Cong Thanh Bui (James)
Managing Partner
Lan Nguyen (Megan)
Head of Legal Business Consulting
The latest data from the Foreign Investment Agency of the Ministry of Planning and Investment indicates that, as of November 20, 2023, the actual capital implementation of FDI projects has surged to $20.25 billion. This marks the highest figure recorded during the period from 2018 to 2023. This surge in investment highlights the country’s growing appeal as a favorable environment for doing business in Vietnam. Aside, Vietnam has solidified its position as a prime destination for FDI.
Vietnam is becoming one of the most attractive economies for doing business in Vietnam attracting significant foreign investment. What are the factors behind this dynamism? This report highlights the key factors that are making Vietnam a forward-looking economy. It aims to provide valuable insights for businesses and investors considering opportunities in doing business in Vietnam. Understanding these factors empowers stakeholders to make informed decisions. This knowledge is crucial for successfully entering the Vietnamese market and capitalizing on its growth trajectory for doing business in Vietnam.
1. Recent history of Investment in Vietnam
1.1 Doi Moi Reform: openness to economic liberalism – 1986
The so-called Doi Moi reform took place at the beginning of the decline of the USSR. Still based on a model of the economy that was too constrained, Vietnam undertook an in-depth transformation of its system, particularly in political and economic terms.
Essentially, the Doi Moi in its early stages was focused mainly on the removal of self-imposed barriers to progress and the utilization of various market-oriented measures. This included liberalization of the domestic market, encouragement of foreign direct investment (FDI) and the private sector, while reducing subsidies to under-performing state-owned enterprises (SOEs).
These steps quickly brought positive results. From a country facing perpetual food shortages, Vietnam in 1989 for the first time exported 1.4 million tons of rice, since remaining a major rice exporter. In 2008, it exported 4.7 million tons, becoming the world’s second-largest rice exporter after Thailand, playing an instrumental role in stemming the threat of a severe international food crisis in early 2008.
Even now, as many farmers switch to more profitable options like shrimp or fruit farms, and the government cuts Vietnamese rice exports, it is yet the third largest global rice exporter in 2023 following Thailand and India, signifying Vietnam’s global importance on the market.
1.2 Joining ASEAN: Becoming a commercial ally in Asia – 1995
Facing continuous trade restrictions and embargoes from the West and realizing its political isolation, Vietnam started a mission to “make more friends and less enemies” in 1988. This was why Vietnam expressed its interest to join ASEAN in 1992 and became its official member in 1995. Joining ASEAN had crucial social, political, economic, and security implications for Vietnam. Its ASEAN membership integrated Vietnamese security with the whole of Southeast Asia and created a favorable environment for economic development. This, in turn, raised Vietnam’s global image, leading to increased cooperation with multiple players in the region and a greater bargaining position when negotiating treaties.
Vietnam was the first Indochinese country to join ASEAN. Its membership helped helped end confrontation between the Indochinese bloc and ASEAN. This foster a longer tradition of openness towards international investors. Vietnam has also helped ASEAN partner with non-regional players — including China, Russia, India, and the EU, making it easier to lift trade barriers and attract investment from these economic entities to Vietnam.
1.3 Joining WTO: Vietnam dissolves its remaining economic borders and enters international trade with full force – 2007
Joining the WTO augmented Vietnam’s economic link with other trading partners and boosted its export performance. As member countries of the WTO collaborate to promote trade liberalization, trade barriers to Vietnam are gradually phased out.
As the remaining restrictions on imports among WTO members are removed, Vietnam can enhance export earnings from major industries such as textile and garment, further improving the country’s trade balance. Additionally, as a WTO member, Vietnam has to adhere to higher international standards, making it a better destination for investors as it becomes less unpredictable and a more open market.
Furthermore, according to WTO rules, Vietnam had to abolish tariff exemption measures and export subsidies. Gradual reductions in most tariff rates had to be lowered from an average of 17.4% in 2007 to 13.6% by 2019 (Tumbarello 2007).
But at the same time, with easier market access, Vietnam could negotiate lower prices for imports of raw materials and semi-processed inputs. Hereby reducing local firms’ production costs, further reducing barriers to enter the Vietnamese market.
