"Looking at the cumulative amount of investment in Vietnam since 1988, South Korea ranks first with $85.8 billion, ahead of Singapore and Japan. However, in recent years, Korea has been in a neck-to-neck competition with China," Kim Hyong-mo told Nikkei Asia in an interview.
In 2023, South Korea ranked fourth in foreign direct investment in Vietnam, lagging behind Hong Kong, China and Singapore.
Among South Korean investments announced last year was LG Innotek's $1 billion investment in Hai Phong to expand the production of camera modules.
However, South Korean companies have been cautious about new investments due to the global economic slowdown, according to Kim. "Many Korean companies find it challenging to expand investments in Vietnam due to rising labor costs, especially as Chinese companies also increase their presence in the country," he said.
Kim said Vietnam and China are poised to fortify their ties, having issued a statement to deepen their relationship into "a community with a shared future" when Chinese President Xi Jinping met Vietnam's Communist Party leader, Nguyen Phu Trong, in Hanoi in December.
Kim said Vietnam's open trade and investment environment, along with its geopolitical advantages and domestic political stability, will continue to position the country as an attractive investment destination.
But he referred to some challenges that have affected investment momentum, including the rising minimum wage, which will increase about 6% on average from July, and a shortage of highly skilled workers.
"Vietnam has been structurally slow in making policy decisions, and there is a notable lack of infrastructure, including electricity. Strong regulations such as labor issues, environmental assessments and the Fire Services Act," which requires high prevention standards at factories, "have made it difficult for foreign companies to make investment decisions," he said.
Kim said Vietnam's recent implementation of a global minimum corporate tax of 15%, in accordance with a global agreement, could undermine its attractiveness as an investment destination.
"Vietnam's decision to introduce a minimum tax is understandable, as it seeks to secure tax revenue from multinational companies," Kim said. "However, this move is expected to nullify Vietnam's advantage in corporate income tax benefits, potentially impacting future investment decisions. Some companies may hesitate to invest in Vietnam unless burden-reduction measures to replace conventional corporate tax incentives are disclosed promptly."
Due to the minimum tax rule, Vietnam's tax revenue will reportedly increase by more than 14.6 trillion dong ($588 million), of which 10 trillion dong will be borne by South Korean companies in 2024.
Kim said, "Korean companies with an effective tax rate below 15% in Vietnam cannot evade certain impacts. However, the targets are not limited to Korean firms such as Samsung Electronics and LG," adding that among the 122 companies facing higher tax rates are multinationals like Intel, Panasonic, Foxconn, Pegatron and Bosch."
Asked if South Korean companies will shift to other countries, such as India, Kim said: "Considering the background of many Korean companies moving from China to Vietnam in search of cheaper labor costs, it's inevitable that labor costs will also rise in Vietnam. However, while there is a need to explore alternative investment destinations to Vietnam, they won't be easily found."
He stressed that KCCI member companies he recently spoke to are not considering withdrawing from Vietnam or retreating on their investments despite a series of issues. "Korean companies have firmly established their position through trade, investment and continuing production activities in Vietnam."
As for the state of Vietnam's overall economy, Kim said there are now signs of improvement after gross domestic product growth slowed to 5% in 2023 from 8% in 2022. "Enhanced diplomatic relations between Hanoi and Washington are expected to yield positive effects. Moreover, direct investment from multinational companies withdrawing from China is expected to increase," he said.