The steady flow of foreign investment into Vietnam has, and will continue to, propel economic growth. This growth has significantly increased local spending power, with an increase in the expenditure for both urban and rural consumers.
Consumer spending in Vietnam has seen growth in numerous industries, which has changed the market. For example, there is growing demand for high quality education; students enrolled in higher education went from 16 percent in 2005 to 29 percent in 2015. The needs of Vietnamese people are changing and can be seen in their demand for higher standards across not only education, but health and leisure, to name a few.
In addition, it is forecast that the number of people from 60 years old and over in Vietnam will surge more than double, from 11.9 million to 29 million, by 2050. The age group of over 80 will triple to account for around six percent of the country’s population presenting significant opportunities for the healthcare industry.
2021 could also lead to structural shifts and changes in investment patterns.
For example, the rise of consumer-facing FDI is contingent on the growth outlook for consumer spending and the return of mobility particularly in sectors such as hospitality. In addition, Vietnam’s rapidly evolving digital business landscape could impact consumption trends.
By 2025, Vietnam’s digital economy could expand to US$52 billion. Sub-sectors of the digital economy such as e-commerce, digital banking, and online gaming represent nascent and high-growth areas of consumer demand that investors could target. Therefore, while the Vietnamese consumer remains a driver of FDI, it is possible that the routes foreign firms need to take to reach the consumer could change.
Vietnam’s export and import industries both in the goods and services sectors could become lucrative targets for investors. In addition, agreements with countries beyond Asia could attract a new set of investors. For example, research suggests that 72 percent of EuroCham members are of the view that the EU-Vietnam FTA could lead to a surge in European firms investing in Vietnam.
For the year ahead, Vietnam remains a strong candidate for investment from ASEAN and beyond. Given its investor-friendly policies, relative economic and political stability, cost efficiency, and consumer demand prospects, Vietnam is likely to continue gaining from supply chains restructuring in Asia in addition to attracting a new range of investors in terms of geography and sectors.
Workforce and Labor
Vietnam has a population of over 97 million people spread over 330,000 square kilometers. The country is still predominately rural, with urban centers providing a home for just 35 percent of the population. Companies entering Vietnam for the first time often fail to account for regional variation in the labor market and invest in locations ill-suited to their industry.
Investors that take the time to explore Vietnam’s provinces will find opportunities to manage costs while maintaining productivity. Executives will benefit from understanding the cost differential between different provinces in Vietnam, but the real beneficiaries of a regional approach will be human resource (HR) departments and hiring managers. HR departments that understand what Vietnam has to offer will be much better positioned to recruit, onboard, and, where necessary, train new workers.
Vietnam’s investment landscape is broken into three main zones in the north, center, and south of the country. Out of these three provinces, investors typically end up investing in the north and south of the country.
Vietnam boasts a labor force of almost 60 million workers, growing by over 1 million per annum. 35 percent of this Vietnam workforce supply is generation Y born between 1976 and 1995. Almost 95 percent of the labor force is literate and over 88 percent were enrolled in secondary school, in which 5 percent are proficient English and over 10 percent are considered highly skilled. Of this workforce, 42 percent are engaged in the agricultural sector, 35 percent in the service sector and 23 percent in industry. These figures imply that education and training in Vietnam may help people to get decent jobs and go out of the informal sector.
For that, the workforce sources in the future need to be better prepared for news and have a higher degree of soft skills including creative thinking as well as the ability to adapt with the industrial development through the world and countries.
Low labor costs
One of Vietnam’s advantages making it a preferred destination for investors is its competitive minimum wages as compared to other countries in the region. Vietnam minimum wages range from US$132 to US$190 depending on the region– with the highest being in cities like Hanoi and Ho Chi Minh City.
While typically minimum wages are increased every year, this year the minimum wages have remained the same due to COVID-19 related challenges.
These wages are around half of what China’s are in various provinces, which range from US$173 to US$400.
China is known to dominate the manufacturing industry but with wages rising, many businesses have already moved operations to maintain margins in low cost manufacturing.
In addition, China’s ageing population has produced labor shortages in the manufacturing industry. While Vietnam still needs to develop a skilled labor force, it has a young, dynamic workforce that is ready to fill the gap.
As Vietnam’s economy continues to grow, rising wages will be an unavoidable feature of doing business in the country. Nevertheless, Vietnam’s improving business environment, free trade agreements and low costs make it an ideal location for foreign investors looking to relocate.
Businesses should plan ahead and prepare their budgets, operational capacity, and costs for the new year when the new wage hike goes into effect.
Proximity to China
Vietnam’s close proximity to China is further helping it to become a manufacturing base, while being viewed as a China plus one destination.
Cities such as Hai Phong in Vietnam are just 865 km away from China’s manufacturing hub of Shenzhen.
By situating manufacturing centers close to traditional hubs in China, manufacturers are able to reduce costs with limited interruption or delays to existing supply chains.
In addition, many factories in Vietnam are foreign-owned with investments from China, Taiwan, and South Korea. This makes transitioning out of China into Vietnam smoother, making it easier to transfer existing checklists, specifications, or other product information.
Vietnam’s location close to regional shipping routes and position in Asia allows manufacturers entering Vietnam to focus on exports.
It has an approximately 3,200 km long coastline with around 114 seaports. The three largest seaports in Vietnam are in Hai Phong (north), Da Nang (central), and Saigon (south).
In addition, Vietnam has an extensive railway network: the Kunming (China) – Hai Phong (Vietnam) is 855 km long and remains important for cargo transportation.
While Vietnam’s infrastructure is still unmatched to China’s, the government has prioritized infrastructure development to facilitate economic growth.
Moving your Manufacturing Business to Vietnam
Vietnam’s greatest challenge is how to manage its growth responsibly.
Thankfully for Vietnam, the trade war has created enough push factors to encourage manufacturing businesses to relocate. This has already caused a shift in global supply chain networks with countries such as Vietnam reaping benefits.
Before sizing up Vietnam as a potential destination for relocation, foreign investors must do their due diligence and consider several factors, such as identifying a location, raw materials, sourcing partners, and supply chain logistics.
It is further advisable to use a professional service with knowledge in the region to assist firms to plan out their manufacturing strategy
Vietnam's Free Trade Agreements Network
Over the past few years, Vietnam has been active in signing bilateral trade agreements with countries throughout the world.
Its membership in the Association of Southeast Asian Nations (ASEAN) also makes it a party to several FTAs that the regional bloc has signed.
In addition, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the EU-Vietnam free trade agreement (EVFTA) will propel Vietnam into becoming a competitive business environment.
The standard of product quality, manufacturing, and employee rights guaranteed in these agreements will allow Vietnam to become a manufacturing hub and expand as an exporting base.