Vietnam has become an attractive destination for foreign funding, especially in science and technology. Duong Vu, associate at Rouse Legal Vietnam, discusses improvements in high-tech imports, the legal system, and the market in general.
Vietnam is taking advantage of the increasing number of foreign companies investing in the country by creating policies and incentives to encourage funding in high-tech industries and scientific research, with a focus on environmental protection. And the appeal is only growing as the local legal framework for foreign funding and technology transfer practices continues to improve.
The wave of companies with foreign capital has been growing strongly in Vietnam in recent years, especially after the country signed various bilateral and multilateral free trade deals. In terms of new projects, scientific and technological projects accounted for 16.7 per cent of total projects in 2021.
The following year, foreign investors had poured money into 19 out of the 21 civil economic sectors of the country, in which science-technology is one of the most invested fields. With foreign direct investment inflows shifting to high value-added industries and occupations, investors appear to be prioritising high technology; projects with advanced, modern, and green technologies; and areas showing gradual decrease in labour force.
At a government level, programmes like the Foreign Investment Cooperation Strategy for 2021-2030 emphasise the important goals of raising the share of registered capital from developed countries and increasing local business presence and operations of multinational corporations in Fortune Magazine’s Fortune 500 list by half.
Seizing this opportunity, many foreign firms have chosen Vietnam as a manufacturing base, including Samsung, LG, and Foxconn. Other international groups including Panasonic, Yamaha, Bosch, GE, HP, and Piaggio have local research and development (R&D) operations, suggesting the country is not only a manufacturing hub but also a possible centre for innovation.
CHALLENGES TO TECH DEVELOPMENT
Despite the progress, Vietnam still has some challenges to overcome. Firstly, legal and management mechanisms/policies are not synchronised, which hinders development of science, technology, and innovation, as well as promotion of exchange and purchase of sci-tech products in the domestic and foreign market.
To improve this, a comprehensive intellectual property protection system and simplified administrative procedures are also needed.
Secondly, there are difficulties in transferring international advanced technologies into Vietnam. New high-quality investment funds from Europe, the United States, and developed countries are expected, but the deployment of solutions to unlock the path for this inflow could need to further improvement.
Just 5 per cent of local projects are using modern technologies and source technologies from the US and Europe, while 80 and 15 per cent are using medium technologies and outdated technologies, respectively.
It suggests that the efficiency of the technology transfer from foreign firms to Vietnam implemented through investment channels is not being met. Obviously, there is still a large technology gap between Vietnam and other countries for Vietnam to continue with its sustainable development goals.
Economic growth relating to technological development is supported by R&D activities. Clearly, innovation and technology improvement are reflected in increased patent applications. Investment from overseas positively affects the innovation of the economy, which is reflected through patent filings. In particular, it contributes to the growth of technological capability, and stimulates the demand for patents.
For example, the trend of technological development is shown through the proportionally increased correlation between the GDP growth and the number of patent applications during 2010-2021. Worthy of note, patent filings increased on average by 10.4 per cent a year, while Vietnam’s GDP also increased by 17.4 per cent a year.
However, while some industries have the capacity to add high value using modern patents and technologies, they do not contribute much to Vietnam’s GDP. While many industries show promise, the greatest contribution lies in industries that create the lowest value added per employee.
Challenges still remain in attracting foreign investment in science and technology, including the lack of skilled human resources and inadequate infrastructure for R&D.
KEY LEGAL IMPROVEMENTS
Vietnam has made robust efforts and fairly decent progress in terms of developing relevant legal frameworks, programmes, and also an ecosystem for foreign funding over the past few decades.
Vietnam has participated in a series of new-generation free trade agreements (FTAs), which contribute to strengthening trade relations between Vietnam and partners and removing trade barriers to participate more deeply in global production and supply chains.
The FTAs directly facilitate the opening of the service market and policies for foreign investors. Vietnam and its FTA partners both reaffirm the application of important principles such as non-discrimination between domestic and foreign investors, not applying some measures affecting them. In addition, Vietnam is expanding the number of fields that allow backers of FTA partners to invest in business here.
