Foreign firms are the growth engine for Vietnam’s high-technology exports, which reached 27% as a percentage of its total manufactured exports in 2014.
Its population is less than one-tenth of India’s and so is its gross domestic product. It may be growing at over 6% annually for the last three years, but India outpaces it by a whole percentage point more. So then why is it that Vietnam’s electronics exports are almost ten times that of India’s?
At a time when India’s electronics exports have hardly doubled over the last decade – and, in fact, have drifted down over the last few years – overseas sales from Vietnam in the sector have soared by a multiple of 23 from just $3.3 billion in 2007 to over $77 billion in 2016. India’s figure comes in at just $8.3 billion for 2016.
Comparing the two economies, while Vietnam’s GDP in 2016 at $201 billion is just a fraction of India’s $2.2 trillion, the former has made much faster progress than the latter in terms of per capita income. In 2010, the average Vietnamese citizen had an income of $1,297 in current dollars, compared to her Indian counterpart at $1,429. By 2016, the ASEAN member nation’s per capita GDP was almost a quarter than that of India, as per IMF estimates.
Vietnam’s attack on poverty too has been more successful than India’s. Between 1993 and now, its poverty ratio fell from 60% to just 13.5% as per its official poverty line. In 1993, more than half the population lived on less than $1.90 per day, the World Bank’s poverty measure; currently, just about 3% of the population remains below this income level. In India, 21.2% of citizens or 268 million people still have to be pulled up to over this baseline. The Southeast Asian nation also ranks higher in the UNDP Human Development Index, at 115 compared to India’s 131.
Yet, the disparity between the two economies is evident. India attracted $44 billion in FDI in 2015 while Vietnam garnered just $11.8 billion. In most metrics, from market size and number of engineers to R&D participation, India is simply much bigger.
Vietnam commenced its economic reforms process in 1986 with Doi Moi or the rejuvenation strategy. Liberalisation of both agricultural and non-agricultural sectors was undertaken to develop market institutions and expand the role of the private sector. International integration was a key facet of the reform era.
The Bilateral Trade Agreement with the US in 2001 provided it access to a large and rich market, as also opened it up to US investments. In 2006, Vietnam acceded to the WTO. Vietnam is a member of the ASEAN grouping, which is undertaking regional integration within itself and has also entered into many free trade agreements with partner countries and regions. The country concluded an FTA with the EU in 2016 which entered into force in October 2016. The EU is Vietnam’s fifth largest foreign investor.
While a growing number of foreign companies invested in the electronics space attracted by low-wage workers and favourable tax incentives, the entry of Samsung of the Republic of Korea into Vietnam in 2010 was a game-changer for its electronics exports (HS Code 85). The Korean giant started making smartphones in one of the poorest areas in Vietnam, in the northern part of the country. An entire township came up, employing thousands of workers and bringing in its wake several hundred foreign component makers.
In tandem, the local economy mushroomed with new hotels and restaurants, and many other companies came up as indirect outcomes of the Samsung investment. According to Bloomberg, Samsung has invested $15 billion in Vietnam and exported about $33 billion worth of mobile phones in 2015.
Intel is another high-technology MNC in Vietnam. Its chip testing and assembly facility in the country is its largest anywhere in the world, involving $1 billion of FDI. The facility came up in the Saigon Hi-Tech Park in 2010 and moved up the value chain to produce central processing units and systems on a chip. This is despite the fact that there were inadequate local suppliers. Intel is engaged in training and entrepreneurship development for domestic companies to increase localisation.
Foreign firms are the growth engine for Vietnam’s high-technology exports, which reached 27% as a percentage of its total manufactured exports in 2014. In contrast, high-technology exports accounted for 7.5% of India’s aggregate cross-border manufactured products sales in 2015.
There are several driving forces for Vietnam’s success in the high-technology sector. The country started as a home to labour-intensive manufactured products such as apparel and footwear, with companies such as Nike setting up shop in the 1990s. Footwear still remains Vietnam’s second largest export item. This built the familiarity with multinational companies and created a pool of workers able to meet the tight working conditions demanded by rigorous standards and international market deadlines.
Over the years, Vietnam also put in place an attractive tax regime for corporates. Corporate income taxes were progressively brought down from 25% to 22% in 2014 and 20% in 2016. Special packages are available for specific identified sectors to be promoted, including high technology. High-technology zones and some industrial areas also receive tax benefits. If a large manufacturing project is able to meet a certain minimum revenue or employ more than 3,000 workers within four years of operation, it is eligible for tax breaks. New investments will also attract favourable tax terms if they support the high-technology sector.
Preferential tax rates of 10% and 20% are possible for 15 years and ten years respectively for identified sectors, and further tax holidays may also be granted. Vietnam’s transfer-pricing regulations are aligned to the OECD’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. Regulations on advance pricing agreements came up in 2014.
Companies may also have received additional benefits in terms of cheap land, while the exchange rate has remained at competitive levels. Foreign companies are allowed to remit all profits, royalties and fees in hard currencies.
Vietnam’s attractiveness as an investment destination for foreign companies may have shrunk with the recent decision by the US to exit the Trans Pacific Partnership, a free trade agreement that was expected to deliver high benefits for Vietnam, a participating nation. However, it remains a viable option for manufacturers moving out of China.
This model of incentivising large anchor MNCs to undertake high investments even in the absence of local supply-chain capabilities seems to deliver strong results. With access to a convenient industrial park including well-developed amenities and strong connectivity for port evacuation, MNCs appear willing to invest and to engage in building local capacities by training workers and supporting related businesses.
India, which seeks to move up the share of manufacturing in its GDP, has much to offer global firms and can effectively scale up such a model. A similar system worked well when the Japanese auto major Suzuki Motor Corporation entered India as partner for Maruti in 1982 and set up a new supply chain with local ancillaries, some of which went on to attain a global profile as suppliers to original equipment manufacturers.
Instead of worrying about poor global trade growth and subdued global demand, India should invite top global companies to set up manufacturing facilities in India. The right incentive package and a stable policy structure could make Indian manufacturing an attractive proposition for overseas investments.
Sharmila Kantha is an author and industrial policy specialist.