1.4 Implementing EVFTA: an alignment of economic standards for a lasting alliance with the European continent – 2020
Entering EVFTA to eliminate import tariffs by up to 99 per cent opens new gates of opportunity for Vietnam and the EU. This allows Vietnam to participate in one of the most developed markets in the world with much greater freedom, while also facilitating increased investment from Europe into Vietnam. The establishment of Danish Lego’s factory in Binh Duong Province is one of the most recent examples of this trend.
1.5 Implementing IPEF: towards an agreement focusing on the ethical aspects of international trade – Soon
Initiated by the United States, the IPEF (Indo-Pacific Economic Framework for Prosperity) is part of a new generation of agreements designed not only to boost trade but also to improve the quality of that trade. The IPEF is a coalition of 14 member countries that include India, Australia, Brunei, Fiji, Indonesia, Japan, South Korea, Malaysia, New Zealand, the Philippines, Singapore, Thailand, and Vietnam The IPEF sets out a number of moral objectives for international trade in the region, notably through various pillars among which digital economy development, supply chain resilience, infrastructure, clean energy, and decarbonization; and tax and anti-corruption.
Some key information on the draft IPEF agreement:
- 40% size of world GDP
- 28% trade of word trade
- Anti-corruption measures
- Digital economy development
- Supply chains resilience
- Clean energy infrastructure
2. International Openness
(Signing agreements to drive stronger international growth)
Globalization and trade liberalization emerge as the primary drivers of 21st-century economic growth, representing an inevitable trend toward enhanced production specialization and labor force distribution.
As evidenced by Vietnam’s recent history, there’s a notable inclination towards embracing foreign investment, aimed at dismantling protectionist trade barriers in favor of granting easier market access to international entities. These entities, leveraging Vietnam’s low production costs, simultaneously contribute to the improvement of Vietnamese infrastructure and economy. Central to facilitating this dynamic are Free Trade Agreements (FTAs).
2.1 ASEAN Free Trade Agreement (AFTA)
ASEAN Free Trade Area (AFTA) is a multilateral free trade area among ASEAN members to enhance their contemporaneously encourage the attractiveness of the foreign direct investment. Its ultimate objective is to gradually reduce tariffs to 0-5%, eliminating tariffs barriers of some commodity groups and to remove non-tariff barriers, harmonizing procedures of member countries in AFTA. The key mechanism for carrying out AFTA is the Common Effective Preferential Tariff (CEPT). CEPT sketched out a detailed mechanism intending to reduce tariffs with its initial stage beginning on 1st January 1993, with all Member States complying to reduce previously existing tariff rates to 20%. Additionally, member countries were encouraged to adopt an annual rate reduction, gradually reducing barriers for foreign trade and investment.
With the achievements of reduction tariffs because of the implementation of AFTA and CEPT, ASEAN Trade in Goods Agreement (ATIGA) became effective on May 17th, 2010.
Consequently, Vietnam completely eliminated tariff barriers alongside other ASEAN countries, 99.2% of tariff lines have been removed, whereas 90.0% of tariff lines of acceding countries including Cambodia, Laos, Myanmar and Vietnam were eliminated since 2017. In 2018, the tariff elimination rate in the whole ASEAN area reached more 98.6%. For Vietnam, since January 1st, 2018, an addition (7%) tariff lines were reduced to 0%. This leads to an increase in the sum of tariff lines from ASEAN to Vietnam to a 97% level, which continues to develop.
As the result, ASEAN businesses find it significantly easier to navigate the landscape of doing business in Vietnam. Evidence of this includes the $381.4 million acquisition of FV Hospital in Ho Chi Minh City by Singapore’s Thomson Medical Group, the largest healthcare deal in Vietnam’s history.
2.2 Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTTP)
Since its effective date of January 14th, 2019, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) has had a far-reaching impact, extending across various sectors from traditional commerce to smaller transactional issues like government procurement and e-commerce. It also addresses non-traditional issues such as labor, environment, and anti-corruption in trade and investment. Widely regarded as a high-quality and comprehensive Free Trade Agreement (FTA), the CPTPP represents a significant commitment level.