To improve the business climate and facilitate foreign investment in sci-tech, the government issued Decision No.569/QD-TTg in May 2022 on the strategy for development of science technology, and innovation by 2030. The strategy calls for shifting foreign money to high-tech industries and ensuring those investments include provisions relating to environmental protection.
Vietnam is implementing policies and incentives for high-technology, scientific research, and technology development firms that fund areas including renewable energy and environmental protection. This includes preferential tax rates of 10 per cent tax for the first 15 years, which may be extended for larger projects.
In addition, a tax exemption can be awarded for a maximum of four years initially, and a 50 per cent discount against enterprise income tax can be awarded for a further nine years. Such projects also may enjoy an import duty exemption for imported goods to create fixed assets that cannot be procured locally.
This also encourages foreign investment into large infrastructure projects, reduces the burden on the government to finance such projects, and increases links between foreign financiers and the Vietnamese private sector.
In terms of market attractiveness, Vietnam is one of the fastest-growing economies in Southeast Asia, with an average annual growth rate of around 6 per cent over the past decade. According to the 2022 Global Innovation Index, Vietnam ranks fourth in Southeast Asia and 48th globally on the index.
Vietnam is performing above expectation on innovation relative to its level of economic development and continues as one of the record holders by being ‘Innovation Achievers’ for the 12th consecutive year. Within the region as a whole, Vietnam is seen as having made the greatest advances over the past decade, having moved up more than 20 index ranks.
Other representative countries in the region such as Thailand, Indonesia, and the Philippines also have large populations and growing economies, but they may face challenges such as natural catastrophes and infrastructure deficiencies.
Vietnam has a high growth potential, transitioning from a low-cost manufacturing hub to a higher value-added economy, with a focus on technology and innovation. Also, as mentioned, Vietnam has made significant progress in improving its legal framework in recent years. Thailand, Indonesia, and the Philippines may have similar legal frameworks, but obstacles such as political instability are present.
DIGITAL TRANSFORMATION EFFORTS
According to reports, Vietnam’s digital economy reached $3 billion in 2015, $9 billion in 2019, and is forecast to reach $30 billion in 2025. Vietnam’s digital economy has grown tremendously since 2010 when smartphone coverage surpassed half its population. Vietnam’s recent accelerated growth is owed to Industry 4.0, which has seen the local infrastructure and business environment develop rapidly over the past decade.
Regarding digital government transformation, Vietnam has recorded substantial progress relating to e-government development, particularly with delivery of online public services, telecommunications infrastructure, human capital development, and national database development.
Vietnam also approved the National Digital Transformation Programme to 2025, with an orientation towards 2030, which will help accelerate digital transformation through changes in awareness, enterprise strategies, and incentives towards the digitalisation of businesses, administration, and production activities.
One way international businesses can involve themselves in such efforts is by investing in the development of digital infrastructure and technologies such as broadband networks, cloud computing, and big data analytics, which will modernise the economy of Vietnam and open more opportunities to tap into the country’s growing market.
POSSIBLE FUTURE TRENDS
Going forward, Vietnam will focus on innovation in fundamental and key industries such as energy, mechanical engineering, ICT, electronics and telecommunications, robot manufacturing, cars, and software manufacturing. Therefore, these are the sectors that will attract funding inflows in Vietnam.
Foreign investment in sci-tech in Vietnam is expected to continue to grow in the coming years. Particularly, emerging technologies such as AI, the Internet of Things, and blockchain are all areas where Vietnam holds significant potential and where we can expect to see more investment and collaboration.
In addition, the recent pandemic has accelerated the adoption of digital tech, which has created new opportunities for foreign investors in Vietnam’s sci-tech sector. As more businesses and consumers embrace digital solutions, there will be growing demand for innovative technologies and services that can help them to adapt and thrive in the new digital environment.
Investments relating to renewable energy, green agriculture, the consumer goods industry, and green manufacturing to adapt to global climate change are also areas that hold great promise. It is noted that the recent wave of green foreign funding is gradually shifting from traditional industries to high-tech and cleaner manufacturing sectors making use of green and renewable energy.
Overall, the future of sci-tech investment in Vietnam is bright, with potential for continued growth and development in the years ahead.
Author: Duong Vu
The article was first published in the Special Publication of Vietnam Investment Review - 35 Years of Foreign Investment in Vietnam