Vietnam has emerged as a low-cost manufacturing hub in Asia by beating China and India. According to the Economist Intelligence Unit (EIU), Vietnam performed better than its peers in foreign direct investment (FDI) policy and foreign trade and exchange controls.
Several factors turn Vietnam into a low-cost manufacturing hub including the incentives for international companies for setting up manufacturing units for hi-tech products, the low labor rates, and the free trade agreements.
The EIU report showed that Vietnam has scored 6 out of 10 in foreign direct investment policy and 7.3 in foreign trade and exchange controls. India has scored 5.5 in FDI policy and 5.5 in foreign trade and exchange controls. China has scored 5.5 in FDI policy and 6.4 in foreign trade and exchange controls.
In the labor market, Vietnam has scored 5.6 and India has scored 5.4. However, China has scored 5.7 which is more than both Vietnam and India.
Of all the 14 countries in Asia, 12 countries have fared better than India in the FDI policy and labour. Only Indonesia and Bangladesh fared low in their FDI policy and labour.
Pakistan fared worse than India in foreign trade and exchange controls. Bangladesh scored less than India in infrastructure.
As per the EIU report, Vietnam will continue to offer incentives to international firms for investment. But its domestic supply linkages in more advanced manufacturing will remain limited for the next 10 years.
Vietnam’s low-skilled manufacturing workers will remain competitive for years. But the shortage of specialised labour will become a disadvantage for business development.
Vietnam’s free trade agreements have a tremendous impact on its trade relations and have helped to reduce export costs. For example, the EU-Vietnam free trade agreements remove tariffs on several products exports to the EU.
Even after the slowdown in trade growth in major economies like the United States, Japan, and China, Vietnam remains an outlier. Vietnam’s import-export turnover crossed $500 billion and its economy grew by 8% in 2019.