Assessment of factors influencing the ability to attract investment of vietnam’s electronic products and components industry

ASSESSMENT OF FACTORS INFLUENCING THE ABILITY TO ATTRACT INVESTMENT OF VIETNAM’S ELECTRONIC PRODUCTS AND COMPONENTS INDUSTRY Subject: Economics of Investment... An Analysis of Factors I

ASSESSMENT OF FACTORS INFLUENCING THE ABILITY TO

ATTRACT INVESTMENT OF VIETNAM’S ELECTRONIC PRODUCTS AND COMPONENTS INDUSTRY

Subject: Economics of Investment

CONTRIBUTION

TABLE OF CONTENT LIST OF FIGURES OE EE I IIE EEE EE EEE EU A UIE EE eee eeeeeeeeeae 1

3 Relationship between RCA and Diamond Theory Ăn nhnHHHee 9

II An Analysis of Factors Influencing the Ability to Attract Investment of

Vietnam’s Electronic Products and Components Industry .::cccceeeseeesseeeeeeeeeeees 10 I1 rể hot s6 nha a ằ 10

b._ Labour Supply and Wages ie i kh 11

2 Demand CondifionS nh KH 14

3 Related and Supporting Indus†ri@s LH Ha KH ket 17

4 Firm Strategy, Structure, and Competition ch Ha He 20

5 Chance Factors nh eốem(.44a 24

IV Policy Recommendation - ng kh kh rệt 26

CONCLUSION ooo .a.a.a (i1ÍI 28

LIST OF FIGURES

Figure 1.1 Vietnam’s largest export commodity group 2023 - nhe 4

Figure 1.2 Vietnam’s electronics market projected Growth 0.00 eee eeseeereereeee tere 5

Figure 1.3 Revenue of electronics market in Vietnam from 2018 to 2027 6 Figure 2.1 The determining factors of Diamond Theory ce eee eeeeeteeeeneeeenns 7 Figure 3.1.1 Comparison of population pyramids for Vietnam and Japan, 2023 12 Figure 3.1.2 Gross monthly minimum wage levels in some Asian countries, 2019 13 Figure 3.2.1 Forecast of global loT connections by Connectivity Type from 2019 to

Figure 3.2.2 Forecast of growth of global consumer electronics volume 2018-2028 15

Figure 3.2.3 Forecast number of 5G mobile subscriptions worldwide from 2019 to 2029,

Figure 3.2.4 Size of the global industrial automation market from 2020 to 2025 17 Figure 3.4.1 Export value of electronic devices, computers and computer parts in Vietnam from 2016 to 2025 LL LH KHE ky 21 Figure 3.4.2 General mapping of an electronics industry global supply chain 22 Figure 3.4.3 EU imports of high-tech products, top six partners, 2011-2021, Unit €

Figure 4.1 Value-added “smiling curve” in global supply chains .:ccccceeeeeeeeeeeeees 26

ABSTRACT

This report evaluates factors influencing Vietnam’s ability to attract investment in its electronic products and components industry The analysis is grounded in Porter’s Diamond Theory and Revealed Comparative Advantage (RCA), exploring Vietnam's competitive position and growth potential within the global electronics supply chain Vietnam's policies supporting foreign direct investment (FDI), industrial infrastructure, and local supplier development have positioned the country as a hub for electronics manufacturing, attracting major multinational corporations However, challenges persist, including a limited focus

on high-value production and dependence on foreign technology Policy recommendations

are provided to enhance Vietnam's competitiveness by strengthening local R&D, expanding supporting industries, and fostering technology transfer The findings highlight

opportunities for Vietnam to move up the value chain, emphasizing strategies for sustainable growth in its electronics sector

Keywords: Electronics products and components, electronics industry, foreign direct investment (FDI), Porter’s Diamond Theory, Revealed Comparative Advantage (RCA), Vietnam investment attraction

