Asean governments need a change of mindset if they want to follow Vietnam’s lead in attracting foreign investment
- Vietnam has become a hub for foreign direct investment in the past decade, with steady compound annual growth of 10.4 per cent between 2013 and 2019
- Some may say this is thanks to its young labour force and proximity to China, but the appeal of a stable political environment cannot be underestimated
FDI is an important source of private external finance for developing countries and contributes significantly to an economy’s long-term development. It is motivated largely by foreign investors’ long-term prospects for making profits in production activities that they have direct control over, often through joint ventures with local companies based in the countries concerned.
The results of this cross-border economic relationship include technical training opportunities, technological advancement, improved employment prospects, better public finances and improved export potential.
The need for a “China-plus-one” strategy became more apparent in 2015 with Beijing’s announcement of its “Made in China 2025” strategy to upgrade domestic manufacturing, while escalating US-China trade tensions have seemingly given many foreign investors the final push.
But a spate of attacks on foreign-owned factories in 2014 spooked investors, leading the government to ban state-owned enterprises from competing with FDI projects, which helped spur the foreign investment rally seen from 2013-2019.
Competition for FDI within Asean will continue and though some may argue that Vietnam’s geographical proximity to China, as well as its young labour force of 95 million, confer it added advantages, the appeal of a stable political environment cannot be underestimated.
Thailand, the Philippines, Malaysia and Indonesia have all experienced their fair share of political upheavals and uncertainties in recent years, and would do well to look to Vietnam to understand the importance of stability.
Investors also pay close attention to inflation rates, want a stable foreign exchange rate and dislike bureaucratic red tape – something Hanoi has been committed to reducing by implementing e-tax and e-custom services.
Over the past decade or so, Vietnam has moved from focusing on labour-intensive manufacturing towards more automated processes, and is now entering its next phase.
Investors are keenly awaiting the release of the Ministry of Planning and Investment’s draft FDI strategy for the next 10 years, which is expected to prioritise hi-tech, high-value and environmentally-friendly projects.
The sacrifices that Vietnam has made to achieve these FDI inflows are not negligible. Bold measures like instituting transparency in business and governance processes, and obliging state-owned enterprises to operate in non-competitive areas, required real political will and commitment.
Although its neighbours may not appreciate some of these sacrifices, the governments of Malaysia, Indonesia, Thailand and the Philippines will require a clear change in mindset if they want to follow Vietnam’s lead.