General

Current picture of the Foreign Direct Investment in Vietnam Manufacturing and Processing

Trường Lăng

April 13, 2022

General

Current picture of the Foreign Direct Investment in Vietnam Manufacturing and Processing

Trường Lăng

April 13, 2022

Despite the outbreak of Covid-19, the manufacturing and processing sector in Vietnam is on the rise and has the potential to attract growing FDI in the upcoming time. 

Market potentials

According to the Foreign Direct Investment Department of the Planning and Investment, as of March 20, 2022, the total newly registered, adjusted, and contributed capital to acquire shares and contributed capital purchases of foreign investors reached 8.9 billion USD which is equivalent to 87.9% compared to March 2021. Meanwhile, realized capital of foreign-invested projects is estimated to stand at 4.42 billion USD, increasing by 7.8% over the same period in 2021. 

In addition, foreign investors have invested in 18 out of 21 national economic industries, in which manufacturing and processing is leading with a total capital up to 5.3 billion USD, accounting for nearly 60% of the total registered capital. It was followed by the Real Estate sector, Professional activities in science and technology, and Electricity production and distribution with registered capital at 2.7 billion USD, 200.4 million USD, and 194.6 million USD respectively. Although the number of registered FDI projects experienced a slight decrease, the amount of disbursed capital shows an upward trend. This is, therefore, still on the track of Vietnam orientation, attracting FDI in improving quality instead of increasing quantity while removing small-scale projects with insignificant value-added.  

Figure 1: Registered Investment Capital (March 20, 2022)

Mr. Bui Thanh Son-the Minister of Diplomacy articulated that FDI attraction has been identified as a key action to promote economic-social development by the Vietnamese government. In this way, Vietnam has been making attempts to improve the investment-business environment, at the same time, issuing incentive policies for inward foreign direct investment. 

“Currently, the FDI sector contributes about 20% of GDP, over 50% of industrial production value, and about 70% of export turnover of the country, creating jobs and income for millions of workers. Many of the world’s leading corporations are making long-term investments and achieving success in Vietnam. Even when the outbreak of the Covid-19 pandemic has negatively impacted the world economy and Vietnam, FDI attraction to Vietnam maintained its momentum, reflecting the confidence and perception of international investors in Vietnam as a safe and attractive destination”

Mr. Bui Thanh Son-the Minister of Diplomacy

Noticeable FDI trends 

Vietnam’s manufacturing and processing industry maintains its position as a high-potential spot in attracting FDI with the advantages of cheap labor, favorable geographical location as well as preferential policies, especially for high technology products. On a global scale, Vietnam is a low-cost producer with competitive labor prices. On average, Vietnam’s labor cost is significantly cheaper than that of China or the US, while the cost of doing business in Vietnam is relatively economical, especially in the manufacturing sector, thanks to its low investment, construction, and land costs. According to research data from Statista, the average manufacturing wage in Vietnam is 2.99 USD/hour, while in China it is 6.50 USD/hour.

In addition, Vietnam with its 100 million population has a large and well-educated workforce. Hence, The Government of Vietnam has also launched diverse vocational education programs to train skilled workers, particularly the Vocational Education Development Strategy for the period 2021-2030, with a vision to 2045.

Plus, Vietnam’s participation in new-generation free trade agreements such as EVFTA, UKVFTA, and CPTPP creates an attractive investment environment for foreign investors. Thanks to these trade agreements, Vietnam can take advantage of lower tax rates to encourage export businesses to produce domestically and export to non-ASEAN markets. Also, compared with other countries in Southeast Asia, Vietnam stands out with its strategic location in the heart of ASEAN combine with the international airport, seaport, and railway system, facilitating production and transportation.

Tech Wire Asia (Malaysia) predicts that “Vietnam will continue to lead the region in manufacturing and processing, at least for the foreseeable future”

a Manufacturing plant with high-tech equipment

The mentioned advantages have been irresistibly appealing to foreign companies seeking opportunities for up-scaling manufacturing in Vietnam. Other than “tech giants” such as Samsung or Intel, other large global corporations have also announced their commitment to increasing production investment in this Southeast Asian country. Notably, Pegatron – a major manufacturing partner of Apple – Microsoft, and Sony, has invested an additional 101 million USD to establish a manufacturing plant for producing and selling computers, peripherals, communication equipment, and electronic components in Vietnam.

