Foreign Direct Investment (FDI) in Vietnam: Opportunities, Challenges, and Strategic Considerations

Foreign direct investment (FDI) plays an essential role in Vietnam's economic growth, acting as a major driver of development and modernization. The Vietnamese government has established a range of policies designed to create a conducive environment for FDI, with a particular focus on attracting enterprises involved in export-oriented manufacturing and high-tech industries. This strategic approach has significantly contributed to Vietnam's economic expansion over the years. Factors that consistently attract foreign investors include political stability, sustained economic growth, a young and increasingly urbanized population, a highly competitive labor market, and a growing number of bilateral and multilateral trade agreements.

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Key Factors Driving FDI in Vietnam

Several fundamental elements have made Vietnam an attractive destination for foreign investment:

1. Political Stability: Vietnam's stable political environment is a significant advantage, providing a sense of security for long-term investments. The government has maintained a pro-business stance, continually improving policies to attract foreign capital.

2. Strong Economic Growth: The country has seen consistent economic growth, often exceeding 6% annually over the past decade. This growth is supported by expanding industrial sectors, rising domestic consumption, and increasing foreign investment inflows.

3. Demographic Advantage: With a youthful and increasingly urbanized population, Vietnam offers a dynamic labor force. The workforce is not only young but is also becoming better educated and more skilled, as the government emphasizes human capital development through improvements in education and vocational training.

4. Competitive Labor Costs: Vietnam's labor costs remain lower than many neighboring countries, making it an attractive alternative for manufacturing activities. The country has effectively capitalized on the "China plus one" strategy, where companies diversify their production bases away from China to other countries in the region.

5. Comprehensive Trade Agreement: Vietnam has signed numerous free trade agreements (FTAs) that enhance market access and reduce trade barriers. These agreements include both regional and global FTAs, providing preferential market access to over 500 million consumers worldwide.

Foreign Ownership Restrictions and Legal Framework

Vietnam's Investment Law stipulates that foreign and domestic investors should be treated equally. However, in practice, foreign investors have reported facing additional barriers when seeking routine government approvals and licenses. The government maintains foreign ownership limits (FOL) in many industries, which restrict the level of foreign equity in certain sectors. These limits are particularly prevalent in areas deemed sensitive, such as:

- Banking and Financial Services

- Telecommunications and Network Infrastructure

- Transportation and Logistics

- Energy Production and Distribution

- National Defense and Security

Recent reforms have aimed to reduce these restrictions. For example, in January 2020, Vietnam removed foreign ownership limits in the electronic payments sector and reformed regulations to facilitate foreign firms' operations in this area. This reflects a broader trend towards liberalizing foreign investment laws, although some sectors remain tightly controlled.

Certain FDI projects still require approval from the prime minister, particularly those involving large-scale infrastructure, such as airports, strategic seaports, casinos, oil and gas activities, telecommunications infrastructure, forestry projects, publishing, and any investment projects requiring inter-provincial coordination.

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Vietnam's Position in the Global Supply Chain

As global supply chains undergo significant restructuring, Vietnam has continued to attract substantial FDI, with both new capital and additional investments in existing projects. Investors see Vietnam as a strategic location for production and export activities due to its geographic position and favorable trade policies. The country recorded $15.19 billion in FDI in the first half of 2024, marking the highest level of FDI inflows for the first six months in the past five years (2020–2024).

Foreign investors have increasingly focused on sectors such as technology, electronics, and semiconductor manufacturing. Vietnam's status as an emerging hub for high-tech production has been bolstered by large-scale investments in semiconductor manufacturing, renewable energy (such as battery and photovoltaic cell production), and high-value electronic components. By June 2024, Vietnam had accumulated 40,544 active FDI projects with a total registered capital of approximately $484.77 billion. The actual capital realized from these projects reached around $308 billion, equivalent to 63.5% of the total registered capital, reflecting a strong commitment to project implementation.

Strategic Benefits of Investing in Vietnam

1. Market Access to Southeast Asia: Vietnam's strategic location in Southeast Asia allows investors to access a rapidly growing market with nearly 100 million consumers. The rising middle class and increasing disposable income present significant opportunities for consumer-driven industries.

2. Expanding Trade Network: Vietnam's extensive network of trade agreements, including the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the EU-Vietnam Free Trade Agreement (EVFTA), and the Regional Comprehensive Economic Partnership (RCEP), provides preferential access to key markets, significantly reducing tariffs and facilitating trade.

