Vietnam has set its sights on becoming a modern industrialized nation by 2050, with milestones set of reaching upper-middle-income status by 2030 and transitioning to a high-income economy by 2045. To turn these ambitions into reality, the country must fast-track its economic reforms, restructure its economic foundations, and unlock new engines of growth, all while keeping sustainability at the core of its development journey. Among the key players in this transformation is FDI.

More than just a source of capital, FDI brings with it cutting-edge technology, skilled workforce training, broader production links, and a vital boost to the country’s industrialization efforts. But the pressing question remains: how can Vietnam harness FDI not just as a financial inflow but as a true catalyst for long-term economic growth?

That very question took center stage at a recent seminar entitled “How Foreign Direct Investment Contributes to Industrialization in Vietnam”, held on August 7 in Hanoi. Organized by the National Institute for Economics and Finance at the Ministry of Finance, the seminar brought together policymakers and experts to explore FDI’s evolving role in shaping Vietnam’s industrial future.

Backbone of industrial growth

According to a report presented at the seminar, nearly four decades of attracting FDI have significantly reshaped Vietnam’s economic structure, shifting it towards a greater share of industry and services. The combined GDP share of these two sectors rose from 73.5 per cent in 2011 to 79.9 per cent in 2024.

Vietnam’s industrial competitiveness has also improved markedly. The country climbed from 95th place in the global Competitive Industrial Performance (CIP) rankings in 1990 to 31st during the 2019-2022 period, thanks largely to its growing capacity in manufacturing and exports of industrial goods.

FDI has been a key driver behind this transformation. While foreign-invested enterprises (FIEs) account for just 8 per cent of the total number of companies in Vietnam’s manufacturing and processing sector, they control 56.3 per cent of its total capital, generate 61.9 per cent of its total revenue, and employ 59.7 per cent of its workforce.

FDI’s contribution to growth spans multiple dimensions, from injecting significant capital into socio-economic development to expanding export markets, facilitating technology transfer, improving productivity, and even spurring institutional reform. The GDP share of FDI has steadily increased: from 18.22 per cent during 2011-2015 to 21.06 per cent in 2016-2020 and 22.25 per cent between 2021 and 2023.

Value-added growth of FIEs has consistently outpaced the national average. In absolute terms, FDI’s contribution to GDP growth rose from 0.98 percentage points in 2011 to 1.39 in 2019 and 1.63 in 2022. Its relative contribution to GDP growth has also steadily climbed from 15.3 per cent.

On a regional level, FDI’s concentration in key industrial parks has created powerful “growth poles” in various sub-regions of Vietnam, attracting labor and accelerating the development of critical transport infrastructure. These have led to the formation of key economic corridors. FDI has also driven spatial restructuring, shifting investment from major urban centers to surrounding satellite localities, spawning new growth hubs in areas such as northern Bac Ninh province, neighboring Bac Giang province (now part of Bac Ninh), southern Binh Duong province (now part of Ho Chi Minh City), and the north-central region.

In trade, FDI has played a pivotal role in maintaining Vietnam’s foreign exchange reserves by boosting export revenues, which are critical for stabilizing exchange rates amid rising external pressures, especially for an economy as open as Vietnam’s.

In terms of public finance, tax contributions from FDI enterprises have seen a steady rise, from VND77 trillion ($2.96 billion) in 2011 to approximately VND243 trillion ($9.35 billion) in 2022, accounting for a consistent 13-14 per cent of State budget revenue.

FDI has also had a disinflationary effect over the long term. Quantitative analysis shows that foreign investment, particularly in manufacturing, helps expand the overall supply of goods and services, thereby easing inflationary pressures.

Lastly, the report highlighted FDI’s strong positive impact on job creation and wage growth across domestic sectors - benefiting workers, contributing to poverty reduction, and helping narrow income inequality.

