Illustrative image (Photo: VNA) Vietnam’s economic growth has been accelerating this year, and sothe World Bank (WB), International Monetary Fund (IMF) and others have sharplyrevised up their GDP growth forecasts for the country, with an increasingnumber of economists now expecting it to exceed 8% this year. This has promptedinvestors to ask what is different in Vietnam and why.
In a note, Kokalari said, quoting newly published research byeconomists at Harvard University, that one reason Vietnam is aneconomic outlier is that FDI is supporting the country’s manufacturing whilealso driving an increase in the complexity of products produced in Vietnam.
An increase in the complexity of the products a country is able tomake is the single most powerful growth driver for a developing country'seconomy, according to the economist.
“The recent announcements by Samsung, Apple and others make usconfident that high-tech foreign investments will continue propelling Vietnam’seconomic growth for years to come,” he said.
Samsung, Vietnam's single largest foreign investor, announced thatit would start producing semi-conductor parts in the country.
Apple said it would begin producing watches and MacBooks in Vietnam,the first time they will be made outside China.
Apple has “big plans for Vietnam” according to insiders, who alsonoted that the Apple Watch is particularly complicated to manufacture becauseof the challenge of squeezing so many components into such a small case.
According to research by the London School of Economics and theWorld Bank, FDI is instrumental in helping “developing economies move intohigher value-added parts of the value chain,” and high-tech FDI has had a bigpositive impact on Vietnam’s economy.
Furthermore, Vietnam achieved the biggest jump in Harvard'sEconomic Complexity Index ranking in the last two decades, partly because theSamsung and Intel investments attracted a flurry of other high-tech investmentsfrom Apple, LG Electronics, Dell, and a number of Japanese firms.
The primary motivations for firms to set up high-tech factories inVietnam include a high-skill, low-wage workforce and the country’s geographicproximity to high-tech supply chains in Asia, according to Kokalari.
Recent US-China trade tensions, especially the Bidenadministration’s recent announcement it would keep Trump’s tariffs on Chineseimports in place essentially ensures that multinational firms would continuepouring FDI into Vietnam for years to come, Kokalari said.
Vietnam’s trade surplus with the US more than doubled from 35billion USD in 2018 to 71 billion USD (20% of GDP) in 2021, during which timeits trade deficit with China also more than doubled to 54 billion USD.
Movingup value chain propels GDP growth
According to economists, high-tech FDI boosts Vietnam's GDPin two ways: by lifting incomes and improving the country's capability toproduce complex products.
The former supports GDP growth in the short-term since domesticconsumption accounts for two-thirds of Vietnam's GDP, while the latter booststhe country’s long-term economic prospects.
The net result is that the production of smartphones, homeelectronics and other products with a relatively high degree of complexityultimately contributed over 1,000 USD of Vietnam's 3,000 USD per capita GDP in2020.
The revenues and earnings of most companies listed on Vietnam’sstock exchanges are primarily linked either directly or indirectly to domesticconsumption.
This gives active stock managers ample opportunities to outperformthe benchmark VN-Index by assessing which companies’ stock prices are likely tobenefit the most from their exposure to the higher spending by Vietnam’semerging middle-class consumers that ultimately results from increasedhigh-tech FDI inflows.
Kokalari said “Foreign-owned factories in Vietnam still importmost of the components/production inputs they require to make the products theyexport, especially high-tech products like consumer electronics andsmartphones.
“We expect the imported content of Vietnam’s exports to plunge andthe local content contribution to soar as local firms develop their ability tosupply foreign companies with production inputs in the years ahead.
“Next, the nascent wave of FDI into the production of some of themost complicated products ever manufactured in Vietnam should lead to more‘spillover effects’ that will lead local manufacturers to diversify into highervalue-added segments in the value chain.”
The plans by Apple and Samsung to produce some of the mosttechnologically advanced products ever made in Vietnam would significantlyboost Vietnam's GDP growth in the years ahead, and ensure that the economic“decoupling” that Vietnam achieved this year could be sustained in 2023.
“Our day-to-day interactions with a wide range of Vietnamesebusinesses – from large cap listed companies to ultra tech-savvy smallentrepreneurs – continually make us appreciate the strong parallelsbetween Vietnam’s economy in the 2020s and Japan in the 1970s, when thatcountry embarked on its multi-decade climb up the global value chain.
“We remain extremely bullish on Vietnam’s economic prospects andby extension on the prospects for much higher stock prices in the yearsahead.”/.
VNA