One year after the CPTPP came into effect, in 2019, trade exchange turnover between Vietnam and Member States in the CPTPP reached $77.4 billion, marking a 3.9% increase compared to 2018. Vietnam’s exports to CPTPP member countries amounted to $39.5 billion, showing a 7.2% increase compared to the previous year. Notably, markets with which Vietnam had not previously established trade relations, such as Canada and Mexico, experienced a significant surge in trade following the implementation of the CPTPP. Consequently, in 2020, Vietnam enjoyed a $1.6 billion export surplus with CPTPP member countries despite the global economic turmoil caused by the pandemic.
The CPTPP fosters economic growth by promoting economic cooperation, liberalizing protectionism, and reducing corruption. Thereby making the Vietnamese market more predictable. This, in turn, lowers investment risks and administrative costs for foreign investment, rendering Vietnam a much more attractive market. The positive outcomes of Vietnam’s CPTPP membership in its first-year fuel further optimism. Projections suggest that the CPTPP could increase Vietnam’s GDP by 4.7% in 2035 compared to 2017. Additionally, Vietnam’s export turnover is expected to grow by an average of 4.32% per year, leading to diversified export markets. Total export turnover is forecasted to reach $311.1 billion in 2030, compared to $179.5 billion in 2017. Furthermore, the CPTPP is anticipated to create between 20,000 to 26,000 jobs annually.
2.3 EU-Vietnam Free Trade Agreement (EVFTA)
As mentioned previously, Vietnam-EU relations have undergone a spectacular growth in trade turnover as the consequence of EVFTA. Over two years of its implementation, Vietnam’s export value to the EU reached around $83.6 billion, while the country ranked second among the EU’s biggest ASEAN trading partners. The new-generation trade agreement also contributed to accelerating Vietnam’s structural transformation, with an increasing share of industrial and service sectors in economic activities, as the Vietnamese government moves away from supporting low-income produce like rice farms.
Currently, the country’s export basket has gradually shifted from primary products to light manufacturing ones such as electronics, textiles, footwear, and apparel. The great boost in trade relations between Vietnam and different trading partners is an indicator of this dynamic development, which resulted in its annual real GDP growth of 8.02 per cent in 2022. This is further supported by the gradual shift of international companies from China as it becomes more expensive. Consecutively, Vietnam was able to create a growing surplus in merchandise trade with the EU, worth $31.8 billion in 2022 (an increase of 36.8 per cent on-year).
In addition to making good use of tariff incentives to promote the export of commodities, EVFTA also contributes to attracting high-quality investment flows with EU technology and other partners of Vietnam. This has been demonstrated in EVFTA commitments to ensure a more open and transparent investment and business environment. This reduces uncertainty and investment risks. As a result, making setting up companies in Vietnam more feasible.
Up to now, the EU is one of Vietnam’s key investors. With broad market commitments for investment in manufacturing and services sectors, and bound by commitments to protect intellectual property, the EVFTA has created a new motive for attracting investment of EU groups to Vietnam, encouraging more companies to set up their operations in Vietnam. With the scale and potential development of the EU, Vietnam can become a trans-shipment area for trade and investment of the EU in the region.
3. An alternative to China
(Vietnam as an ideal target for the China plus one strategy)
After decades of heavy investment in China, many foreign businesses are now seeking to mitigate risks linked to potential political and economic shifts. Southeast Asia is increasingly seen as a viable alternative, with Vietnam emerging as a prime destination. The country’s robust economic growth and strategic geographic position on the Pacific Balcony make it a focal point for investors. This trend is likely to be amplified if the Indo-Pacific Economic Framework (IPEF) agreement is implemented.
