Cheap labor costs, big investment incentives, political and policy stability, and strong trade relations appeal Vietnam as an alternative investment destination to China, according to a special report published by The Economist Intelligence Unit. The country is now rated more highly than competitors such as China, Indonesia, India, Bangladesh and Pakistan. [Interestingly, Sri Lanka is rated the most favorable in South Asia in terms of business environment.]
The report focuses on labor, investment incentives, and trade relations, which are central to Vietnam’s competitiveness as a manufacturing hub.
First, the report argues that the ample supply of low-skilled labor will remain a core strength of Vietnam. Working age population is estimated at 68 million, which is about 70% of total population. It appears to be enjoying a “demographic dividend”, which refers to a share of working-age population being larger than those under 15 and over 64 years of age. Agricultural sector accounts for over one-third of the employed workforce, and workers from rural areas have been a key source of labor in manufacturing sector. There is still a stock of surplus labor in the agricultural sector, which means wages growth among low-skilled and unskilled workers in manufacturing sector will remain restrained. However, the availability of skilled labor force will still be an issue.
Second, the report states that Vietnam is offering generous concessions for high-tech manufacturers thinking to relocate labor-intensive processes. Incentives for lower-value added industries will be continue to be rolled back. Vietnam offers various incentives for FDI in industrial zones (industrial parks and export-processing zones), special economic zones, and technology parks. Most are export-oriented industries. It offers corporate and personal income tax exemption and rate reduction. High-tech sectors such as automotive, machinery, and production of advanced capital goods are offered below-market land rents, which is a major incentive amidst rising rent costs. Eligibility criteria are made flexible, especially for large firms. EPZs are not that popular these days because of reduction of import tariffs, which have made duty-free intermediate imports under EPZs largely redundant. The report notes that going forward the eligibility criteria for investment incentives will focus on higher value-added industries.
Industrial clusters in Vietnam are concentrated in four geographical areas that were designated as priority regions for industrial development: Northern, Central, Southern and Mekong Delta Key Economic Zones. Footwear, textile and garment industries are well developed with advanced labor specialization and scaled-up manufacturing operations. Electronics exports have limited domestic value added, which the government is trying to change through vertical integration in the production of smartphones (Samsung is opening a R&D facility and a phone screen manufacturing plant).
Third, the report notes that Vietnam participates in more trade agreements and has better trading relations with major trading partners than its regional neighbors. This helps in promoting competitive export. It is a member of ASEAN Economic Community, Regional Comprehensive Partnership Framework, Comprehensive and Progressive Agreement for Trans-Pacific Partnership, and the EU-Vietnam Free Trade Agreement. For instance, CPTTP opens up more access to Canada and Mexico (with whom it did not have agreements before) for Vietnamese sports footwear, telephone sets, electrical machinery, and clothing and apparel.