Vietnam’s electronic products and components industry is largely fueled by a mix of domestic policy reforms and global shifts Major multinational corporations have established production bases in Vietnam, attracted by relatively low labor costs, proximity

to key Asian markets, and government incentives for high-tech industries However, despite the advantages, the sector faces various challenges, such as limited high-tech infrastructure, fluctuating skilled labor availability, and rising competition from neighboring countries like China, India, and Thailand These factors highlight the need for a comprehensive evaluation

of the key determinants that influence the attractiveness of Vietnam’s electronics sector for potential investors

While previous research has focused on general factors that impact foreign direct investment (FDI) in developing countries, few studies have specifically targeted Vietnam’s electronics industry, a rapidly evolving and h igh-potential sector This research aims to assess and analyze the key factors influencing the ability of Vietnam's electronic products and components industry to attract investment By examining these factors in detail, the study seeks to provide valuable insights for policymakers, industry leaders, and potential investors, ultimately supporting the growth and competitiveness of the industry in both regional and global markets

CONTENT

| Market Overview

The Electronic Products and Components market in Vietnam is defined as the production

of computer hardware, electronic components, telecommunications equipment, electronic devices, and optical instruments With regards to the market size, the electronics industry contributed approximately 17.8% of Vietnam’s overall manufacturing sector in 2023,

according to data from the General Office of Statistics This significant share highlights

both the scale and importance of electronics in the country’s industrial landscape, as global and domestic demand for electronic products continues to rise

Computers, Phones & Machinery, Textiles& Footwears Vehicles& Wood & Aquatic Iron & steel

electronic accessories equipment, garments spare parts wood goods

products & tools & spare products

components parts

2022 m= 2023 Unit: Billion USD

Figure 1.1 Vietnam's largest export commodity group 2023 (Source: General Office of Statistics) Looking forward, Vietnam’s Electronic Products and Components market is poised for sustained growth In 2024, the industry is projected to generate a value added of approximately US $18.9 billion, reflecting the wealth created by industry activities The market is expected to grow at a compound annual growth rate (CAGR) of 3.31% from 2024

to 2029, indicating steady expansion This growth trajectory reflects the increasing investments in production facilities, advancements in technology, and Vietnam's advantageous position within global supply chains

Figure 1.2 Vietnam’s electronics market projected growth (Source: Statista)

Worldwide, Viet Nam ranked 12th in world exports of electronic products in 2020, according to the Industry Agency under the Ministry of Industry and Trade (MoIT) In the first nine months of 2024, electronics, computers, and components exports reached US

$52.8 billion, while imports stood at US $79.1 billion, bringing the total trade value of exports and imports to USD 131.9 billion Given the current import value and its high growth rate, there is a strong basis to anticipate that the import turnover for electronics, computers, and components could become the first product category in history to reach US

$100 billion in import value by the end of 2024

Vietnam's electronics market witnessed remarkable growth between 2016 and 2024, largely fueled by foreign direct investment (FDI) initiatives from major global tech players During this period, multinational corporations like Samsung, LG, and Foxconn invested heavily in high-tech manufacturing facilities within Vietnam, reinforcing the country’s appeal as a rising hub for electronics production This surge in FDI transformed the electronics sector into one of the main pillars of Vietnam’s industrial economy By 2028, the electronics sector is forecast to reach US $8748.65 million, demonstrating its rapid expansion and the

substantial impact of FDI-driven growth.

