Vietnam follows the path of East Asian economic tigers

Crossroads (Toward Philippine economic and social progress)
Philippine Star, 15 April 2015

Last week, I highlighted Vietnam’s economic development as one heavily driven by foreign direct investments (FDIs). It follows the early development paths of the East Asian economic tigers.

FDI inflows perk up Vietnam’s industrial export and domestic growth.  The magnitude of the FDI sector has grown rapidly and is still growing. It is estimated that around 23 percent of invested capital in Vietnam is foreign direct investment. And FDIs contribute about 18 percent of Vietnam’s GDP (in 2012).

In turn, FDI enterprises provide 63 percent of the country’s export revenues. Even so, FDI enterprises also account for 53 percent of total imports. Such high import demand arises from the supply chain link with other countries where raw materials are produced. In the case of Vietnam, however, the continued inflows of FDIs also create more imports of capital equipment into the country.

The main sources of FDI investments for Vietnam are the more developed countries in Asia. About 66 percent of total FDIs for 2013 came from Asian countries: Japan, South Korea, Taiwan, and China (including Hong Kong), and Asean countries as a whole.

In particular, Japan, South Korea, Taiwan and Hong Kong companies have gone to Vietnam to transfer many of their high cost operations located elsewhere, some at home and some from third countries. Investors from these countries have moved to Vietnam as a result of its abundant labor at low cost.

There are recent dramatic examples. Samsung, the Korean giant electronics company has built its handset phone company with an investment of $1.5 billion in 2009, and has committed toward expanding this plant further with a second larger factory soon, to make 100 million phones a year. Other mobile phone companies have come to Vietnam too. LG Electronics and Nokia are investing heavily.

Intel, a major maker of electronic microchips, recently announced a major expansion of its operations there. Henceforth, it will manufacture its new Haswell microchip for computers, thus raising further Vietnam’s jump in the electronics industry ladder.

All these developments highlight new investment directions. In the short time from the late 1990s, Vietnam’s policy of inviting FDIs has succeeded well. It has become an attractive site for assembling and manufacturing a wide range of industrial goods taking advantage of its natural comparative advantage. Initially, most of these industries were labor-intensive.

Goods produced in the country include many famous “foreign brands,” but they are made in, and exported from, Vietnam. These products are the exported consumer goods for the modern consumer: many household wares of electrical and electronic appliances such as refrigerators, washing machines, air-conditioners, televisions and radios, garments, sporting goods and shoes. In addition, there are some basic items of exports such as food products. Fish exports from Vietnam have caused a drop of fish prices in industrial countries, and US producer groups have been complaining.

The biggest export market: US. After years of relatively impressive growth of bilateral trade with the US, the volume of trade between Vietnam and the US by 2014 has achieved a total of $36.3 billion. (At this point, I use US government agency trade statistics, as they are more consistently available and more recent. They slightly differ from Vietnam’s numbers due to trading and transport lags.)

What is most impressive about these numbers in 2014 is this. Vietnam’s exports to the US amounted to $30.6 billion, while imports from the US were only $5.7 billion. This means a trade surplus with the US of $24.9 billion! Put another way, Vietnam’s value of exports to the US in 2014 was 5.3 times that of imports.

This export trade is quite extensive. The percentage composition of the total value of exports to the US in 2014 is as follows: Textiles and garments account for 35 percent; Footwear, 11 percent; Wood and wood products, eight percent; Computer, electric and other parts, seven percent; Fishery and fish products, six percent; Telephone and other parts, five percent; Machinery, equipment and other parts, four percent; and All other remaining export groups, 24 percent.

Commercial relations between the two countries were somewhat delayed in getting re-started after the end of the Vietnam War. In 1993, Vietnam’s exports to the US were zero, even while Vietnam bought a measly $7 million of imports from it. It was only during the following year that Vietnam began exporting to the US, and quite minimal at that.

By 2000, commercial relations have assumed a respectable volume. Total trade volume had reached $1.2 billion, with exports to the US of $0.6 billion.

The watershed year for Vietnam-US trade relations was 2001 when the bilateral trade relationship between the two countries was signed. Since then, the trade between the two countries has accelerated. Vietnam’s exports kept outpacing imports from the US from year to year. The total trade volume of $36.3 billion in 2014 is 24.2 times the volume of trade for the two countries in 2001, which was then only $1.5 billion.

This expansion is an astounding number. Yet, more growth is likely to come because Vietnam is part of the proposed Trans Pacific Partnership (TPP), which is a regional free trade agreement which is being sponsored by the United States. (Vietnam has been a member of Asean since 1994.)

Vietnam’s global trade. Globally, a different picture for Vietnam emerges. Its overall trade and payments position was in deficit until recently, achieving only a precarious overall trade balance.

With most of the East Asian countries, its trading position is in deficit. In part, its FDIs are part of the global supply chain in these region, including the Asean countries.

Data errors for stocks of FDIs in last week’s essay. I inadvertently transferred the wrong data (from UNCTAD) for the stocks of FDIs  for Vietnam. The correct numbers were $5.7 billion (in 1995); $56.9 billion (2010); $64.4 billion (2011); and $81.7 billion (2013).

As a result, the multiples of Vietnam’s FDI stocks over the comparative Philippine stocks are less in magnitude, but are still quite substantial: 0.9 in 1995; 2.3 (2010); and 2.5 (from 2011 to 2013). The conclusions of the paper are therefore unchanged. I thank Professor Epictetus Patalinghug of UP’s Virata School of Business for pointing out the data error.