Vietnam’s SEZ Boom Attracted Investment but Left Domestic Firms Behind

An ADB study finds that Vietnam’s special economic zones successfully attracted foreign investment, boosted jobs, and increased revenues for foreign firms, helping transform the country into a major manufacturing hub. However, the research warns that SEZ expansion may have disadvantaged domestic private businesses and weakened aspects of local governance, highlighting the need for policies that balance foreign investment attraction with stronger support for local firms and institutional reforms.

A new study by the Asian Development Bank (ADB), drawing on data from Vietnam's Ministry of Planning and Investment, the National Statistics Office, and the Provincial Competitiveness Index (PCI) developed by the Vietnam Chamber of Commerce and Industry, offers fresh insights into how special economic zones (SEZs) have shaped the country's economy. While the zones have successfully attracted foreign investment and created jobs, the research suggests they may also have weakened conditions for domestic businesses and created governance challenges.

How SEZs Helped Transform Vietnam

Since the 1990s, Vietnam has used SEZs as a key tool to attract foreign direct investment. These zones offer investors benefits such as tax incentives, easier administrative procedures, and better access to land and infrastructure. By 2020, the country had approved nearly 600 SEZs spread across most provinces.

The strategy helped turn Vietnam into a major manufacturing and export hub. Global companies, including Samsung and Intel, established large operations in the country, creating jobs and boosting exports. According to the study, provinces with greater SEZ coverage experienced significant growth in employment, revenues, and the number of foreign-invested firms. Joint ventures between foreign and domestic investors also benefited from the expansion.

Domestic Firms Struggle to Keep Up

The study, however, finds that the gains were not shared equally. While foreign-invested firms expanded, domestic private companies experienced declines in revenues and firm numbers in provinces with greater SEZ exposure.

This suggests that incentives designed to attract foreign investors may have unintentionally placed local businesses at a disadvantage. Many domestic firms operate outside SEZs and therefore do not enjoy the same benefits available to multinational companies. As a result, foreign-led growth has not always translated into stronger local business development.

For policymakers, this is an important finding. Attracting investment is only one part of economic development. Ensuring that domestic firms can grow, compete, and connect with global supply chains is equally important for long-term prosperity.

A Mixed Impact on Business Governance

The research also examined how SEZs affected the broader business environment. Surprisingly, provinces with larger SEZ footprints performed worse on several governance indicators.

Businesses reported more difficulties accessing land, obtaining legal and planning information, and operating in a transparent regulatory environment. The study also found evidence of increased informal charges and stronger perceptions of preferential treatment for large foreign and state-owned enterprises.

These findings suggest that while SEZs can create attractive conditions inside designated zones, they do not automatically improve the wider business environment. In some cases, they may even reduce incentives for broader reforms.

Why the Findings Matter Beyond Vietnam

The study carries lessons for many developing countries that rely on SEZs to attract investment. Governments often view these zones as quick ways to generate jobs and industrial growth. The findings confirm that SEZs can be highly effective in attracting foreign capital.

However, the research also shows that investment incentives alone cannot replace good governance. Transparent regulations, fair competition, secure property rights, and support for local businesses remain essential for sustainable economic growth.

Countries that focus exclusively on attracting foreign investors may risk creating economic enclaves where growth is concentrated within SEZs while domestic firms struggle to benefit.

A Policy Roadmap for the Future

The study's main message is not that SEZs should be abandoned, but that they should be complemented by broader reforms. Policymakers can use the findings to design more balanced industrial strategies that promote both foreign investment and domestic enterprise development.

This means strengthening links between multinational companies and local suppliers, improving transparency in policymaking, reducing informal costs, and ensuring that domestic firms have access to the resources needed to compete. It also means measuring success not only by the amount of investment attracted but by how much value is created across the wider economy.

As Vietnam seeks to move up the global value chain, the challenge will be turning the success of its SEZs into broader economic gains. The ADB study suggests that the country's next stage of development will depend on creating a business environment where both foreign investors and domestic firms can thrive together.