On August 8, HSBC Bank's Global Research Department released the report "Vietnam at a glance - FDI" stating that Vietnam is still a favorite destination for foreign direct investment (FDI) enterprises.

Many competitive advantages

HSBC experts say that over the past 20 years, Vietnam has emerged as a major manufacturing hub and deeply integrated into the global supply chain. Exports have increased by more than 13% annually on average since 2007, dominated by foreign-invested enterprises.

Until now, FDI inflows into Vietnam have mainly come from South Korea, most notably Samsung. In 2023, Chinese manufacturing companies have also stepped up investment, with nearly 20% of newly registered FDI capital. FDI capital implemented in Vietnam in the first 6 months of the year is estimated at 10.84 billion USD, up more than 8% over the same period last year and the highest level in the past 5 years.

Since the beginning of the year, newly registered FDI manufacturing enterprises have increased by 36% compared to the same period last year and higher than some previous years. Bac Ninh province attracted more than 30% of total registered capital in June and July, as Amkor Group boosted investment in a semiconductor project in the province with an additional 1.07 billion USD.

According to HSBC, the interest of multinational corporations in Vietnam has increased sharply thanks to many factors, including competitive costs and FDI support policies.

Compared to labor costs in the Asian region, manufacturing worker wages in Vietnam are lower even though people have a solid general education level.

Other costs, such as the energy required to operate the plant, and diesel, which is widely used in industry, show a competitive advantage in price.

In addition, Vietnam has made significant progress in establishing various economic agreements with its trading partners, such as the EU-Vietnam Free Trade Agreement (EVFTA) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). These developments have supported and facilitated foreign investors.

Part of the reason for the favorable investment environment can be attributed to the government’s active support through the tax system. Vietnam is competitive with other countries thanks to its statutory corporate income tax rate of 20%. Some businesses can take advantage of extended tax breaks and exemptions to further reduce their effective tax rate.

To date, attractiveness factors have played an important role in attracting investment and helping Vietnam integrate deeply into the global value chain. In fact, Vietnam’s participation in the global value chain has increased sharply over the years, currently comparable to Singapore. However, the increase in integration has mainly occurred through more backward linkages. Vietnam is currently positioned as a hub for importing complex intermediate inputs for final assembly, as evidenced by the low localization rate in the electronics industry.

Maintain strong capital flows

To maintain strong investment flows, HSBC experts said it is important for Vietnam to move up the production value chain and increase the domestic value added in these goods.

Compared to the strong growth in consumer electronics exports, Vietnam’s share of global integrated circuit (IC) exports has grown at a slower pace. The shortage of skilled technical workers has led to difficulties in developing semiconductor manufacturing capacity. This has prompted the government to seek ways to expand the semiconductor industry’s human resources in the coming years.

In addition, the shortage of skilled workers also affects other sectors, such as logistics and maritime transport. In addition to expanding and improving vocational education at the national level, more initiatives to support and encourage the participation of foreign companies in the domestic economy can help increase the benefits of increasingly sophisticated FDI flows.

On the other hand, factors besides tax considerations, such as infrastructure quality, also need to be actively addressed.

Measures such as leveraging digitalization to streamline trade processes, ensuring stable and “green” energy, and facilitating the movement of goods through improved infrastructure are likely to influence investment decisions by multinational corporations in the coming years.

"Encouragingly, there are signs that more sophisticated manufacturing knowledge and processes are penetrating Vietnam. In 2022, Samsung established a research and development center in Hanoi to further develop its manufacturing capacity and began producing some semiconductor components. Meanwhile, Apple is also increasing its influence in Vietnam, allocating product development resources to iPads," the HSBC expert emphasized.

Regarding other sectors, HSBC assessed that in July, Vietnam's trade continued to recover, with exports increasing by 19% year-on-year, easily surpassing market expectations.

Meanwhile, inflation continued to edge closer to the State Bank of Vietnam’s ceiling of 4.5%. Headline inflation rose 0.5% month-on-month due to still-high commodity prices and other volatile factors such as higher health insurance premiums. As a result, year-on-year inflation stood at 4.4%, roughly in line with market expectations. However, HSBC expects the unfavorable base effect to ease soon, pushing inflation down to around 3.6% for the full year of 2024.

In summary, with price pressures relatively contained and the domestic sector taking more time to stabilize, HSBC expects the State Bank to maintain its accommodative stance and keep the policy rate steady throughout the forecast period at 4.50%. This is likely to help Vietnam achieve its 2024 growth target of 6.5%./.