3. Infrastructure Development: Vietnam is investing heavily in infrastructure, with major projects in transportation (roads, railways, ports), energy (renewable energy, power plants), and telecommunications. This infrastructure development supports business expansion and integration into global supply chains.

4. Supportive Business Environment: The government has made efforts to streamline administrative procedures and reduce bureaucratic hurdles. Tax incentives and favorable land-use policies further encourage foreign investment, particularly in special economic zones and industrial parks.

Investment Incentives for Foreign Investors

To attract foreign investment, Vietnam offers a range of incentives, including exemptions on import duties for goods that cannot be sourced locally, such as machinery, components, and construction materials. Special incentives are available in certain sectors and regions, including:

• High-Tech Industries: Advanced technology, research and development, and new materials sectors receive favorable tax and land rental rates.
• Renewable Energy: The government promotes investment in clean energy, including solar, wind, and energy-efficient products.
• Automotive and Software: The automotive industry, software development, and high-value electronics manufacturing benefit from various tax incentives.
• Vocational and Primary Education: Educational institutions receive support to help develop the country's skilled workforce.

Since the adoption of global minimum tax rules in 2023, tax-based incentives have become less effective, prompting the government to explore other ways to attract investors, such as enhanced infrastructure development and non-tax-based incentives.

Trade Facilitation and Foreign Trade Zones (FTZs)

Vietnam has prioritized the development of various types of trade zones to enhance trade and investment. These include:

1. Industrial Zones (IZs): Dedicated to industrial activities, these zones provide facilities for manufacturing and processing, attracting industries looking to streamline production and distribution.

2. Export Processing Zones (EPZs): Designed to support export-oriented production, EPZs offer businesses simplified customs procedures, duty exemptions on imported raw materials, and tax incentives for export activities.

3. Free Trade Zones (FTZs): These areas allow for storage, warehousing, and logistics services without customs duties, benefiting companies involved in global trade.

With over 350 IZs and EPZs in the country, foreign investors find it easier to implement projects in these zones due to pre-established infrastructure, reducing the complexities associated with land acquisition and site development.

Foreign Exchange Regulations

Vietnam has a relatively open foreign exchange regime, allowing investors to convert and repatriate profits or investment capital, provided they meet legal requirements, such as fulfilling tax obligations. The State Bank of Vietnam (SBV) plays a crucial role in managing the exchange rate by setting the interbank lending rate and issuing a daily reference exchange rate based on market movements and the currencies of major trade partners.

Labor Policies and Practices

Vietnam has been a member of the International Labor Organization (ILO) since 1992 and has ratified nine core labor conventions, covering issues like discrimination, child labor, forced labor, and occupational safety. The ratification of Convention 87 on freedom of association in line with the EVFTA commitments is a testament to Vietnam's efforts to improve labor rights.

The labor market in 2023 included 52.4 million people aged 15 and above, with a participation rate of 68.9%. Unemployment was low, at 2.28%, but youth unemployment (15–24 years) was higher, at 7.6%. The workforce remains young, with a significant portion under 40, indicating a strong demographic potential. However, gender disparities in labor force participation persist, with women's participation at 62.9% compared to 75.2% for men.

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Foreign Investment Consulting Services at NVCS Law Firm

NVCS is a law firm specializing in legal consultancy, corporate compliance, and foreign investment advisory services. With years of experience in advising on foreign investment in Vietnam, NVCS is proud to offer clients professional and dedicated foreign investment consulting services:

Overview of Foreign Investment Consulting in Vietnam

- Consultation on Foreign Investment Forms: Providing guidance on various forms of foreign investment, including joint ventures, 100% foreign-owned enterprises, and public-private partnerships.

- Preparation of Application Documents for Investment Registration Certificate and Business Registration Certificate: Assisting clients in preparing all necessary documentation for obtaining these certificates.

- Client Representation in Contacting Authorities and Submitting Applications: Acting on behalf of clients to liaise with relevant authorities and submit all required documents.

- Verification of Document Legality and Direct Delivery to Clients: Ensuring the legality of all paperwork and delivering approved documents directly to clients.

- Resolving Issues Arising During the Investment Registration Process for Foreign Investors: Handling any unexpected complications that may occur during the registration process. 

NVCS Law Firm is committed to providing thorough support for foreign investors seeking to establish and expand your businesses in Vietnam.

Contact us for more information. 

Lawyer: Mr. Tony

Phone: +84 919 195 939

Email: tuulawyer@nvcs.vn

Website: nvcs.vn