Vietnam maintains growth despite changing foreign direct investment trends

Sagarika Chandra, Director, Asia Pacific Sovereigns Fitch Ratings

Vietnam is already benefiting from supply chain diversification, with exports steadily growing due to cost competitiveness and growing economic integration. Vietnam’s export mix has changed over time. Starting with lower-end apparel, Vietnam has moved up the value chain, with electronics now accounting for a larger share of exports. Attempts are also being made to attract semiconductor manufacturing.

These trends should contribute to solid prospects for the country’s medium-term economic growth of 6–7 percent, supported not only by a steady inflow of foreign direct investment (FDI), but also by the development of the services sector resulting from ongoing urbanization.

The authorities have introduced incentives to attract more foreign investment, building on past successes. The 2020 Investment Law focused on improving the regulatory framework for foreign companies, as well as incentives to encourage investment and growth in higher-value-added sectors, such as tax breaks for companies in high-tech sectors.

Vietnam’s 2025-2035 Industrial Development Strategy identifies electronics and ICT as one of 10 priority sectors. Vietnam has adopted a framework relatively similar to China’s in relying on inflows of foreign direct investment (FDI) to lay the foundation for a manufacturing sector.

Vietnam has relatively low labor costs (although they are rising) and a highly skilled workforce, helped by significant investment in human development in previous decades and good results in international assessments of student learning outcomes.

The country’s share of the smartphone market is growing. Samsung has significant smartphone manufacturing facilities in Vietnam. Rising unit labor costs in China are also undermining labor competitiveness, making Vietnam more attractive. These trends were evident even before the escalation of U.S.-China trade tensions and have been a contributing factor to the shift toward lower-value-added goods production over the past decade, particularly in Vietnam.

Recent policy discussions with the United States have pointed to a potential increase in Vietnam’s role in semiconductor supply chains, although this is likely to be a long-term goal.

Trade liberalization has been another factor contributing to the success of Vietnam’s export-oriented model. Vietnam has taken decisive steps to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership as one of the first member countries to expand market access. Meanwhile, the Regional Comprehensive Economic Partnership is likely to support greater access to regional markets in the Asia-Pacific region.

Vietnam’s geopolitical presence is expanding, and the country has so far managed to balance the US-China relationship. Diplomatic ties with the US were upgraded to a comprehensive strategic partnership in 2023, which could help Vietnam maintain its appeal as a friendshoring destination, especially for higher-end goods, potentially including semiconductors. Vietnam’s share of the US market has doubled in the past few years, reaching 4 percent.

Meanwhile, Vietnam also remains an attractive destination for Chinese companies looking to expand their presence abroad or bypass U.S. tariffs. Indeed, outward investment by Chinese companies has continued to grow over the past decade, particularly in Mexico and Vietnam.

There are risks to our strong underlying outlook for Vietnam’s foreign direct investment, exports and growth trajectory, both domestic and external. On the external side, potential changes in US trade policy in light of the upcoming presidential election would have negative implications for Vietnam. Recent Fitch analysis shows that Vietnam’s growth could be hit hard by both tariffs targeting China and the global tariffs proposed by former President Donald Trump.

Domestically, infrastructure bottlenecks may be a constraint. In 2023, high electricity demand led to periodic power outages, which affected industrial production. The authorities increased the allocation of capital expenditure in the state budget for 2024, in line with their medium-term public investment plans.

Overall, despite long periods of high growth and resilience of economic activity to shocks in recent years, we believe that Vietnam’s reliance on credit growth targets to stimulate economic activity continues to pose persistent risks to the country’s overall macroeconomic stability.

Recent tensions in the real estate sector pose challenges in effectively managing emerging complexities in the economy and financial sector. Vietnam’s governance standards are also weaker than in similarly rated countries.

Hai Phong remains a magnet for foreign direct investment The northern port city of Haiphong is attracting foreign investment, with 967 foreign direct investment projects worth a total of $30.65 billion.

Ba Ria-Vung Tau increases FDI attractiveness The southern province of Ba Ria-Vung Tau is becoming an increasingly attractive investment destination in Vietnam thanks to its favorable investment climate and ambitious development plans.

The South-East Region Could Gain a Specialized Foreign Direct Investment Policy The south-eastern part of the country could be offered specific mechanisms that will create a solid foundation for the inflow of high-quality foreign investments.

Vietnam reports $20.5 billion in foreign direct investment in first eight months According to the Foreign Investment Agency, Vietnam recorded more than $20.52 billion in foreign direct investment (FDI) by the end of August, up 7 percent from a year earlier.