Along with that, Pegatron plans to invest in research and development (R&D) activities as well. Additionally, LEGO (Denmark) – the most well-known toy producer in the world – will invest nearly 1.32 billion USD in establishing a toy-manufacturing base in Binh Duong Province.

Most recently, Samsung has invested in a new Samsung R&D Center, with an investment of 220 million USD in Hanoi. This center is intended to complete by the end of 2022 and focuses on researching new technology trends, namely AI, Big Data, IoT…, becoming a strategic R&D base in the region of this MNC.

The Financial Times assessed that, in fact, an increasing number of multinational enterprises are looking to build production factories in Vietnam and this trend will continue to be more popular. Some economic experts even think that Vietnam is a “rising star” of manufacturing supply chains in the Asia-Pacific region. According to the World Bank (WB), the Covid-19 epidemic remains complicated, but FDI flows in Vietnam are booming, proving that foreign investors maintain confidence in Vietnam.

The final factor driving the growth of the manufacturing industry is the government’s incentives.

Legal environment

Resolution No. 115/NQ-CP set a goal that by 2025, Vietnamese enterprises will be able to produce goods for the supported sectors with high competitiveness and meet 45% of domestic production and consumption demand. In parallel with strategic orientations, several preferential policies and action programs have been implemented.

On the reform and improvement of the business environment and enterprise support over the past time, Chairman of the Vietnam Confederation of Trade and Industry (VCCI) Pham Tan Cong commented that in general, support policies have been issued in a timely manner. Remarkably, some policies can be mentioned 

  • Resolution 128 on opening the economy in time 
  • Resolution 11/NQ-CP on reducing VAT and supporting land rent, preferential import and export tax rates. Under the Resolution, the deadline is extended for paying corporate income tax, personal income tax, value-added tax, excise tax, and land rent in 2022, and the loan interest is supported for certain subjects. 
  • Decree No. 57/2021/ND-CP supports industries supplying raw materials, spare parts, and components for the manufacturing sector. The tax savings from the application of this Decree will provide financial assistance to businesses suffering impact due to the Covid-19 pandemic.

The National Assembly and the Vietnamese Government have recently had an extraordinary meeting in January 2022 to amend 8 laws to avoid the overlap, including the Law on Enterprises, the Law on Investment, the Law on Electricity, and the Law on Value Added Tax. Thus, the Government has well responded to investors, enterprises, and the public’s expectations, bettering the legal environment for further development and adaptation.

An overview of Vietnam’s investment incentive financial policies in recent years shows that no discrimination exists between domestic and foreign investors. Hence, the reduction of corporate income tax rates and the diversification of tax incentives have contributed to a favorable investment environment to attract foreign capital inflows.

However, the legal framework remains several shortcomings. In detail, incentive policies are inconsistent in the objectives and the implementation measures. One of the main objectives of preferential policies is to attract FDI enterprises to using high-tech solutions, yet the incentives are based on tax, land rent, or the number of employees rather than criteria on deployed technologies. Meanwhile, some incentives are issued without a clear regulation on the conditions and procedures to enjoy those incentives, therefore, eligible enterprises have difficulties in acquiring the confirmation from the state agencies. Likewise, most tax incentives in Vietnam rely on the revenue of the enterprises or on the absolute time from the time the project comes into operation, leading to foreign investors profiteering from preferential policies.

Conclusion

Due to the uncertainty of the world economy, global corporations seek to diversify and increase the resiliency and connectivity of their supply chains while decreasing dependence on a single country. Under that situation, Vietnam has become a top destination for investment in manufacturing and processing, yet the country also faces challenges, especially in improving the supporting industry. However, Viettonkin believes that with the advantages Vietnam possesses, along with the supportive policies from the Government and the improvement in the business community, Vietnam will maintain its momentum as a hub spot for regional and global manufacturing and processing.  

If you are interested in investing in manufacturing and processing in Vietnam, please contact our Vietonkin consultant team via email or contact page. Our professionals, who are insightful of the Vietnam market and legislation, can provide detailed advice on helping your companies navigate through the legal processes of setting up business in Vietnam.

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