10000

8748,65 8341,5

Figure 1.3 Revenue of electronics market in Vietnam from 2018 to 2027 (Source: Statista)

Further illustrating the sector's dynamism, current trends in the electronics manufacturing sector were driven by two main product categories: handsets and their components, which totaled US$57.5 billion, and electronics, computers, and other related components, which

contributed US$50.8 billion These categories saw substantial growth rates, with handsets

and components increasing by 11.5% and electronics and computer components rising by 13.6% compared to 2020 This steady upward trend indicates the sustained demand for Vietnamese-made electronics on the global market, spurred by rising production capabilities and a strategic focus on high-demand electronic goods

The Vietnamese electronics industry, while growing rapidly, stands at a critical juncture

To maintain this upward trajectory, Vietnam needs to take advantage of factors influencing the ability to attract investment, thus not only strengthen the industry’s resilience to global economic shifts but also elevate the country’s position as a competitive player in the global electronics market

Theoretical Background

1 Diamond Theory

Diamond Theory, developed by economist Michael Porter, is a framework for analyzing a nation's competitive advantage in a specific industry Also known as Porter’s Diamond Model, it aims to explain why certain countries or regions excel in particular sectors by examining the interplay of four main factors Porter theorized that these factors create a

“diamond” shape when visualized, highlighting how they collectively contribute to the development and global competitiveness of an industry within a specific location

The four components of Diamond Theory are Factor Conditions, Demand Conditions,

Related and Supporting Industries, and Firm Strategy, Structure, and Rivalry

e Factor Conditions: Availability of resources, such as skilled labor, technology, and

Figure 2.1 The determining factors of Diamond Theory

7

Porter’s Diamond Theory illustrates how these four elements combine to build a thriving industrial environment, where companies are driven to innovate, adapt, and compete on a global scale The model underscores that a nation’s competitive advantage is shaped not only by natural endowments but also by the dynamic, interconnected factors that stimulate growth and resilience within specific industries

2 Revealed Comparative Advantage

Revealed Comparative Advantage (RCA) is an economic concept used to determine a country’s relative advantage or disadvantage in the production and export of a specific good

or service compared to other countries RCA is based on the theory of comparative advantage, which suggests that countries tend to specialize in producing and exporting goods in which they have a lower opportunity cost relative to other nations

RCAis calculated using the Balassa Index, which compares the share of a particular product

in a country’s total exports to the share of that product in global exports The RCA formula

Where:

Xi: Export value of product or sector j from country i,

Xit! Total export value of all products from country i,

Xwj: Total export value of product or sector j worldwide,

Xwt! Total export value of all products worldwide

lf the RCA value is greater than 1, the country is considered to have a comparative advantage in that product, indicating that it exports more of that product relative to global averages An RCA less than 1 implies a comparative disadvantage in that product Calculation for the electronic products and components market in the year 2023:

As the RCA of this industry is 2.53, it implies that Vietnam has a strong comparative

advantage in this sector, as well as being an attractive area for both domestic and foreign

investment This suggests that the country is particularly competitive in the electronics market on the global stage Moreover, the electronic industry is a relatively important part

of the country’s export portfolio, possibly indicating an industry where the country has developed specialized skills, technology, or cost advantages Policymakers might prioritize supporting or expanding this sector, given its strength in global trade Overall, a high RCA indicates a strong position of this industry that Vietnam can leverage for economic growth and potentially greater influence in international trade for that sector

3 Relationship between RCA and Diamond Theory

Revealed Comparative Advantage (RCA) and Diamond Theory both e xplore how countries

achieve competitive advantages in certain sectors, but they approach it from different perspectives RCA quantifies a country’s export strength in a sector relative to the world average, showing where a nation has an edge in trade Diamond Theory, however, offers

an analytical framework for understanding why certain industries thrive

The two frameworks complement each other RCA highlights which sectors a country is competitive in, and Diamond Theory can explain why and how these successes contribute

to that comparative advantage Together, they help policymakers and businesses identify and nurture competitive sectors

An Analysis of Factors Influencing the Ability to Attract Investment of

Vietnam’s Electronic Products and Components Industry

1 Factor Conditions

a Policy

Viet Nam’s Law on Foreign Investment, which was first launched in 1987 and most

recently updated as the Law on Investment 2020, sets out the statutory right s for foreign

investors to contribute to the country’s economy through: (i) business corporate contracts; (ii) joint ventures; and (iii) 100 percent FD! businesses The law was one of the first laws enacted at the beginning of the Doi Mdi transition from a centrally planned economy to a market economy in 1986