3.1 A favorable context for the emergence of an alternative to China
3.1.1 Rising operating production costs in China
China’s operating costs, particularly in its tier 1 and tier 2 cities, have risen dramatically over the past two decades, surpassing those in Vietnam. Furthermore, China’s aging population and fierce competition for skilled workers have led to labor shortages in key sectors like manufacturing and technology. Despite freezes in wage increases in many parts of China, labor costs remain substantially higher on average than those in Vietnam. China’s minimum wage ranges from $210 to $406 per month, significantly higher than Vietnam’s $140 to $160. For international investors make foreign investment looking to minimize costs and maximize profits, this cost differential is a crucial factor in determining where to establish their facilities in order to maintain their margins. Consequently, with the increased participation of Vietnam in international agreements, the Vietnamese market appears increasingly attractive for doing business in Vietnam compared to China.
3.1.2 A global trade battle with the USA
Another major issue for investors in China is the political tension between the PRC and the West. For USA, China became a threat to its economic hegemony, thus, to curb Chinese influence, in 2018 USA has placed numerous tariffs on Chinese goods, to which PRC reciprocated. Prices of Chinese goods soared, making numerous US brands (like Nike) to follow a China plus 1 strategy, seeking alternative production locations. However, Vietnam’s low production costs and proximity to China made it a prime choice for relocation. Moreover, as Vietnam has a one-party system like in PRC, thus offering political stability.
3.1.3 Tensions over respect for human rights
Moreover, The EU, UK, and US imposed sanctions on Xinjiang officials due to human rights abuses against Uyghurs. This prompts China to retaliate with trade sanctions. To avoid being associated in the West with exploiting locals and to circumvent costs relating to the West-PRC trade war, some companies consider to relocate part of their operations. As China’s neighbor, Vietnam offers a strategic alternative for businesses considering doing business in Vietnam. The country offers a solution for companies that seeking to diversify their supply chains and hedge against potential disruptions in China, such as trade shocks or political instability.
3.2 Vietnam’s correlative competitiveness
This resulted in a 35% increase of imports from Vietnam to USA between 2018 and 2019. Vietnam’s strategic Asian location and its position along key regional shipping routes create favorable conditions for export-oriented Vietnamese manufacturers. It has approximately 3,200 kms of coastline, with 114 seaports (as of January 2022), including numerous deepwater port options along its coasts. These advantages come together strongly, when considering Vietnam as a China +1 destination.
Furthermore, China +1 option, has positioned Vietnam as a likely preferred alternative base for manufacturing for many companies. Its proximity to China makes it a convenient and strategic choice. For instance, Hai Phong in Vietnam is only 865 km away from China’s manufacturing hub of Shenzhen. Manufacturers have located their production facilities near traditional Chinese manufacturing hubs. This strategic move has reduced costs and maintained uninterrupted supply chain operations.
4. A dynamic labor market
(Vietnam’s social competitiveness on the labor front)
Apart from being a cost-effective alternative to China, Vietnamese labor market offers some further advantages.
4.1 An economy of large numbers of young workers
Vietnam has one of ASEAN’s largest labour markets of almost 60 million workers. Over 51.3 million workers are officially employed in Vietnam as of September 2023, and this number is steadily increasing. Generation Y, comprising 35% of the Vietnamese workforce, demonstrates potential for sustained productivity and skill development within manufacturing sectors. Currently, Vietnam continues to build a highly skilled labor force. Meanwhile, its current workforce provides a strong foundation for addressing talent gaps and driving economic progress. Almost 95 percent of the labour force is literate and over 88 percent have completed in secondary school. Among them, 5 percent are proficient in English while over 10 percent possess highly skilled. This workforce, 42 percent in the agricultural sector, 35 percent in the service sector and 23 percent in industry.
This suggests that the workforce in Vietnam is a developing one.
4.2 A workforce better suited to industrial relocation
The movement of Vietnamese people from traditional agriculture to the manufacturing and services industries fueled much of Vietnam’s economic growth in the past decade. In addition, the agriculture sector is becoming increasingly mechanized. Despite this, finding highly skilled employees remains challenging due to the early stage of workforce development in Vietnam. Only 12 percent of Vietnam’s workforce is considered highly skilled (as of 2021). By investing in its workforce, particularly in many technological fields, Vietnam can attract more industries seeking a large pool of skilled and cost-effective labor.
