Beyond Manufacturing: OECD Maps Vietnam's Road to High-Income Growth Through Quality FDI

The OECD's FDI Qualities Review of Viet Nam concludes that while foreign investment has been central to the country's economic success, future growth depends on attracting high-quality FDI that promotes innovation, skilled jobs, technology transfer, digital transformation, and green development rather than low-cost manufacturing alone. It urges governments, development partners, and private investors to strengthen policy coordination, invest in skills and R&D, modernise regulations, and build stronger links between multinational companies and local businesses to achieve sustainable and inclusive growth.

The Organisation for Economic Co-operation and Development (OECD), working with Vietnam's Foreign Investment Agency (FIA) under the Ministry of Finance, has called for a major shift in the country's investment strategy as it moves toward becoming a high-income economy by 2045. The report argues that Vietnam has successfully attracted foreign direct investment (FDI) over the past four decades, but future growth will depend less on the amount of investment and more on its quality. The OECD says the next phase should focus on investments that improve productivity, promote innovation, strengthen local businesses, create skilled jobs, support digital transformation, and accelerate the country's green transition.

Since the Doi Moi reforms in 1986, Vietnam has transformed itself from one of the world's poorest economies into a major manufacturing and export hub. Trade now equals almost 200% of GDP, making it one of the most open economies globally. Labour productivity grew by an average of 4.5% annually between 2000 and 2023, one of the fastest rates in ASEAN. Despite slowing global investment flows, Vietnam continues to attract some of Southeast Asia's largest FDI inflows, supported by trade agreements, investment reforms, and its strategic location within global supply chains.

Strong Investment Success but Limited Local Benefits

The report highlights that foreign companies have played a critical role in Vietnam's economic rise. Although they account for less than 3% of all formal enterprises, they generate 27% of total business revenues, 34% of wages, and 29% of formal employment. Their influence is even greater in manufacturing, where foreign firms account for 78% of revenues, nearly 80% of wage payments, and almost 90% of employment. They also provide jobs for around 40% of formally employed women, particularly in export-oriented industries such as electronics and garments.

However, the OECD warns that the current FDI model is reaching its limits. Most foreign investment remains concentrated in assembly-based manufacturing with relatively low value addition. Around 60% of inputs used by foreign firms are sourced locally, but 21% of these inputs come from other foreign companies rather than Vietnamese SMEs, limiting technology transfer and domestic industrial development. Public spending on research and development is only 0.4% of GDP, while greenfield investment in R&D accounted for just 1.9% of total FDI capital expenditure between 2020 and 2024, well below the OECD average of 3.7%. These figures suggest that Vietnam must strengthen innovation and build stronger links between multinational companies and domestic enterprises.

Policy Priorities for Government and Development Partners

The report recommends that policymakers shift from attracting any investment to targeting investments that deliver long-term economic value. It calls for better coordination among ministries responsible for finance, science, industry, labour, and digital development so that investment policies support national goals on innovation, skills, climate action, and industrial upgrading.

The OECD also recommends easing restrictions in knowledge-intensive sectors such as telecommunications, finance, and digital services, where advanced technology and innovation can generate higher productivity. Stronger enforcement of intellectual property rights, simpler licensing procedures, and more consistent regulations across provinces would improve investor confidence and encourage technology transfer.

Another important recommendation is to redesign investment incentives. Instead of relying mainly on tax holidays and reduced corporate income tax rates, the report suggests providing expenditure-based incentives that directly support research and development, workforce training, renewable energy, and green technologies. It also recommends creating transparent digital platforms that allow investors to easily access information on incentives, approvals, and regulations.

For international development partners, the report identifies opportunities to support innovation ecosystems, vocational education, SME development, digital infrastructure, renewable energy projects, and institutional reforms. Development agencies can also help improve labour market information systems, strengthen governance, and finance climate-resilient infrastructure needed for Vietnam's next stage of growth.

Opportunities and Risks for Businesses

The report says Vietnam remains one of Asia's most attractive investment destinations, particularly in sectors such as semiconductors, artificial intelligence, digital services, cloud computing, renewable energy, and advanced manufacturing. Around half of all greenfield FDI between 2020 and 2025 was directed towards digital or green sectors, showing a clear shift toward knowledge-intensive industries.

However, investors also face several challenges. Businesses report shortages of engineers, technicians, digital specialists, and renewable energy professionals. Only about 20% of foreign companies provide formal training to employees despite the growing demand for skilled workers. Regulatory differences between provinces, infrastructure gaps, and uncertainty in digital regulations also increase business costs. The OECD encourages companies to work more closely with universities, vocational institutions, and local suppliers to strengthen domestic value chains and improve workforce skills.

A Roadmap for Sustainable and Inclusive Growth

The report concludes that Vietnam is entering a decisive phase of economic development. The country's earlier success was built on attracting labour-intensive manufacturing, but future competitiveness will depend on innovation, technology, and sustainability. Policymakers are encouraged to strengthen supplier development programmes, increase support for research and development, modernise digital regulations, promote green investment, and improve coordination across government institutions.

The OECD also stresses that future investment should create broader social benefits. Women remain underrepresented in leadership positions despite their high participation in manufacturing, while investment continues to be concentrated in major urban centres. Policies that promote women's leadership, expand opportunities in less-developed regions, and strengthen environmental standards will help ensure that economic growth becomes more inclusive.

For governments, the report provides a roadmap to improve investment quality and long-term competitiveness. For development partners, it identifies priority areas where technical and financial assistance can accelerate reforms. For the private sector, it highlights emerging opportunities in high-value industries while underlining the importance of investing in innovation, local partnerships, workforce development, and sustainable business practices. Together, these reforms could transform foreign investment from a driver of export growth into a catalyst for innovation-led, resilient, and inclusive economic development.