In order to attract more foreign and domestic investment for the development of industries, Vietnam has implemented several unique policies to transform itself into an electronics production hub, setting itself apart from other countries

Firstly, the Vietnamese government has implemented some favorable foreign investment policies Vietnam's Law on Investment, notably updated in 2020, allows for 100% foreign ownership in key sectors like electronics, contrasting with more restrictive policies elsewhere in Asia For instance, China has significant restrictions on foreign investments

in areas such as technology, telecom, and critical infrastructure Foreign investors often need approval from various regulatory bodies, which can delay or complicate entry However, in Vietnam, the favorable foreign investment law ensures robust rights for

foreign investors, enhancing the appeal of Vietnam as a production base

Secondly, strategic industrial zones with targeted incentives are also carried out Vietnam has established numerous industrial zones specifically catered to electronics manufacturers

In 2024, there were 429 industrial zones and economic zones operating in the country These zones provide tax incentives, land rental discounts, and prioritized utilities, streamlining the setup process and reducing operational costs, a strategy more extensive than those of some regional competitors Tax incentives play a key role in attracting high- tech investment, focusing on corporate income tax (CIT) breaks for companies operating

in high-tech industries, zones, and underdeveloped regions The key incentives are Reduced Corporate Income Tax (CIT) Rates and Additional Tax Holidays

Regarding the Reduced Corporate Income Tax (CIT) Rates, new foreign-invested firms in

high-tech manufacturing can benefit from preferential CIT rates of 10% for up to 15 years

and 17% for up to 10 years If the projects produce goods with “international

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competitiveness,” these reduced rates can be extended up to 15 years Furthermore, with regards to the Additional Tax Holidays, by depending on the location and type of project, investors may qualify for additional exemptions and reductions: (1) Four-year CIT exemption followed by a 50% CIT reduction for nine ye ars for companies eligible for the 10% CIT rate; (2) Four-year CIT exemption followed by a 50% CIT reduction for five years for companies operating in designated areas; (3) Two-year CIT exemption and 50% CIT reduction for four years for those operating in certain industrial zones or specific areas Thirdly, the government put into practice incentivized technology transfer policies Through the 2017 Technology Transfer Law, Vietnam encourages foreign firms to share advanced technology with local enterprises This law, supplemented by programs for skills training and joint projects, provides a more active approach to technology transfer compared to typical mandates in other countries The Vietnamese government has also

implemented strategic policies to advance technology and automation in manufacturing

through Industry 4.0 initiatives Key among these is the National Digital Transformation Program, launched on June 3, 2020, with goals for 2025 to boost productivity and competitiveness

Last but not least, the Vietnamese government also provides significant support for local supplier development and SMEs Vietnam has implemented robust policies under its 2017 SME Support Law to elevate local businesses, especially SMEs, to meet international standards, integrating them into the electronics industry supply chain This includes tax incentives, subsidized loans, and training - a comprehensive approach often focused only

on larger firms in other nations Additionally, Vietnamese authorities, such as those in Bac

Ninh, actively collaborate with foreign corporations like Samsung to enhance local suppliers’ production processes These initiatives, including consulting programs, help local suppliers achieve the quality and operational standards needed to join global supply chains, distinguishing Vietnam’s supportive approach from others

b Labour Supply and Wages

With a youthful workforce, competitive wage structure, and potential for productivity growth, Vietnam’s labor market has enabled it to attract multinational corporations focused

on cost-effective manufacturing solutions By comparing Vietnam with other key regional players, it becomes clear why Vietnam stands out as a production hub rather than occupying other roles in global supply chains

Firstly, Vietnam’s demographic advantage, marked by a youthful labor force and a “golden population structure” expected to last until 2039, sets it apart from regional competitors

