Report: Vietnam 2nd Most Attractive Market in Southeast Asia

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By Julia Gu

May 15 – A recent survey by the ASEAN Business Advisory Council (ABAC) revealed that Vietnam ranked as the second most attractive investment destination in Southeast Asia after Indonesia. Vietnam’s FDI in recent years has largely gone into its manufacturing sector, particularly the manufacturing of textiles and footwear, but the country’s role and its position relative to other Asian countries is evolving.

With steady growth in agriculture, Vietnam is set to surpass India to become Asia’s commodity trading hub by attracting more global investment in the nation’s commodity trade section. Vietnam has replaced India as the largest exporter of cashews, seafood, coffee and pepper, and in the next few years, the country is about to overtake India in rubber production as well. Vietnam’s annual production of pepper has increased to 120,000 tons while India, which previously was the largest pepper producer in the world, is now producing only 48,000 tons per year. The International Finance Corporation, a division of the World Bank, said it would invest about US$40 million to assist Vietnam in its commodity trade financing.

Low-cost labor is abundant in Vietnam, but mostly unskilled, because the country’s manpower has basically shifted from agriculture to low-end manufacturing and other industries without proper training, according to a recent report by the McKinsey Global Institute (MGI), the business and economics research arm of McKinsey & Company.

According to MGI’s survey conducted among 808 foreign firms in Asia, Vietnam is the most challenging place in Asia to find managers and the second most challenging market for hiring skilled engineers. In order to continue high GDP growth, Vietnam needs to improve its productivity growth by at least 50 percent, the firm suggested. Without the required capacity, the country’s GDP would expand at a rate of 4.5 to 5 percent year-on-year, significantly below than the central government’s target.

And the abundance of low-cost labor may be temporary. Although Vietnam’s minimum wage is currently considered low compared to China and some ASEAN members, the central government has been revising it on an annual basis. From 2003 to 2008, Vietnam’s minimum wages increased around 15 percent annually. Most recently, the Vietnamese National Assembly approved VND59.3 trillion (US$2.83 billion) in salary increases, and starting from May 1, 2012 the minimum salaries for employees would be VND1.05 million (US$51) per month, about US$10 higher from last year. The MGI report describes the potential for Bangladesh and Cambodia to overtake Vietnam in low-cost manufacturing, as the two countries now offer cheaper manpower compared to Vietnam.

“To facilitate a transition to higher productivity activities, low-wage labor needs to be replaced with new sources of comparative advantage,” read the MGI report. “Beyond the economy’s immediate difficulties, policy-makers need to develop a much more acute emphasis on retooling the economy’s structure to achieve the productivity growth that will sustain strong long-term growth.”

Dezan Shira & Associates is boutique professional services firm providing foreign direct investment business advisory, tax, accounting, payroll and due diligence services for multinational clients in Vietnam. To contact the firm, please email vietnam@dezshira.com, visit www.dezshira.com, or download the firm’s brochure here.

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