Despite being hit hard by COVID-19, Vietnam’s economy remained resilient and even grew at 2.91 percent in 2020 (General Statistics Office). This is the result of both government’s decisive containment measures and the ability of Vietnam to keep a high business confidence index. According to the European Chamber of Commerce (EuroCham), the Business Climate Index (BCI) in the third quarter of 2020 increased 24 points, jumping to 57.5 points – the highest score since the outbreak of COVID-19.
FDI acted as a key component of Vietnam’s 2020 economic growth, as the country attracted US$17.2 billion in FDI project value in the first 11 months of 2020 which is 97.6% over the same period last year (Ministry of Planning and Investment). The FDI sector saw a trade surplus of 32.1 billion USD, leading to a trade deficit of US$12.7 billion of the domestic sector. The processing and manufacturing sectors are the main fields that attracted investment, accounting for 48.2% of the total registered investment capital. Electricity production and distribution ranked second, following by real estate business, wholesale, and retail. These number showed an FDI trend which focused on the trade sector, as it increased for the first time in ten years. The FDI preference for trade-intensive sectors can be explained as a positive effect from various trade agreements including EU-Vietnam Free Trade Agreement (EVFTA) and the UK-Vietnam FTA.
In the first 11 months of 2020, there were 109 countries and territories investing in Vietnam. Singapore ranked first position in the list with a total investment capital of nearly US$8.1 billion, accounting for 30.6% of the total investment capital in Vietnam. South Korea ranked second with an investment of US$3.7 billion, comprising 14% of the total investment capital. China, Japan, Taiwan, and Thailand were also the countries that contributed actively to Vietnam’s FDI. In recent years, Asian countries have become the biggest investors in Vietnam. It is noteworthy that China has risen to be the third biggest FDI partner with 311 new projects in 2020. A recent survey showed that Japanese firms considered Vietnam as the most promising FDI destination in 2020. Likewise, Thai firms’ registered projects doubled in 2020, as a result of a favorable investment climate and Vietnam’s participation in multiple regional trade agreements.
Source: Ministry of Planning and Investment (as of November 20th, 2020)
Key FDI trends in 2021
In 2021, the key trends of foreign investors’ activities including trade intensity and the rise of Asian investors are projected to carry forward. In addition, the trade intensity of FDI is projected to expand as trade agreements and access to foreign markets are the top priority of FDI investors. As a result, Vietnam’s export and import industries in the goods and services sectors would become more attractive to investors. Besides, agreements with countries outside Asia could be a driving force for the increase in a new set of investors. In 2021, Vietnam will remain an ideal place for investment from ASEAN and beyond. Thanks to the investor-friendly policies, relative economic and political stability, and consumer demand prospects, it is likely that Vietnam will continue to benefit from the supply chain transformation underway in SouthEast Asia.
The next wave of FDI
Apart from the key trends, a projected new wave of FDI is also the component that contributes to a positive outlook of FDI in Vietnam. This wave is being driven by global factors such as the US-China Trade War, the COVID pandemic. It is expected that the next wave of FDI will have a more significant impact on the economy than previous FDI inflows, as the Prime Minister has identified FDI as one of the main pillars to drive Vietnam’s GDP growth in 2020 and beyond. The initial waves of FDI into Vietnam resulted from the high skill level and low wages of the workforce, as well as the country’s proximate geography to the garment, furniture, electronics, and other industries, supply chains in Asia. The next wave of FDI will be driven by the relocation of companies’ factories out of China. It is projected that 20% of China’s manufacturing base is likely to re-locate in 5-10 years’ time. South East Asia will be the destination for both multinational and Chinese companies to set up factories.
The next wave of FDI will be a driving force for Vietnam’s economic transformation. The inflows of FDI have not only created jobs for millions of low-skilled Vietnamese workers but also helped foster the emergence of the middle class. In addition, multinationals will help increase local firms’ capability as they start to build a local supply chain in Vietnam. Other ‘’spillover benefits’’ including advanced technology, managerial knowledge, and working practices will also be amplified as the size of the scope of FDI firms increase.
In conclusion, the outlook for FDI inflows in Vietnam remains positive and the trends in 2020 will be carried on in 2021 and beyond. As the economy stayed resilient despite the negative impacts of COVID-19, Vietnam is considered a favorable and stable investment climate. It is expected that the new waves of FDI will be coming and contribute to further growth of the economy.