Climbing the value chain

Vietnam is increasingly being recognized as one of Asia’s fastest-growing economies and is aiming to attract higher-value investment. What are the biggest gaps between its policy ambition and implementation?

There is a gap, but I think we have to give it a bit of time, because Vietnam is still catching up. The country only really opened up in 1989, with reforms beginning around 1993 and 1996. That’s only about 30 years ago, so there are still many gaps that need to be filled, and that is to be expected.

The ambition is to move quickly, but implementation cannot be rushed. You have to manage the pace because if you accelerate too fast, there can be negative consequences. For example, if the government pushes investment too aggressively, it needs more capital, which can divert funding away from other sectors and put upward pressure on interest rates. It can also create inflationary pressures because more imports and stronger domestic demand can push up prices.

So while demand is already here and expectations are high, the key is to pace the process. Whenever you can accelerate, you should accelerate, but it has to be done carefully.

At the same time, Vietnam needs to make sure it remains competitive in attracting investment. There is competition not only from other countries but also from other regions where labor costs may be even lower. That means Vietnam cannot rely on low costs alone.

How should Vietnam strengthen its competitiveness and unlock the next phase of growth?

The first priority is to maintain a business-friendly environment. Policies need to be clear, consistent, transparent, and easy to understand so that both foreign and local businesses can operate in a safe and predictable environment. If foreign investors are uncertain about tax rules or regulations, they may simply choose another market where the system is easier to navigate.

The second priority is the workforce. As the economy develops, wages will naturally rise. Singapore experienced the same thing. The important point is that productivity must rise as well. That requires continuous skills upgrading, workforce training, and an education system that is aligned with what businesses actually need. Otherwise, companies won’t be able to find the talent they’re looking for.

Vietnam also still needs foreign capital because its domestic capital base is not yet as deep as that of more developed economies. Countries like Malaysia have stronger local corporate champions, while Vietnam is still developing more of them. Over time, that will change.

Finally, infrastructure remains critical. Vietnam needs to continue investing in transport, logistics, power, and other infrastructure, but again, it cannot be rushed. If investment is accelerated too aggressively, you run into the same issues of competing for capital and creating inflationary pressures. Infrastructure development needs to continue, but at a sustainable pace.

Those are the key areas that I think will help Vietnam remain a competitive and attractive investment destination while supporting its next phase of growth.

If the last decade was about attracting investment, what should define Vietnam’s next phase of economic growth? Which sectors do you believe will drive the country’s growth over the next five to ten years?

This is really what people are referring to when they talk about FDI 2.0, and I think that’s the right way to look at Vietnam’s next stage of development.

The first phase, from 1989 until now, relied on the traditional growth model. There’s nothing wrong with that. Vietnam had labor, land, and competitive costs, so it focused on labor-intensive manufacturing and lower-skilled assembly work. Singapore went through exactly the same stage. When it became independent in 1965, we called it the “screwdriver industry” because we were essentially assembling imported parts.

With FDI 2.0, Vietnam needs to move up the value chain. In the first phase, the value proposition was low-cost labor. While there was some value-added, that model is very vulnerable to competition because companies can always find another location that is cheaper. Competitiveness is always evolving.

To avoid that, Vietnam needs to increase the amount of value it creates. Instead of simply assembling components, the country should attract companies to manufacture more sophisticated parts locally and carry out more R&D. Rather than having R&D done elsewhere and production taking place in Vietnam, more innovation should happen within Vietnam itself.

Of course, this can’t happen across every industry. The focus should be on sectors where Vietnam has the potential to be competitive. There are areas where Vietnam may not have a natural advantage, such as advanced medical research, but electronics is a different story. That’s why I think the Vietnamese Government has made a smart decision by focusing on semiconductors. Party General Secretary and State President To Lam has shown good foresight in recognizing the importance of moving up the value chain.

The goal is not to remain vulnerable to low-end competition. Vietnam needs to move toward higher-value activities, not necessarily the very highest end immediately, because the capabilities and engineering talent are still developing, but progressively higher over time.

Electronics is one obvious example. Vietnam already has experience in lower-end manufacturing, so the next step is to build on that foundation. The same applies to semiconductors, electrical equipment, and electronics more broadly.

