VIETNAM FOREIGN DIRECT INVESTMENT (FDI) - LATEST UPDATE AND OUTLOOK ON EUROPEAN UNION - VIETNAM FREE TRADE AGREEMENT (EVFTA)
VIETNAM FOREIGN DIRECT INVESTMENT (FDI) - LATEST UPDATE AND OUTLOOK ON
EUROPEAN UNION - VIETNAM FREE TRADE AGREEMENT (EVFTA)
Vietnam has worked on attracting FDI with a reduced Corporate Income Tax for prioritized
sectors, with a lowered standard rate - from 25 to 10-20 percent - and by waiving the land rental
fees for Foreign Invested Enterprises (FIEs). If the FDI are promoted, it is mainly due to the
technological transfer they include. Despite the increasing number of foreign invested
enterprises in Vietnam, the spillover effects are still expected because of the lack of three
conditions: dense backward linkages, geographical proximity and FDI absorptive capacity.
Our first concern tackles the lack of backward linkages created by Vietnamese firms. More than
half of the FIEs import inputs from home or from a third country, depending on several factors:
the suppliers form, the sector and the country of origin.
FIEs are mainly served by private and import suppliers, even though the percentage of FIEs by
suppliers’ type varies within each sector. Finance and services are the two sectors with the most
backward linkages since they rely on human capital. In manufacturing and mining sectors, the
FIEs import more than half of the inputs from another country.
Besides, the FIEs are diversifying their sources, showing a change of sourcing strategy
regardless of the investment incentives they receive. The suppliers’ types are more diverse than
it used to be: in 2-year time, 45 to 68% of the FIEs served by domestic private suppliers, 10 to
20% served by household suppliers… the in-house sourcing is the only supplier form which has
The many incentives are meant to promote FDI in high-tech sector, underprivileged regions and
other priority sectors, but we can question the reality of the technological transfer. Indeed the
incentives target regions and sectors that are not ready to receive such advanced technologies and
therefore FIEs in more developed regions do not rely on incentives.
Across provinces, the main sectors determine the source of FIEs suppliers considering the
complexity of the technology needed for the activity. Vietnamese suppliers are more able to form
linkages with FIEs in lower-tech sectors, where the technological gap is not prohibitively large.
Thus, more linkages are established with Taiwanese companies which concentrate on textiles,
light manufacturing and light electronics, than with Japanese or Korean companies specialized in
complex electronics. FIEs are under no obligation to transfer their technology which prevents
Vietnamese firms to join the high-tech supply chain and to establish forward linkages.
The geographical proximity between the FIEs centers and the domestic private firms must be
greatly considered as the transfer of technology mostly occurs in face-to-face technical
consultations. Yet, it is difficult to draw a distinction between the proximity impact and the
domestic firm’s strategy. In either case, the proximity has an influence over the choice of
strategy and a close proximity ensures a better technological spillover. The establishment of a
private domestic firm in an industrial zone increases the efficiency of exporting but diminished
the chance of technological transfer by isolating the FIE from a larger economic pole.
Finally, the FDI absorptive capacity facilitates even more technological transfer. Indeed, if the
gap between the domestic enterprise and the FIE in matter of new technology and of work force
training is too large, the potential for transfer is reduced.
In matter of labor quality, State-Owned Enterprises have a higher percentage of high-quality
labor when domestic firms have less educated labor force. The quality of the work force is
crucial to adopt FIE’s technologies and management techniques. Thus, domestic suppliers of
FIEs are less likely to assimilate from their foreign clients due to a more limited absorptive
capacity. Improving labor quality is the key missing in promoting FIEs technological transfer.
The linkages and the proximity only allow people to get in touch and enhance a better spillover.
Guidance on the EVFTA
It is a golden time to invest in Vietnam due to the FTA, Vietnam being the only ASEAN country
to sign this agreement with the EU (Singapore has signed the FTA in 2014 but this does not
affect Vietnam’s competitiveness as Singapore mainly exports machines, chemical products and
Under the provisions of the agreement, over 99% of the tariff lines will be eliminated within 7
years from the effective date of the FTA. Vietnam’s duties on EU exports will disappear in a
ten-year period, EU’s duties in a seven-year period for some products (motorcycles, car parts,
half of EU pharmaceutical). The opening of the market will emphasize commercial relations
between EU and Vietnam and benefit to both of them. Vietnam’s commitments to World Trade
Organization (WTO) and to additional (sub)sectors such as Interdisciplinary R&D services,
nursing services, packaging services etc. offer the EU partners best possible access to Vietnam’s
For the distribution sector, an Economic Needs Test is required, as for the WTO, but with
exemptions and time delay of five years after the date of entry into force of the Agreement. Thus
after 5 years, the requirement of the ENT will be abolished.
Vietnam is the most investment worthy place in ASEAN and will ensure this position partially
thanks to EU-VN FTA. Its stable development of the economy and controlled inflation, its
adapted legislation foster an environment proper to investment.
Most important issues
- Consider what suppliers’ form is the most suitable to be served by, regarding the
technicity of the activity.
- Choose the relevant strategy to adopt between perceiving incentives but letting go of
linkages, and establishing backward linkages with the domestic firms’ even if it means
- Decide the timing to invest: Vietnam is the new land of investment this is why investors
should position themselves as early as possible to timely grab the opportunities that FTAs
create when they come into effect.
- Pay attention to the newly adopted legislation: the Government tends to improve the
business climate by reforming the legislation, especially when new trade pacts are
coming into effect (e.g. Investment Law, Enterprise Law, decree on Public-Private
Please do not hesitate to contact Mr. Oliver Massmann under firstname.lastname@example.org
If you have any question on the above, Oliver Massmann is the General Director of Duane
Morris Vietnam LLC.
Thank you very much!