Vietnam’s investment landscape
Vietnam maintains its position as an attractive investment for foreign investors as Foreign direct investment (FDI) inflows continue to increase. Vietnam’s numerous Free Trade Agreements (FTA), strong economic performance, cost-competitive production and increasing capabilities remain important factors in facilitating investments in the country. The trend is expected to continue as inflation in several economies are stabilizing and central banks in the US, the EU and the UK are forecasted to cut interest rates in 2024.
Vietnam finished 2023 with a GDP growth rate in Q4 with an increase of 6.72% but ended with a GDP increase of only 5.05% for the entire year, down from 8% from the previous. The economic performance fell short of Vietnam’s growth target 6.5% in part due to reduced foreign demand for Vietnamese goods derived from a general sluggish global economy. This resulted in exports falling to a three-year low as well as a slowdown in government and foreign investments. Policy shifts towards domestic consumption as a main driver of economic activity have only partially been successful in filling in for lack of volume in foreign demand and investments.
The Vietnamese government has already reduced the growth target for 2024 to 6%, whilst forecasts by the Central Institute for Economic Management and Asian Development Bank predict GDP growth between 5.5% and 6.5%.
Vietnam has witnessed substantial advancements in foreign investments, with recorded FDI inflows increasing by 32.1% year-on-year (YoY) to reach 36.6 billion USD by the end of 2023. However, it is important to note that while these gains in investment have materialized, the full benefits and outcomes from these investments will take some time to manifest. Vietnam continues to be among the fastest growing economies and has increased the diversification of its export markets with a larger inclusion of US, EU, and Western Asian markets.
Vietnam’s Consumer Price Index grew by 3.25% for 2023, which is a slowdown in inflation rates from previous years, with a high point in 2022 at 4.5%. The lower inflation rate in 2023 suggests a trend toward a more stable economic environment.
Previous increases in the inflation rates were driven by the release of stimulation funds during Covid and more recently the Russia-Ukraine War that resulted in increased fuel prices. Government initiatives are believed to be effective and the forecast for the inflation rate in 2024 is expected to further slowdown to 3%, contributing to an overall improving economic environment.
Sectors such as education and housing and construction materials continue to experience the highest inflation rates at 8.36% and 5.67% respectively, while sectors such as food and drink experienced an increase of 2.93. Sectors such as education, housing and construction materials continue to experience the highest inflation rates at 8.36% and 5.67% respectively. Sectors such as food and drink experienced an increase of 2.93. Meanwhile, clothing and footwear saw an increase of 1.8%.
Foreign direct investment (FDI)
Vietnam experienced a remarkable rise in registered FDI inflows in 2023 with a total of 36.6 billion USD, 32.1% increase YoY according to the Foreign Investment Agency (FIA) of the Ministry of Planning and Investment (MPI), with disbursement of 23.18 billion USD. The upturn is believed to be derived from the stabilization and reduction of inflation and interest rates in key sources of FDI. The relaxation of Covid-restrictions has been an additional supporting factor in the increase of FDI inflow.
The main contributors of Vietnam FDI continue to be neighboring economies. Republic of Korea, Singapore and Japan are the biggest investors, followed by Taiwan, Hong Kong, and Mainland China. The sustained influx of FDI is underpinned by Vietnam’s comprehensive FTAs, as major contributors to FDI maintain such agreements with Vietnam.
Amongst Vietnam’s 21 sectors, the manufacturing and processing sector has emerged as the predominant recipient of FDI, as it accounted for 61,38% of FDI received. Vietnam’s emergence as a hub of semiconductor production have supported growth in the sector that has attracted large FDI-project, most noticeably a 2.6 billion USD semiconductor project by Samsung in 2023. The investments are concentrated around Vietnam’s most economically dynamic cities, Ho Chi Minh City and Hanoi which accounted for 12.29% and 8.78% of FDI inflows respectively.
Vietnam’s remarkable performance in attracting FDI underscores its appeal to global investors. This success is underpinned by the establishment of a stable relationship with its business communities and streamlining of its regulatory framework, with initiatives including simplification of licensing procedures and relaxation of foreign ownership limitations. FDI inflows are anticipated to be boosted due to the expected reduction of interest rates by central banks in the US, EU, and UK in 2024, following the end of the inflation crisis spanning 2021 to 2023.
Global Investors Target Thriving Vietnamese Retail
Vietnam’s retail market has emerged as a compelling destination for global investors, driven by robust economic growth, a burgeoning middle class, and an upward trajectory in consumer spending.
The nation’s economic landscape, characterized by strong GDP growth and a large and youthful population with increasing purchasing power, has positioned Vietnam as an attractive potential investment market for retailers. Major international retail brands are capitalizing on this opportunity, actively expanding their presence and devising extensive strategies to navigate the dynamic Vietnamese market.
A key driver of Vietnam’s retail appeal is the government’s commitment to fostering a favorable business environment and facilitating foreign investment. Policies aimed at liberalizing the retail market have encouraged global retailers to establish a robust foothold in the country. This proactive approach aligns with Vietnam’s broader economic strategy, attracting foreign businesses keen on tapping into the nation’s vibrant consumer market.
The evolving consumer landscape in Vietnam plays a pivotal role in shaping the retail sector’s growth. As preferences shift towards modern retail formats and a surge in online shopping, retailers are presented with opportunities to adapt and cater to changing consumer needs. This adaptability is crucial for retailers aiming to thrive in Vietnam’s dynamic retail environment.
A remarkable 9.6% increase in retail sales of consumer goods and services in 2023, underscores the resilience and strength of Vietnam’s retail market. The increase of purchasing power of an emerging Vietnamese middle class offer opportunities for foreign firms to enter higher premium segments which have not yet been consolidated.
The Untapped potential of Vietnam’s Agricultural Sector
Vietnam’s agricultural sector is gaining attention as a global investment destination. The recognition of this untapped space encompasses underutilized resources, unexplored markets, and areas where innovative agricultural practices can flourish.
Vietnam has set an ambitious goal to double its agricultural investment to 34 billion USD by 2030, aligning with the commitment to modernize the sector, enhance productivity, and ensure sustainable development.
The potential benefits for both Vietnam and foreign investors are substantial. Investing countries can diversify their agricultural export markets by capitalizing on Vietnam’s growing middle class and their increasing demand for high-quality agricultural products. Simultaneously, Vietnam can leverage foreign expertise, advanced technologies, and investments to modernize its agricultural practices.
However, challenges exist in realizing these ambitions. Limited information, unfamiliarity with the market, and concerns about local regulations have impeded foreign investment in Vietnam’s agriculture. Addressing these challenges is pivotal in attracting a higher volume of FDI to the sector.
Vietnam’s agricultural sector shows great potential for collaboration based on its highly fertile areas, low production costs and friendly investment environment. With a targeted plan to double agricultural investment by 2030, Vietnam aims to welcome foreign investors to support them in unlocking its untapped potential.
About this report
This report was compiled with contributions from the team of business experts in our Vietnam office.
ARC Consulting, a division of ARC Group, is an advisory firm specialised in supporting western companies operating in Asia. Our mission is to bridge between the business ecosystems of Asia and those in Europe and the US. Our services cover market entry and expansion, production and sourcing, cross-border M&A as well as operational improvement and compliance.
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