Deglobalization among new FDI challenges, opportunities for Vietnam

Vietnam faces new FDI challenges amidst recent global and regional developments including a deglobalization trend that requires it raise its competitiveness, says KPMG Vietnam partner Nguyen Cong Ai.

Over the past several decades, Vietnam has become a successful FDI destination thanks to its stable political and economic environment, competitive labor costs, strategic geographical location and open trade policy. However, recent complicated global and regional developments present both challenges and opportunities for the country to remain attractive to foreign investors.

FDI inflows into Vietnam in the first half of 2023 were affected by the complicated regional and global developments, including geopolitical tensions, high inflation, tightened monetary policies, concerns over environmental issues, technological innovation and changing consumption habits. These have had significant impacts on global capital flows and FDI trends worldwide, and Vietnam is no exception. Some of the important shifts in foreign investment trends relevant to Vietnam include global economic restructuring, deglobalization and global supply chain restructuring.

Global economic restructuring

The transition from a linear economy to a circular economy is gaining increased attention, driven by growing awareness of environmental issues, economic benefits and the potential for integrating advanced digital technologies.

The green economy boom is having a profound impact on many sectors of the Vietnamese economy, especially textiles, energy, and automobile manufacturing.

Long-term changes in consumer habits towards environmental protection and social responsibility could impact Vietnam's textile and garment exports to the EU market. To maintain competitiveness and market access, Vietnam needs to increase compliance with environmental and labor standards and invest in sustainable materials and production methods. Vietnam can also diversify its export products and target markets by taking advantage of free trade agreements (FTAs) it has signed with the EU and other countries.

On the other hand, the country has great potential to develop renewable energy, especially solar and wind power, thanks to its rich natural resources, favorable geographical conditions, and the government’s support policies. However, there are still challenges including limited infrastructure, financial and technical capacity, and legal barriers that need to be addressed to fully tap this potential.

Vietnam also has the opportunity to become an electric vehicle production and consumption center in the region given the expected increase in demand. The country possesses a number of built-in advantages such as a large domestic market, a skilled and young workforce, a strategic geographical location, and government support.

However, it also faces a number of challenges including the lack of a comprehensive legal framework, nascent technology, high production costs of electric vehicles and batteries, and an underdeveloped electric charging station system. Addressing these challenges is key for Vietnam to succeed in its path to become a green vehicle production and consumption hub.

Deglobalization on the rise

The globalization trend has shown signs of slowing down since the global economic recession of 2007, and declined more seriously in the 2018-2022 period with total foreign investment capital accounting for just 1.3% of global GDP on average. Instead, the trend of deglobalization has become increasingly popular, and this especially evident when major economies such as the U.S. and Europe apply protectionist strategies to reduce China's influence. This trend has had many consequences, notably efforts to bring production, especially in important industries like semiconductor materials and electric vehicle batteries, back home or to other territories and countries sharing a common set of values and standards. This has limited FDI flows into developing countries which depend on this source for capital, technology transfer and export growth.

However, the deglobalization trend has also opened up new prospects for Vietnam in attracting more projects from Asian economies such as Singapore, Japan, South Korea and Taiwan. These economies are actively diversifying their supply chains to reduce dependence on China, in parallel with efforts to expand their presence in Southeast Asia.

Japanese businesses plan to spend $19 billion over the next 10 years to build factories producing electric vehicles, batteries and semiconductor materials in Vietnam. The signing of more than 100 cooperation agreements between Vietnamese and South Korean businesses during the South Korean president's June 2023 visit is also evidence of the potential benefits of the deglobalization trend for Vietnam.

To balance the negative impacts of deglobalization, Vietnam needs to continue to fully tap its advantages from the FTAs it has signed, while actively seeking and pursuing new agreements with potential partners. Making good use of these FTAs will help Vietnam access large and diverse markets and attract FDI from countries that want to take advantage of preferential tax rates and rules of origin. In addition, Vietnam can also cooperate with emerging economies that have similar economic development goals and challenges, like India, Brazil and South Africa.

