Mr. Tae-shin Kwon, President and CEO of the Korea Economic Research Institute, discusses the economic relations between Vietnam and South Korea.
■ What are your thoughts on the economic relations between the two countries?
Relations have reached the stage of developing a strategic partnership beyond simple economic cooperation and maintaining growth in mutual economic cooperation. The relationship between our two countries has developed, especially economically, since diplomatic ties were established on December 22, 1992. Former State President of Vietnam Tran Duc Luong visited South Korea in August 2001, resulting in a more comprehensive alliance. The relationship is expanding economically, culturally, and diplomatically, and it has changed from investing simply in manufacturing sectors to becoming a key economic partnership, being mutually reciprocal and long term through free trade agreements (FTA), supporting the development of nuclear power stations, conducting joint research and development (R&D) efforts, and training technical professionals.
■ In which sectors are South Korean investors interested in investing in Vietnam?
South Korean investors are interested in high value-added industries, such as electrical equipment and electronic components and the services sector. I see a shift in the investment trend, from labor intensive industries to higher value-added industries. Meanwhile, diversification has progressed. Investment in the textile manufacturing industry has moved to the primary metal, electrical equipment, and electronic component industries. Investment in cyclical industries such as real estate and construction remains healthy but is gradually declining. South Korean investors are seeking opportunities to invest in culture, tourism, and services, in addition to manufacturing, while investment in logistics and the services sector is also growing.
South Korean companies (especially the leading 10~20 conglomerates) are now interested in developing manufacturing bases (which may include not only manufacturing facilities but also R&D and design facilities). In fact, South Korea ranked first in foreign direct investment in Vietnam in 2014, due to intensive investment by major South Korean companies. For example, Samsung and LG established factories in Vietnam last year, spending $5.8 billion, which led to South Korea being ranked at the top. South Korea is the second-largest investor, following Japan, in terms of accumulated investment. Therefore, at this point, it is important for the Vietnamese Government to understand in which sectors the Top 10 South Korean companies could invest in Vietnam
■ What are the main factors behind Vietnam attracting large amounts of investment from South Korea?
It has resulted from a combination of several factors: similarity to South Korea, abundant human resources, high productivity with competitive labor costs, increasing advantages in global supply chains, and active support from the government.
Regarding the similarity to South Korea, South Koreans and Vietnamese are both influenced by Confucianism. Our two countries share many things - the importance of blood relations and human relations, awareness about equality, and respect for the elderly, among other things.
In abundant human resources and high productivity with competitive labor cost, the two countries have a vast pool of young labor (the average age in Vietnam is 27.4 and in South Korea is 39). The total population of Vietnam is about 91.5 million, which is the 13th largest in the world.
Compared to South Korea, Vietnam has 90 per cent of its productivity but far lower labor costs. It is also suitable for producing electrical goods, since Vietnamese use chopsticks, which are believed to make people nimble-fingered and ambidextrous.
As for expanding advantages in global supply chains, when Vietnam signs on to the TPP and its FTA with the EU, lower tariffs are expected in the export of complete products. This will consolidate the relationship between South Korea and Vietnam in terms of taking advantage of global supply chains.
In relation to active support from the government, through the simplification of the customs clearance process and thanks to support from the Vietnamese Government, Samsung became the first to use an electronic customs clearance system in Vietnam. Vietnam is considered a safe investment market. Its legal framework is well-organized and executed compared to nearby countries such as Myanmar and Cambodia.
The Vietnamese Government reduced the corporate tax rate from 32 per cent to 28 per cent and then to the current 22 per cent (in 2013), and plan to reduce it further to 20 per cent by 2016. The country also applies tax exemptions for start-up businesses for the first four years and 50 per cent reductions for the following nine years.
■ So what should the Vietnamese Government do to continue attracting investment from South Korea?
Consistency and transparency in government policy and enhancement in objectivity in administrative procedures are a must. Investment value in Vietnam will increase even further if it keeps enhancing its legal stability and investment environment. From a long-term perspective, training high-quality human resources is crucial. Vietnam, ultimately, should expand its businesses from its current production base to producing high value-added products and developing its IT industry and service industry. Therefore, we emphasize the long-term development of top-level human resources.
■ Vietnam and South Korea signed an FTA last year. How will it affect trade and investment for both sides over the next few years?
Expected advantages for Vietnam include an increase in exporting tropical fruit and a growing number of workers going to South Korea. It will also enjoy tax exemptions on shrimp, up to 15,000 tons. There are also additional trade opportunities opening up in dried and frozen garlic and ginger.
For South Korea, in the early years of the FTA it will enjoy exporting home appliances, cosmetics, and tires to Vietnam. As Vietnam is considered one of the largest construction markets in Southeast Asia, it’s expected that infrastructure and city construction will bring great opportunities to South Korea.
From a long-term perspective, investment by South Korean companies in Vietnam will increase through a higher level of trade openings. Thanks to trade openings in motor car components and the services market, South Korean investment in Vietnam will rise. In particular, improvements in the investment environment and the enforcement of protection for foreign companies (property) will bring even more South Korean investment to Vietnam.
■ If you were asked to make suggestions to both governments regarding the building of the East Asian Community, what would you say?
It seems that both countries maintain stable trade and investment relationships in the East Asian Community. However, both should cooperate to enhance its industrial structure. For South Korea, it is diversifying from manufacturing to services. Through taking advantage of the FTA between South Korea and Vietnam, South Korea should expand its services market to ASEAN.
For Vietnam, ultimately, shifting its main industry from simple manufacturing to high value-added manufacturing is of great importance. As a country with abundant high-quality human resources in Asia, Vietnam should move its main business sector to high value-added manufacturing, including R&D and design.