Relative to gross domestic product, Vietnam attracts the second-highest amount of foreign direct investment (FDI) after Singapore in the Asean grouping, an HSBC study has found.
It attributed this to the country’s wages being the lowest among major Asean members and its business environment being more competitive than that of the Philippines and Indonesia, though it still trails significantly behind Thailand and Malaysia in the latter aspect.
The country’s urbanisation rate is still low at 30 per cent and should continue to accelerate in the coming years. This means that the increase in productivity from farmers moving into cities in the past two decades is still far from ended.
More than 60 per cent of its population is under 35, and the labour force is likely to expand in the next two decades, meaning more domestic demand and less wage pressure.
In the past couple of years the country has lost its lustre as one of the best-performing countries in the region because of raging inflation and inefficient management of the economy. This has slowed FDI inflows, but they remain robust for a country of its size, HSBC said.
This has allowed the country to gain market share in low-skilled manufacturing such as clothing and footwear.
Its exports are also increasing in value, boosted by foreign investment in electronics by Korean and Japanese companies.
The rapid increase in Japanese involvement in Vietnam is considered positive for future productivity and growth in manufacturing, according to the study.
In 2011, Japanese FDI made up 25 per cent of total inflows to Vietnam and in January-October 2012 this had risen to 58 per cent.
According to a survey by the Japan External Trade Organisation, Japanese investors find the communist one-party state attractive because of its low production costs, abundant labour force and political stability, considering it to be cheaper and more stable than Thailand or China.
But Vietnam lags behind the other two in terms of its links to regional markets and the performance of Japanese firms investing there.
The appreciation of the yen against the dong is another positive, along with Japanese government support for investment in Vietnam.
The survey suggests that should Vietnam keep improving its economic structure, FDI inflows are likely to accelerate.
Areas of concern include infrastructure, access to raw materials, customs duties, administrative procedures, corruption and intermediary goods for production.
Even in the current environment, many Japanese firms are flocking to Vietnam to reduce costs and expand their production base.
With the Vietnamese government making economic stability a bigger priority than rapid growth, there is hope that more progress can be achieved.
In the coming decade, as production costs rise in China and Thailand, Vietnam looks well positioned to fill the gap and move up the value chain, analysts say.