4.3 Vietnam invests in training its workers
Vietnam’s labor costs are highly lower than those in countries like China and Cambodia. This makes the country a highly competitive destination for doing business in Vietnam. However, rising wages will inevitably become a challenge for businesses as Vietnam’s economy continues to grow in the coming years and decades. The Vietnamese Government places a greater focus on technical training and post-secondary education. This aims to meet the demand of high-skilled industries and to prepare for the shift of its economy into a more tertiary-focused sector of employment.
5. Infrastructure and Tax incentives
(Beyond market structure, proactive measures to attract investors)
Vietnam is gradually building up its real estate and infrastructure to encourage foreign investors to relocate. Vietnam’s efforts to improve its investment climate are paying off. Investors increasingly view Vietnam as a strong alternative to China. Attracting foreign investors to do business in Vietnam requires proactive measures from the public authorities to encourage their development.
5.1 Priority given to transport infrastructure
Vietnam’s infrastructure currently lags behind China. To stimulate economic growth and attract foreign investors, the government is prioritizing infrastructure development.
In April 2021, Vietnam’s transport ministry announced its transport infrastructure master plan until 2030. This plan with an estimated cost of between US$43 billion and US$65 billion. This includes the recently approved plan to build a 1,372km north-south highway by 2030 for an estimated cost of USD 14 billion. Under the master plan, Vietnam will construct thousands of kilometers of new expressways, high-speed rail routes, deepwater ports, and new international airports.
5.2 Large-scale urban projects
Similarly, The government has announced plans to develop and upgrade urban utilities infrastructure. Additionally, there are 44 planned PPP (Private-Public Partnership) projects worth up to USD 120 billion in the road and power sectors. This offers numerous opportunities for infrastructure investors. This massive investment will boost demand for construction and infrastructure contractors. The government aims for Vietnam to achieve a cargo transportation capacity of 4.4 billion tons per year. Additionally, they plan to increase road transport capacity to handle 2.76 tons of cargo and 9.43 million passengers annually. These improvements will strengthen the country’s transport network and infrastructure, attracting more foreign investment.
Here are 3 of the major property projects that aim to boost trade:
- My Thuan 2 Bridge
The My Thuan 2 Bridge has a total length of over 6.6 kilometres, including approach roads. It connects Tien Giang and Vinh Long provinces. The bridge links to the My Thuan-Can Tho Expressway. This stretches for 23 kilometers between Vinh Long and Dong Thap provinces. This expressway will cut travel time between Ho Chi Minh City and Can Tho City in half. Reduced fuel consumption and faster transport times will lower transportation costs, boosting regional development and increasing cargo capacity.
- HCMC Metro Line
HCMC authorities plan to complete the Metro Line No. 1 project by the end of 2024. This 19.7-kilometer urban railway will link Ben Thanh Market in District 1 to Suoi Tien Theme Park in Thu Duc City. The project aims to establish a modern and efficient public transportation system. This will expand the pool of potential workers accessible to local factories. This increased labor supply empowers investors to select the most qualified candidates for their businesses.
- Nhon-Hanoi Station Urban Railway
Hanoi is also making progress with the long-stalled Nhon-Hanoi Station urban railway. Part of the project, including the elevated section from Nhon to Cau Giay station, will begin commercial service this year. This will improve public transportation options within the capital city. Several component projects of the North-South Expressway will open to traffic by year-end, including the National Highway 45-Nghi Son and Nghi Son-Dien Chau sections.
5.3 Increasing investment incentives
Attracting foreign direct investment requires more than just physical infrastructure. To create a favorable environment for doing business in Vietnam, the governments must also implement incentives for foreign investors to encourage these investments.
The government strategically plans Vietnam’s Investment Zones (IZs) and Industrial Parks (IPs) to offer investment and manufacturing advantages. These zones play a crucial role in the country’s economic growth and attract significant Foreign Direct Investment (FDI).
Industrial Parks serve as primary locations for manufacturing activities, offering competitive facilities, infrastructure, logistics, and favorable tax incentives. This environment presents foreign investors with significant opportunities to enhance production efficiency and maximize profits. These IPs are strategically located in the North, Central, and South regions of Vietnam. Their positioning along trade routes enables seamless integration into supply chains catering to China, Europe, and Pacific trading partners.
