Vietnam’s inward investment surge — will it last?

Country has shown it can compete for FDI in the region but must now invest in skills

The number of inward investment projects into Vietnam more than doubled last year, with 241 investments being made by foreign companies into greenfield facilities in the fast-growing southeast Asian country. The projects equate to a total estimated capital expenditure of £13.1bn, according to data from fDi Markets, a data service owned by the Financial Times. In 2013, there were 118 projects totalling £10bn.

Vietnam was the second most popular investment destination in the Asia-Pacific in 2014 based on capital investment received, behind only the goliath China, and ranked fifth for the number of FDI projects.

Last year’s strong performance still fell below the high-watermark year of 2008, when the country attracted 350 projects for a combined capex of £42bn. In line with global FDI trends, project numbers declined in the years following the global financial crisis to reach their lowest level in a decade in 2013.

The Asian Development Bank (ADB) credits the rising FDI inflows with bolstering Vietnam’s healthy GDP growth. The economy grew 6 per cent last year, its fastest rate since 2011, and the manufacturing sector expanded 8.5 per cent, largely thanks to FDI, the bank said.

Since 2003, when fDi Markets’ data began, Vietnam has received 2,394 greenfield investments. The top source countries for these investments have been Japan (554 projects), the US (288) and South Korea (187). China comes in at number 11 on the list of source markets, contributing 64 projects. Nearly half of all investments have been in manufacturing facilities.

Rising labour costs in China have created an opening for more cost-effective countries in Asia to compete more successfully for production facilities.

Late last year, US-based consumer goods company Procter & Gamble announced plans to establish a new $100m Gillette razor plant in Binh Duong, while UK-based Unilever said it would invest $40m in a factory in Bac Ninh province producing liquid detergent, home cleansing substances and fabric conditioner.

According to fDi Markets, 60 per cent of foreign companies investing in Vietnam cite growth potential of the domestic market as the top driver, followed by proximity to markets or customers (25 per cent) and business climate (15 per cent). Only 10 per cent cite low costs as a motivation; but it cannot be overlooked that production-centric labour costs in Vietnam are lower than Malaysia, Thailand and the Philippines, and equitable with Indonesia, which has a huge market but a complicated business environment. Total operating costs for the average biotech-pharmaceutical or medical devices manufacturing plant are roughly 50 per cent lower in Vietnam than in China, according to data from fDi Benchmark, a sister service to fDi Markets. For an automotive plant, costs are 40 per cent lower.

The short to medium-term outlook for FDI in Vietnam looks positive. Its domestic market potential should continue to be viewed favourably by companies, with the ADB predicting GDP growth of 6.1 per cent in 2015 and 6.2 per cent in 2016. Purchasing power parity continues to rise — GDP per capita based on purchasing power parity was at 5,294.4 (international $) as of 2013 compared with 4,395.6 in 2010, according to the World Bank. Early indications point to 2014’s rebound being sustained in 2015. fDi Markets has recorded 66 projects so far this year.

In the longer term, Vietnam will face the same challenge as other countries whose FDI success was built upon the shifting sands of production cost competitiveness — which is to maximise the benefits of a cost advantage as long as they last while investing in skills and technical acumen that can help ensure a climb up the value ladder once the factories start migrating to cheaper locales.