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such as Japan, China, and Thailand, where aging populations limit the availability of young workers As shown in Figure 3.1.1: Comparison of Population Pyramids for Vietnam and Japan, 2023, Vietnam’s population pyramid has a broad base with a substantial proportion

of young individuals, contrasting with Japan’s narrower base and larger elderly population This favorable demographic profile allows Vietnam to provide a steady and growing workforce, ideal for labor-intensive production Notably, Vietnam’s labor force - totaling 54.8 million people aged 15 and above (GSO 2020, p 89) - ranks among the largest in Southeast Asia, enhancing Vietnam’s appeal to companies needing a reliable supply of entry- to mid-level workers

100+ Male 00% 0.0% Female 100< Female

2021, Vietnam’s gross monthly minimum wage level in 2019 was $127, which is comparable to the Philippines at $141 but significantly lower than Thailand at $262 and Malaysia at $266 This substantial wage difference makes Vietnam a more attractive option for companies that prioritize cost-efficiency in labor-intensive industries

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in minimum wages across Southeast Asia, averaging an 11.3% annual increase between

2010 and 2019 While wage growth has outpaced inflation, enhancing workers’ quality of

life, Vietnam’s wages remain lower than those in other regional production hubs This

controlled wage increase allows Vietnam to remain competitive in terms of labor costs, reinforcing its position as an attractive destination for foreign companies

Finally, unlike high-cost locations such as South Korea or Singapore, Vietnam possesses untapped potential for productivity enhancement, which further solidifies its role as a production hub The combination of relatively low wages and ongoing workforce skill development provides an opportunity for Vietnam to increase value-added output in manufacturing This pathway to higher productivity ensures that Vietnam can sustain its competitiveness as a low-cost manufacturing base while responding to rising wage

demands According to the Japan External Trade Organization (JETRO) survey on business

conditions of Japanese companies overseas in the 2022 fiscal year, about 60% of Japanese firms planned to expand their operations in the next 1-2 years, the highest rate in Southeast Asia One reason for this is that 85% of Vietnamese workers in the electronics sector meet the technical and soft skill requirements of Japanese companies

In conclusion, Vietnam’s blend of a young labor force, competitive wage structure, and

opportunities for productivity growth make it uniquely suited to serve as a production hub

in the global supply chain These factors not only differentiate Vietnam from other regional

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players but also enable it to offer an optimal environment for labor-intensive, cost-sensitive manufacturing operations

2 Demand Conditions

The demand for electronic components is surging, driven primarily by the rapid

advancements in loT (Internet of Things), mobile communication systems, and artificial intelligence These three key factors are propelling growth in the electronic components industry, laying the foundation for a smarter, fully automated future

a The increasing demand for smart devices and loT connectivity

The global demand for smart devices and loT connectivity has seen remarkable growth in

recent years, driving substantial increases in the need for electronic components such as

sensors, microprocessors, and connectivity modules This shift is fueled by applications across sectors, ranging from smart homes to industrial automation

Firstly, the loT Analytics report reveals substantial growth in connected loT devices, expected to reach 18.8 billion by the end of 2024, a 13% increase from 2023's 16.6 billion devices Additionally, 51% of enterprises plan to increase loT budgets in 2024, with 22%

of those expecting a 10% or greater rise compared to 2023 Besides that, the loT market is anticipated to grow steadily, with estimates of 40 billion connected devices by 2030, driven

by increased adoption across industrial and consumer sectors This explosion in loT devices reflects not only the consumer’s desire for convenience and smart home solutions but also

an industry shift toward optimized operations and real-time data collection in manufacturing, logistics, and urban infrastructure

Number of global active loT connections (installed base) in billions

2019a 2020a 2021a 2022a 2023a 2024f 2025f 2026f 2027f 2028f 2029f 2030f TAG

Figure 3.2.1 Forecast of Global loT Connections by Connectivity Type from 2019 to 2030

(Source: loT Analytics) 14