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posted on 11 April 2015

Is Vietnam Still an Attractive Market for the Japanese?

Written by , GEI Associate

In recent years, Vietnam has been one of the most popular destinations of Japanese outward investment. However, according to Japan External Trade Organization (JETRO), Japanese FDI in Vietnam has decreased by 65% in 2014, with the total registered capital of $2.02 billion for the entire year. The manufacturing sector, which accounts for the largest proportion in Japanese FDI in Vietnam, dropped from nearly $1.2 billion in 2013 to about $830 million in 2014, by approximately 30%.

There are several reasons that contribute to this considerable decrease. The 25% depreciation of the yen is one major reason that has made it too costly for companies to make outward investments. The difficult economic situation in Japan and the global recession also contribute to the decrease. Moreover, as Vietnam net mentions, there are many complicated investment registrations in Vietnam. For example, the Vietnamese laws prohibit the import of old machines. As a result, companies could not bring the existing equipment to operating factories in Vietnam.

Nevertheless, Vietnam is still an attractive market and continues to lure Japanese investors for 3 main reasons:

First, Japanese have the advantage of expanding business in Vietnam. They are very familiar with the business environment and practices of Vietnam due to their long history of cooperation. According to Nguyen Van Toan, the Vice President of the Overseas Investment Business Association:

The two countries have over 40 years of cooperation. Japan will still be the leading investor in Vietnam in the coming time. As the manufacturing sector is in trouble, they will search for fields with the ability to survive or markets with growth potential.

The JETRO report certainly proves what he said: FDI in the field of construction and real estate increased from 3% in 2013 to 6% in 2014, while the capital had risen to 13%, compared with 2% a year ago. In 2015, many new and existing Japanese investors will also promote cooperation in the agricultural sector of Vietnam. Many Japanese businesses operating in agriculture have traveled to Vietnam to learn about the local sector and seek partners, a JETRO representative said. Many other fields in Vietnam are still lucrative.

Second, even the manufacturing sector is still competitive with its low wage labor. In fact, although there was a considerable decrease in FDI, there was no change in the actual percentage of profitable Japanese businesses in Vietnam (60%). Meanwhile, the Vietnamese government is improving the business and investment environments, including easing complex administrative procedures and infrastructure incompletion situations. Japanese small and medium enterprises (SMEs) that face various challenges in the domestic business environment, such as shrinking markets due to an ageing population, could accelerated their migration abroad to survive. Vietnam, on the other hand, with a population of 90 million people growing to 100 million, and a median age of 30, is a market with great potential. A survey, which was conduced in January, found that 40.7% of 3,750 respondents had plans to invest in Vietnam.

Third, Vietnam is the center stage in the battle between China and Japan for economic preeminence in Southeast Asia. In regard to Vietnam, China has rapidly increased its investment in the country. It has constructed a series of coal-fired power plants in the last 10 years. However, according to the Wall Street Journal, these plants regularly break down or run below full capacity. Also, some Chinese firms bring in their own workers instead of hiring locals. Furthermore, the territorial disputes over South China Sea after the oil-rig incident has worsened the relationship with China and prompted Vietnam to diversify and rely less on Chinese investment. Said Philippa Brant, a China aid expert at the Lowy Institute for International Policy:

What we're starting to see now is that countries don't want to become too reliant on economic support from China... The reality is China's aid isn't inherently better.

In response, Japan is viewing Vietnam's caution toward Chinese aid as an opportunity to increase its influence in Southeast Asia. As Hiroshi Fukada, Japan's ambassador to Vietnam, told the Wall Street Journal:

[Vietnam] has become much more important for us, taking into consideration the maritime security situation in the East [China Sea] and the South China Sea. Japan and Vietnam share common interests and an understanding of how to work together to keep and establish peace and stability, especially in terms of maritime security.

Taking this opportunity, Japan could increase its investment and ODA support, strengthening diplomatic ties. Japanese firms would also transfer more capital to Vietnam from China, due to the territorial disputes over a group of islands (known as the Senkaku islands in Japan and the Diaoyu islands in China), as well as the boycotts of Japanese products in China. More and more companies would start to actively pursue the "China plus one strategy". Vietnam is thus still a popular foreign investment destination.

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