But this isn’t limited to high-tech industries. Even traditional sectors such as garments can move up the value chain. China is a good example. It began with simple manufacturing and assembly, but later shifted toward higher-value activities such as design and product development. Instead of simply producing clothing, companies started offering customers complete design solutions. If a customer wasn’t sure what styles to launch for the next season, the manufacturer could provide the designs as well. That’s a different business model requiring different skills. It’s what we call ODM, or Original Design Manufacturing. The same opportunity exists in footwear, furniture, and other traditional industries. Eventually, Vietnam should be able to provide both the design and the manufacturing.

One final point is that trust is extremely important. Some manufacturers have damaged their reputation by producing unauthorized extra quantities of branded products and selling them outside official channels.

Once that trust is lost, companies won’t secure any future contracts. In many industries, especially fashion, designs are valuable intellectual property intended for a specific season. Protecting that intellectual property is essential. Vietnam needs to ensure these kinds of practices do not happen because they can damage not only individual companies but also the country’s reputation as a trusted manufacturing destination.

What will distinguish this next wave of FDI from the previous one, and is Vietnam well positioned to capture it?

The requirements will be much higher. As you move up the value chain, the demands become much more stringent.

Take semiconductors as an example. Today, even activities such as testing and packaging may not require the highest standards. But if you’re talking about attracting a company like Taiwan (China)’s TSMC to build an advanced fabrication facility, that’s a completely different level.

You need a very stable power supply. There cannot be power failures, brownouts, or blackouts. You also need sufficient supplies of clean, high-purity water because it’s essential for cooling systems and cleaning highly sophisticated equipment. In addition, you need a controlled environment with purified air.

That’s one of the biggest differences between FDI 1.0 and FDI 2.0. With the earlier model, you could set up a conventional factory relatively easily. But if you want to attract more sophisticated manufacturing, the supporting environment has to be at a much higher standard. The physical infrastructure requirements are significantly greater.

The legal environment also becomes more important. Intellectual property protection is essential. Companies need confidence that their technology and innovations will be protected.

The workforce requirements are also different. Operating advanced machinery requires a much higher level of technical expertise, along with stronger safety standards and specialized skills. In the FDI 1.0 era, many factory jobs only required a high school education. For FDI 2.0, you need more university graduates, engineers, and highly-skilled technicians. The country must have enough qualified talent to support these industries.

Another important point is creating an environment that attracts not only foreign companies but also overseas Vietnamese professionals who want to return and start businesses or work for local companies.

That means having a business environment where the rules are clear. Tax regulations should be transparent, with as little ambiguity as possible. Business laws should also be clear and predictable. All of these factors are important if Vietnam wants to attract the next generation of higher-value investment.

Looking ahead, what gives you the greatest confidence about Vietnam’s prospects? And if there were one reform or one priority that could significantly strengthen Vietnam’s competitiveness, what would it be?

I’m very confident about Vietnam’s future because the country has demonstrated its resilience. It has gone through Covid-19, the conflicts in the Middle East, US tariffs, and many other global shocks, yet it has come through them stronger.

Last year, Vietnam achieved more than 8 per cent growth. This year, it is also targeting growth of more than 8 per cent. There are even discussions about reaching double-digit growth. I would be a little more cautious about that. That’s why my own forecast doesn’t assume 10 per cent growth. I think it’s very difficult to achieve. It’s possible, but you may have to sacrifice too many other things to get there. I don’t think that’s worth it.

I would rather see Vietnam maintain a sustainable pace while continuing to achieve strong growth. That’s why I’m optimistic. The country has already proven its resilience.

As for choosing one priority, I wouldn’t necessarily call it a reform, but I do think infrastructure remains one of the most important areas where Vietnam should do more, and do it more comprehensively.

Infrastructure isn’t just about physical assets such as roads, airports, seaports, railways, metro systems, power, and water. Digital infrastructure is also important, as are healthcare and education. The government needs to continue investing in all of these areas.

Education, in particular, requires sustained investment. Resources need to be allocated to ensure Vietnam trains enough engineers and continues upgrading the skills of those already in the workforce. That requires funding, qualified teachers, and sufficient training capacity.

Sometimes that means spending less on other priorities today in order to create a stronger economy tomorrow. China followed that approach by investing heavily in education and human capital. It trained an enormous number of engineers, creating the talent base needed to support the country’s industrial and technological development.

I think Vietnam should continue moving in that direction because investing in infrastructure, both physical and human, is one of the best ways to strengthen the country’s long-term competitiveness.