5.4 Tax Incentives
Foreign Direct Investment (FDI) is a key driver of Vietnam’s economic growth. In response, the Vietnamese government has been renewing and reforming many regulations to create optimal conditions for doing business in Vietnam. Thereby, it fosters a more attractive investment environment fo foreign investors.
In addition to the reform, Vietnam’s investment incentives have also significantly contributed to attracting foreign investment. This includes preferential policies to ensure the goal of global economic integration. Simultaneously, these policies will stimulate the creation of new businesses and enhance production capabilities.
Similarly, Vietnam investment incentives also contribute to positive economic restructuring between regions of Vietnam and overall, to promote economic growth.
The government offers tax breaks such as exemptions or reductions in CIT, VAT, and import taxes, based on the company’s industry and location.
For instance, Vietnam investment incentives at WHA Industrial Zone 1 – Nghe An attract domestic and foreign investment. These incentives facilitate and support the operations of businesses in the zone. The tax incentives include exemptions or reductions of Corporate Income Tax (CIT) and Import Tax. Located at Dong Nam Economic Zone, WHA Industrial Zone 1 – Nghe An can provide investor support with a one-stop service to start running the operation in a short period of time.
5.5 Economic Zone Investment Incentives
Economic Zones
- 2 to 4 years of tax exemption
- 4 to 9 years of 50% reduction on payable CIT
Economic Zones in extremely disadvantaged areas
- 10% of CIT for the lifetime of the project
- 4 years of tax exemption (on a case-by-case basis)
- 9 years of 50% reduction on payable CIT
In addition, investors will get import tax exemption and land leasing incentives. The kind of incentives and exemptions available will vary by business and geography.
Investors can thus expect to profit from revitalizing a region economically. The lower demand pushes land value down, whilst such areas would usually be considered as Zone 4, where the lowest minimum wage threshold would apply. This results in cheaper labor costs.
In fact, most economic zones will qualify an investor for tax holiday incentives. These incentives involve reducing in taxes for a defined period of time. In limited cases, the disadvantaged area, companies might also qualify for a preferential rate of corporate income tax. Foreign investors must operate within designated zones. These zones offer incentives like preferential treatment and tax holidays.
6. Conclusion
Vietnam’s 4 main areas of economic appeal. Overall, Vietnam has become an attractive destination for foreign investors. The country’s attractiveness can be attributed into 4 main points:
- Firstly, due to its increasing international cooperation, Vietnam has become more compliant with international standards. Consequently, its procedures are now clearer and less unpredictable. This, with reducing protectionist barriers, makes it less costly to establish an entity in Vietnam;
- Secondly, Vietnam is geographically close to China. It offers conditions of establishment and partnership in line with the standards previously offered only by China. This makes it a viable and politically more stable alternative.
- Thirdly, Vietnam has a large labor force with competitive wages, allowing companies to suppress their costs to maintain their margins;
- Finally, Vietnamese infrastructure is constantly developing. Combined with all the investment incentives and tax reductions described above, it enables greater efficiency and optimization of workforces. Innovative businesses and investors seeking lower costs in Vietnam can consider setting up operations in less developed areas. This approach can provide cost advantages while contributing to regional development.
At PLF Law Firrm
Vietnam’s growing attractiveness as a destination for foreign investment is undeniable. The combination of economic factors makes doing business in Vietnam increasingly appealing to international investors. To succeed in doing business in Vietnam, businesses must have a strong understanding of the local market. As you explore the potential of Doing Business in Vietnam, PLF Law Firm can provide the essential legal support to ensure your venture’s success.
Contact PLF Law Firm today via email at inquiry@plf.vn or +84913 902 906 or Zalo | Viber | WhatsApp to receive a free 30-Initial Minute Consultation.
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The article is based on laws applicable at the time noted as above and may no longer be appropriate at the time the reader approaches this article as the applicable laws and the specific cases that the reader may wish to apply may have changed. Therefore, the article is for referencing only.
