A smartphone factory in Vietnam. Photo: VNA

Foreign direct investment (FDI) in Vietnam continues to increase, rising from US$11.57 billion in July to $12.8 billion in August 2022, signaling the country’s recovery from Covid-19.

The growth is partly due to Hanoi’s consistent efforts to provide a safe and welcoming environment for foreign business through Special Economic Zones (SEZs) — ensuring companies have access to a local workforce in favorable conditions.

There is a new impetus to invest in Vietnam due to the disruption in supply chains from China’s “Zero-Covid” policy, the threat of Chinese aggression toward Taiwan and Beijing’s strengthening ties with Russia.

Taiwan’s electronic manufacturing giant Foxconn plans to increase its in-country presence, with first-ever plans to manufacture Apple Watches and MacBooks in Vietnam. Yet South Korea remains the country’s largest investor and Samsung Electronics remains its most important corporate partner.

Companies are expected to show interest in Vietnam now that the government is preparing “eagles’ nests” — special economic zones (SEZs) in which doing business is easier for foreign firms.

That will help address Vietnam’s over-reliance on China for imports and the United States for exports. Diversification will improve Vietnam’s significant trade imbalance with Washington after it posted a $69.7 billion trade surplus in goods with the United States in 2020 — a figure that exceeds that of its neighbors.

Firms arriving in Vietnam can expect to find diligent, low-cost labor and an increasingly high standard of living for their international managers, especially in Hanoi and Ho Chi Minh City. Vietnam still faces challenges in finding skilled workers in a country where parents want their children to attend university rather than vocational school.

There is also a lack of good-quality small and medium-sized enterprises to join Vietnam’s supply chains, infrastructure outside the major cities is often of poor quality and air pollution kills thousands every year.

Motorists wait on their motorcycles at a traffic light during rush hour in Ho Chi Minh City on September 8, 2020. Photo: AFP / Nhac Nguyen

Despite these challenges, the Vietnamese government has committed itself to numerous eye-catching pledges concerning digitalization, technology and innovation and achieving net-zero emissions. But it is unclear whether these promises can be kept in the desired timeframe.

Vietnam’s connectivity with other countries stems from its willingness to become a more active global citizen. Despite starting the connectivity process later than its ASEAN neighbors, Vietnam is catching up with its regional peers in the number of free trade agreements it has signed.

Hanoi has joined about every bilateral, multilateral and transnational organization and agreement for which it is eligible.

Vietnam’s willingness to boost connectivity is also about national security. Engagement with other nations enables Vietnam to conduct complex negotiations over issues for which international law is not yet sufficient — such as riverine management and rights to deep-sea resources and territory.

The extensive Vietnamese diaspora offers another form of global connectivity, although there are often complicated political differences between those living inside and outside the country.

Despite Vietnam’s success in attracting investment, it will always have a finite ability to absorb infrastructure and commercial projects. Vietnam faces competition from other countries trying to attract foreign investment of their own. Countries like the Philippines, Indonesia and Bangladesh also have large labor forces — offering them competitiveness through low labor costs.

Vietnam’s SEZ-style approach succeeded in raising hundreds of millions of people out of poverty in China. It involves designating specific areas of land in which there are different legal conditions than the home country — generally those that benefit foreign capital over local labour. These zones have better infrastructure, provision of utilities and telecommunications and include custom-built retail, leisure and health facilities for company managers.

SEZs allow FDI projects to be clustered together, which enables firms to reduce transaction costs by working together and sharing complementary resources and capabilities. SEZ-related incentives encourage firms to obtain specific rather than general advantages.

The Vietnamese government is also quite consistent in enforcing the rule of law. Investors know what to expect given the current political system looks set to continue for the foreseeable future.

Vietnam is angling to strike a delicate trade balance between the US and China. Photo: Reuters
A clothing boutique in downtown Hanoi. Photo: AFP / Hoang Dinh Nam

But the government needs to take immediate action to ensure high-quality public services to business and citizens. Many government employees’ lack of technical capacity remains problematic and the government’s ambitious cyber and digitalization strategies are yet to fully materialize.

The government has taken some steps towards improving the quality of labor skills and qualifications, particularly in STEM disciplines. Overseas universities are encouraged to open courses to enhance local management, creativity and innovation.

Skill development will make it easier for locals to obtain work with foreign firms, encouraging some to launch their own business ventures to participate in regional and global value chains. Fostering the growth of such firms is important because, despite reforms to corporate governance, Vietnamese companies rarely provide meaningful competition for foreign firms.

The measures implemented by the Vietnamese government have achieved success over recent decades, although climate change raises concerns about the economic sustainability of its development model. Hanoi is committed to using the fruits of inward investment to enhance social development and equality, but the speed at which this is taking place remains problematic.

A new model of public administration is required to attract and retain talented people in the public service to help Vietnam navigate the complex political and economic challenges of the future.

John Walsh is Associate Dean and Director, English Language Programs at the International College, Krirk University, Thailand. Trung Quang Nguyen is Head of the Department of Management at RMIT University Vietnam. Burkhard Schrage is Senior Program Manager in the Management Discipline at RMIT University Vietnam.

The article was first published by East Asia Forum, which is based out of the Crawford School of Public Policy within the College of Asia and the Pacific at the Australian National University. It is republished under a Creative Commons license.