Global supply chain restructuring

Recent global economic and political upheavals have exposed the weaknesses and risks of current supply chains and their dependence on a single source of supply or market. As a result, many multinational corporations have had to rethink their supply chain strategies and gradually restructure them towards “regionalization, supplier diversification and increased automation”.

Regionalization is the movement of production closer to consumer markets to reduce transportation costs, shorten delivery times and respond to tariff barriers more effectively. In addition, a regionalization strategy allows businesses to adapt more quickly to changes in consumer habits and regulations of the target market, and enhance resilience to external risks. Supplier diversification is the increased search for alternative sources of supply or multiple sources of supply from different countries or regions to reduce dependence on a single or dominant supplier. This strategy aims to better cope with unexpected disruptions or congestion in the supply chain, while enhancing the bargaining power and operating flexibility of businesses.

Automation is the integration of advanced technologies such as robotics, artificial intelligence (AI), Internet of Things (IoT) and 3D printing into the manufacturing process. This not only increases efficiency, quality and productivity, but also minimizes labor costs, human errors, and environmental impacts.

Vietnam is well positioned to benefit from this trend as multinational companies have been moving part of their production out of China and looking for new sources of supply. Vietnam boasts all the prerequisites to become a new global manufacturing hub. However, the country needs to focus on improving many factors to increase its competitiveness and attractiveness to foreign investors, with an especially important area being infrastructure and supply chain connectivity, including seaports, roads, railways and logistics services. This becomes even more urgent as the strategy of attracting investment through incentives will become less effective when global minimum tax rules are applied.

Improving the quality of human resources and innovation capacity is another key factor in upgrading the value chain and participating more effectively and deeply in the global production chain. As the global economic landscape continues to change, restructuring supply chains through regionalization, supplier diversification and automation is a visionary strategy. Embracing these changes and making targeted improvements are how countries like Vietnam can position themselves as key players in the new era of global supply chains.

Vietnam’s FDI prospects

Looking to the future, Vietnam continues to demonstrate its position as an attractive investment destination, with a booming number of international businesses relocating production here. The increase in the number of new projects, capital contributions and share purchases registered in the first half of 2023 reflects the continuous interest and confidence of foreign investors in the market potential and business environment of Vietnam in the long run.

However, the FDI prospects in the coming years will depend on whether Vietnam can adapt to global FDI trends and whether it can tap its advantages and fix its shortcomings.

To overcome immediate difficulties and continue to rise in the complex global economic and geopolitical context, Vietnam needs to proactively and flexibly apply many solutions in attracting FDI. The country should prioritize building a national FDI strategy consistent with the country's socio-economic development goals and priorities. This strategy needs to identify the key industries and markets that Vietnam targets to attract FDI flows, as well as the preferential measures that the country will provide to lure investors from these markets.

It is necessary to improve the quality and efficiency of FDI management and governance, including simplifying administrative procedures, combating corruption and bureaucracy, ensuring transparency and accountability, protecting intellectual property rights, increasing transparency in resolving disputes and complaints, and improving supervision and impact assessment of FDI projects.

Vietnam should also raise its competitiveness and attractiveness as an investment destination by improving transport infrastructure including seaports, airports, logistics services, energy and telecommunications. Education, healthcare and other public services are also essential to support business operations.

Creating a legal framework, tax system, exchange rate regime and other macroeconomic policies that are conducive to investment; promoting connections between FDI and domestic enterprises; facilitating technology transfer, knowledge dissemination, market access, supplier development, human resource development and other forms of collaboration are other important tasks

Addressing these issues will help Vietnam maintain its competitiveness over other Asian countries including China, India, Thailand, the Philippines and Indonesia in attracting FDI flows, contributing to rapid and sustainable development of its economy.