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The reason why India is not yet a competitor for FDI inflows into Vietnam
Date: 5/25/2023 1:50:26 PM
Financial experts assert that India has not been a threat to FDI inflows to Vietnam until now.


Foreign direct investment (FDI) is one of the most important factors driving Vietnam’s economic growth. However, recently, two potential risk factors for Vietnam’s FDI inflows have emerged: Vietnam may be losing its competitiveness in FDI compared to India, Malaysia, and Indonesia. And the new global corporate minimum tax regime will reduce the attractiveness of Vietnam as an FDI destination by limiting the tax incentives available to potential FDI investors.

Vietnam continues to attract stable FDI inflows

Vietnam continues to attract stable FDI inflows

India is not yet a competitor to Vietnam in terms of FDI inflows

Facing these concerns, Mr. Michael Kokalari, CFA, Chief Economist of VinaCapital, said that India has not been a threat to FDI inflows into Vietnam until now.

Pointing out the reason, Michael Kokalari said: Apple’s announcement this past April about ambitious plans to expand iPhone production in India made a lot of news, but this was also consistent with Other multinational corporations are investing in India mainly to produce products for the domestic consumer market and this is very different from the purpose of investing in Vietnam.

Specifically, Vietnam is pursuing the "East Asian Development Model" - this is also the approach that economies such as "Asia’s Tiger" have used to become rich. This economic growth strategy focuses on manufacturing products for export to the US and other developed countries. Most multinational companies investing in Vietnam are contributing to that effort. Nearly all products manufactured in Vietnam are intended for export, especially to the US - Vietnam’s largest export market (accounting for more than a quarter of export turnover).

In contrast, India is pursuing a strategy of domestic market growth, so multinational companies invest in the country seeking to profit from a rapidly growing middle class rather than seeing it as a production facilities for export. For example, Apple’s iPhone sales in India have exploded in recent years, as can be seen in the table above, so Apple has poured money into India to increase its iPhone production capacity there, which has not been keep up with domestic demand.

Of the 7 million phones the company sold in India last year, only 6.5 million were made domestically, with the rest still having to be imported to meet demand. This explains Apple’s motivation to invest in India to meet rising domestic demand.

In addition, there are currently two main reasons why companies are not investing heavily in India to produce goods for export: issues related to the workforce (including qualifications) and labor law. Strict. Factories in India that employ more than 100 people need government approval before laying off any employees. The “Make in India” program launched in 2015 to attract FDI with the promise of tax incentives is seen as having failed to attract investment from abroad, partly for reasons such as: due to the above.

“We do not think that India can hinder FDI inflows to Vietnam and believe that FDI will likely remain one of Vietnam’s key growth drivers in the coming years. The wave of FDI into India should not be seen as a shift of investment from Vietnam," said Michael Kokalari.

As for the other countries, Malaysia and Indonesia, according to Mr. Michael Kokalari, some observers believe that FDI inflows into Malaysia and Indonesia have increased sharply in the past two years, while Vietnam’s registered FDI capital is almost did not increase significantly.

However, investments in Malaysia and Indonesia are mainly aimed at promoting production of products that Vietnam does not produce, including electric vehicle (EV) batteries. Meanwhile, Vietnam’s high-tech FDI inflows still focus on assembling consumer electronics and other high-tech products as Vietnam’s capacity has not yet expanded into high-tech industries. higher added value such as data center and cloud computing.

Global corporate minimum tax will not reduce FDI inflows into Vietnam

FDI companies investing in Vietnam often enjoy preferential tax rates, which can include 0% in the first years of operation, then gradually increase to a corporate income tax rate of 20% over a period of time. can be up to 10 years.

In 2021, more than 100 countries (including Vietnam) agreed to the OECD’s proposal to introduce a global corporate minimum tax (GMT) of 15% from 2023 on businesses with a combined income. over 850 million USD. The implementation of this agreement was then delayed to 2024 and it is not clear if the US, China and India will participate in the plan.

Vietnam is preparing to implement a minimum tax regime next year, and about 70 companies in Vietnam could face an increase in tax rates if the new tax regime is applied. At the same time, several emerging markets in the region are said to be working on alternative supports, where some of the additional tax revenues will be channeled into a “business support fund” to subsidize some of the costs. production costs of those companies (for example, subsidizing electricity prices, supporting the cost of building new factories, supporting housing for workers, etc.), in order to offset the burden of paying taxes at a low rate. higher than that of companies.

More importantly, low tax rates are not the most important factor in a company’s decision on where to invest in a new factory, according to a survey by the World Bank and other organisations. Other factors such as political stability, favorable business environment, workforce (quality & wages) and infrastructure play a more important role.

“The global minimum tax rate is unlikely to hinder Vietnam’s FDI inflows due to the fact that tax incentives are not the main attraction for setting up factories in Vietnam. Moreover, it is likely that Vietnam will have alternatives to the global minimum tax rate when this mechanism is implemented," said Mr. Michael Kokalari.

(Source:Báo Công Thương)
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