Evolving FDI landscape

Speaking at the seminar, Dr. Bui Quy Thuan, Head of the Research Division at the Vietnam Industrial Park Finance Association (VIPFA), noted that the structure of FDI in Vietnam has undergone a positive shift. From 2010 to 2024, it moved away from labor-intensive industries such as textiles and footwear towards high-tech sectors, with the share of investment in electronics increasing from 4.1 per cent to 17.8 per cent. Other rapidly-growing sectors have included finance, renewable energy, and high value-added services.

FDI has been a key engine of export growth, with the foreign-invested sector accounting for roughly 70 per cent of Vietnam’s total export turnover. This has helped position Vietnam as a global manufacturing and export hub for high-tech products. Global giants such as Samsung, Intel, and LG have made Vietnam an essential link in their global supply chains.

However, Dr. Tran Toan Thang, Head of the Department of International and Integration Policy at the National Institute for Economics and Finance, pointed out that despite creating a large number of jobs, FDI operations in Vietnam remain heavily reliant on low-cost, low-skilled labor. Around 72.1 per cent of workers in the FDI sector have not received formal training, and workplace productivity growth in the sector has been slow and inconsistent.

While the outlook is promising, economists at the seminar warned that despite Vietnam’s growing appeal as an investment destination, structural bottlenecks, especially in workforce quality and infrastructure, could undermine the country’s ability to sustain FDI momentum.

To meet its industrialization goals in the context of global supply chain shifts, experts stressed that beyond ongoing institutional and administrative reforms, Vietnam must undergo a fundamental shift in policy mindset. It must move away from a “growth at all costs” approach to FDI, and instead adopt a more proactive, strategic stance; one that guides and aligns FDI inflows with long-term national development objectives.

Six reforms proposed

To advance Vietnam’s industrialization goals, the National Institute for Economics and Finance has proposed six breakthrough reforms it should focus on to improve the quality and effectiveness of FDI attraction and utilization.

The first is to comprehensively reform existing investment incentive policies. Rather than offering widespread, untargeted incentives, Vietnam should adopt a selective, performance-based framework. Under this approach, the level of incentives would be directly linked to a project’s fulfillment of specific commitments, such as its spending on R&D within Vietnam, the degree of technology transfer, the localization rate, and the level of investment in high-quality workforce training. This shift should be accompanied by a broader overhaul of industrial policy to ensure FDI contributes to meaningful technology and productivity spillovers.

Second, strengthening the capacity of domestic enterprises and building a substantive supporting industry is essential. This involves implementing a national supplier development program to support potential local suppliers with management, technology, and access to credit. A platform should also be developed to facilitate connections between FDI companies and domestic suppliers, addressing the persistent issue of information gaps. Tailored support packages that reflect the size and industry characteristics of each business will help strengthen links between domestic and foreign enterprises. These solutions require carefully targeted State intervention, ranging from market development to investment in national R&D and attracting FDI that is genuinely committed to technology transfer.

The third area of reform is a breakthrough in human resources development, particularly in fostering high-quality talent. This includes promoting meaningful strategic cooperation between the government, academic institutions, and FDI enterprises. Major technology corporations should be encouraged to participate directly in designing training programs, sponsoring laboratories, and offering internships. In parallel, Vietnam needs bold policies to attract and retain technological talent.

The fourth proposal is to establish a national FDI governance framework that enables cross-sectoral and inter-regional coordination. A national-level coordination mechanism should clearly define the respective roles of central and local governments to avoid unhealthy competition between localities and ensure that FDI attraction aligns with national strategies and planning.

Fifth, Vietnam must strengthen its environmental governance capacity in relation to FDI. This includes stricter enforcement of environmental regulations, transparent and independent environmental impact assessments, and stronger penalties for violations. At the same time, policies should continue to be refined to encourage green FDI, especially in renewable energy sectors.

Finally, the sixth reform focuses on improving institutional capacity and policy implementation effectiveness. In particular, it calls for enhancing project appraisal and evaluation skills among local officials to ensure more rigorous and consistent FDI management.