High-tech FDI boosts economic development in Việt Nam

VIETNAM, September 20 –

HCM CITY – Foreign investment in high technology will continue to drive Việt Nam’s economic growth for years to come, said Michael Kokalari, chief economist at investment fund VinaCapital.

Việt Nam’s economic growth has accelerated this year, which is why the World Bank, IMF and others have sharply revised upward their GDP growth forecasts for the country, a growing number of economists s now expecting it to exceed 8% this year. This has prompted investors to wonder what is different in Việt Nam and why.

In a note, Kokalari said, citing recently published research by economists from Harvard University, that one of the reasons why Việt Nam is an economic exception is that FDI supports the country’s manufacturing industry while leading to an increase in the complexity of products made in Việt Nam.

According to the economist, an increase in the complexity of the products that a country is able to produce is the most powerful engine of growth for the economy of a developing country.

“Recent announcements from Samsung, Apple and others make us confident that foreign investment in high technology will continue to propel Việt Nam’s economic growth for years to come,” he said.

Samsung, Việt Nam’s largest foreign investor, has announced that it will start producing semiconductor parts in the country.

Apple has announced that it will start producing Watches and MacBooks in Việt Nam, the first time they will be made outside of China.

Apple has “big plans for Việt Nam” according to insiders, who also noted that the Apple Watch is particularly complicated to manufacture due to the challenge of squeezing so many components into such a small package.

According to research by the London School of Economics and the World Bank, FDI helps “developing economies move into higher value-added segments of the value chain”, and high-tech FDI has had a significant positive impact on the economy of Việt Nam. .

In addition, Việt Nam has made the biggest jump in Harvard’s Economic Complexity Index rankings in the past two decades, in part because investments from Samsung and Intel have attracted a wave of other high-tech investments from Apple, LG Electronics, Dell and a number of Japanese companies. .

According to Kokalari, the main motivations for companies to set up high-tech factories in Việt Nam are a highly skilled, low-wage workforce and the country’s geographic proximity to high-tech supply chains in Asia.

The recent trade tensions between the United States and China, in particular the recent announcement by the Biden administration that it will maintain Trump’s tariffs on Chinese imports, essentially guarantees that multinational companies will continue to inject FDI into Việt Nam for years to come, Kokalari said.

Việt Nam’s trade surplus with the United States more than doubled from $35 billion in 2018 to $71 billion (20% of GDP) in 2021, a period during which its trade deficit with China also more than doubled to $54 billion.

Moving up the value chain drives GDP growth

According to economists, high-tech FDI boosts Việt Nam’s GDP in two ways: by increasing incomes and by improving the country’s ability to produce complex products.

The former supports short-term GDP growth since domestic consumption accounts for two-thirds of Việt Nam’s GDP, while the latter bolsters the country’s long-term economic prospects.

The net result is that the production of smartphones, home electronics, and other products of a relatively high degree of complexity ultimately contributed more than $1,000 of Việt Nam’s $3,000 GDP per capita in 2020. .

Revenues and profits of most companies listed on Việt Nam stock exchanges are mainly directly or indirectly related to domestic consumption.

This gives active equity managers plenty of opportunities to outperform the benchmark VN index by pricing in the stock prices of companies that stand to benefit the most from their exposure to rising consumer spending by emerging middle-class consumers in Việt Nam. which ultimately results from the increase in high technology. IDE entries.

Kokalari said, “Foreign-owned factories in Việt Nam still import most of the production components/inputs they need to make the products they export, especially high-tech products like consumer electronics. and smartphones.

“We expect the imported content of Vệt Nam’s exports to drop and the contribution of local content to skyrocket as local companies develop their capacity to supply foreign companies with production inputs in the coming years.

“Secondly, the nascent wave of FDI in the production of some of the most complex products ever made in Việt Nam is expected to lead to more ‘ripple effects’ that will lead local manufacturers to diversify into higher value segments. added to the value chain”.

Apple and Samsung’s plans to produce some of the most technologically advanced products ever made in Việt Nam would significantly boost Việt Nam’s GDP growth in the coming years and ensure that the economic “decoupling” that Việt Nam Nam realized this year could be sustained into 2023.

“Our daily interactions with a wide range of Vietnamese companies – from large-cap listed companies to ultra-savvy small tech entrepreneurs – continually make us appreciate the strong parallels between Việt Nam’s economy in the 2020s and that of Japan. in the 1970s, when this country began its decades-long climb up the global value chain.

“We remain extremely optimistic about Việt Nam’s economic outlook and, by extension, the outlook for much higher stock prices in the years to come.” —VNS

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