Why Is Vietnam Korea’s Favorite FDI Destination in ASEAN?

Dr. Hwy-Chang Moon's picture

The Association of Southeast Asia Nations (ASEAN) has become a major destination for Korean foreign direct investment (FDI). In 2016, this region alone attracted about one half of Korea’s outward FDI (OFDI). Moreover, one half of Korea’s FDI flows within this regional bloc were concentrated in Vietnam. Korea is the biggest investor in Vietnam, far ahead of the second largest, Japan.

Many argue Vietnam’s abundant cheap labor pool is the main reason behind Korean firms’ location choice. In other words, the latter’s OFDI is efficiency seeking. However, the majority of Korean investments are concentrated in the most expensive regions in Vietnam, in Northern clusters around Hanoi and Southern clusters near Ho Chi Minh City. Therefore, what is more important is not cheap labor but other strategic factors, namely the synergistic benefits arising from clusters. First, these clusters are linked with neighboring countries (e.g., China, other ASEAN members). Second, many Korean small- and medium-size enterprises (SMEs), who are parts and components suppliers, followed Korea’s large electronics firms by locating near the latter’s manufacturing plants. Third, because of Vietnam’s improved business environment in recent years, higher value-added activities (e.g., R&D centers) are being established near traditional manufacturing plants to create or maximize the synergy effects between R&D and manufacturing. Lastly, the economic development originating from manufacturing-focused FDIs generates business opportunities for other industries such as construction, real estates, and finance. This economic boom, in turn, encourages faster growth in distribution and other service sectors (e.g., fast food, entertainment). From this analysis flow two important implications. First, if the basis for FDI inflows into Vietnam is the result of comprehensive cluster effects, Vietnam’s model cannot easily be copied by other competing developing countries. Second, clusters create larger positive-sum benefits and reduce anti-foreignness for both Korea and Vietnam as they create larger mutual benefits.