Vietnam to fall into the processing and assembly trap

A representative of the Vietnam institute for Economics and Policy Research (VEPR) said the total number of newly registered foreign direct investment (FDI) projects, total value of registered FDI and realized FDI tends to increase steadily over time with small fluctuations in the short term.


Since the beginning of 2020, the great fluctuations in the global economy due to the Covid-19 pandemic have significantly reduced the amount of FDI registered in Vietnam. However, the amount of realized capital has increased.


FDI into Vietnam mainly focuses on the manufacturing industry due to cheap labor and abundant natural resources.


By the end of August 2022, Korea had been the largest investor in Vietnam according to data from the Ministry of Planning and Investment. Following are Singapore and Japan. In addition, businesses from the Netherlands, the United States, the United Kingdom, Australia, France, Canada, Germany, and Switzerland have also gradually shifted their investment flows to Vietnam.


The number of EU partners investing in Vietnam tends to increase and mainly focuses on the manufacturing industry. Accordingly, the Netherlands is the largest investment partner when contributing nearly 50% of the total FDI capital of the whole bloc in Vietnam. France, Luxembourg, Germany, Denmark and Belgium contribute nearly 42%.


However, currently, only enterprises from 25 out of 27 EU countries have invested in Vietnam, with 2,378 projects. Total registered capital is USD 27.59 billion. This means that FDI from EU into Vietnam accounts for less than 6.41% of the total foreign capital flowing into Vietnam. In terms of projects, it only accounts for about 6.69%.


Statistics from Eurostat and the General Statistics Office show that the EU's share of investment in Vietnam usually only fluctuates between 2-5% of the total amount of FDI that the bloc invests in the world.


In addition, the relationship between Vietnam and EU countries in comparison with ASEAN countries as an investment destination is still very limited. In addition, the vast majority of projects run by EU enterprises are of small average value.


With the above background, Dr. Nguyen Thi Vu Ha, University of Economics under Hanoi National University, is concerned that Vietnam is facing the risk of becoming a destination for low-quality FDI projects.


“Vietnam may be deeply trapped in the processing and assembly trap and at a disadvantage in the global supply chain due to the low level of technology and low quality of labor" said Ms. Ha.


The digital transformation process may also narrow the EU's investment flows into Vietnam, especially those investing in high-value sectors due to the change in investment objectives of multinational enterprises. Specifically, foreign investors used to choose Vietnam with the goal of finding cheap labor or natural resources, but in the context of the 4.0 revolution, their goal is to find knowledge and technology.


However, this is not Vietnam's advantage because the country still has many limitations in terms of skilled labor, technological and financial capacity, and the quality of infrastructure for high-tech industries is still poor. In addition, Vietnam has not met the requirements of EU investors.


Another challenge for Vietnam comes from the weakening business sentiment of global investors in general and investors from the EU in the face of global uncertainties.



Source: VietnamCredit

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