Since establishing diplomatic relations in 1992, South Korea has become one of Vietnam’s most significant investors. It has also become a key export market for various Vietnamese goods, such as electronics and textiles, marking a vibrant trade relationship.

The robust presence of South Korean companies in Vietnam, such as Hyundai Motor Company, Lotte Group, LG Electronics, Samsung Electronics and SK Group, highlights this solid economic foundation. Their investments reached $81.5 billion across 9,666 projects by July 2023.

Despite global market volatility and the COVID-19 pandemic’s ramifications, the resilience of this economic partnership speaks to the strategic importance both nations hold for each other. 

South Korean President Yoon Suk-yeol’s visit to Vietnam in June 2023, which elevated the countries to “Comprehensive Strategic Partners,” reinforced the country’s status as a key investment destination for South Korean conglomerates and small to medium enterprises (SMEs).

However, the landscape is fraught with challenges that require careful monitoring and adept management of risks to secure and grow market presence effectively.

PARALYSIS OF BUREAUCRACY & POLITICAL RISK 

Despite Vietnam’s integration into the global economy and diminishing adherence to orthodox Communist ideology, it remains governed by the Communist Party of Vietnam, the sole legal political entity, marking the nation’s political landscape as decidedly authoritarian with significant restrictions on civil and political rights.

In March 2023, Vo Van Thuong assumed the country’s presidency through a National Assembly resolution, succeeding a predecessor who was ousted over a corruption scandal. This event underscores the pervasive issue of corruption affecting the business climate, where facilitation payments are often expected to circumvent bureaucratic delays.

Under Thuong’s leadership, with the support of General Secretary Nguyen Phu Trong, Vietnam has embarked on an anti-corruption campaign, resulting in the incarceration of numerous high-profile officials. 

However, this crackdown has inadvertently slowed the administrative process, exacerbating bureaucratic inertia and hindering economic activities. Officials, wary of future investigations, are increasingly hesitant to approve new projects, fearing accusations of corruption could lead to severe consequences.

While few foreign companies have been affected to date, the anti-corruption drive exposes them to indirect impacts and the risks of being ensnared in broader investigations. One significant challenge for foreign businesses, including those from South Korea, is navigating Vietnam’s complex bureaucratic landscape.

Despite governmental promises to streamline administrative processes and reduce oversight, the practical implementation of these reforms remains a significant hurdle.

South Korean businesses operating in Vietnam must be prepared to navigate challenges related to bribery and corruption, emphasizing the importance of conducting thorough due diligence in all business dealings. A zero-tolerance policy toward corruption, coupled with comprehensive workforce training to identify and resist corrupt practices, is essential.

Additionally, the support network provided by organizations such as the Vietnam International Arbitration Centre and the Korea Chamber of Business in Vietnam offers valuable legal and advisory resources.

Vo Van Thuong takes his oath as president of the Socialist Republic of Vietnam for the 2021-2026 term in Hanoi on March 2, 2023 | Image: Viet Nam Government Portal

TRICKLE-DOWN IMPACTS  

The tenure of Vietnam’s current leadership is set to continue until the 14th National Party Congress in 2026. During this period, bureaucratic inertia may prevail as officials adopt a cautious stance, potentially delaying critical sign-offs for new investments. 

While reflective of the current political climate, this caution risks impeding the progress of infrastructure projects essential for Vietnam’s development goals.

There are dozens of projects, which involve South Korean and South Korea-backed entities, in the pipeline. Ranging from a few hundred million USD to billions of USD, these projects are crucial for enhancing supply chains, logistics and clean energy production in Vietnam.

During Yoon Suk-yeol’s visit to Vietnam last June, over 100 businesses signed memorandums of understanding at a Vietnam-Korea Business Forum. Notably, Vietnamese multi-industry T&T Group announced a landmark agreement with KOGAS and SK E&S to jointly develop LNG and hydrogen infrastructure, which will facilitate the procurement, importation, transportation, and supply of LNG for power generation and other industrial activities.  

Expedited infrastructure investment is especially needed to fortify Vietnam’s ports, modernize them, and expand their capacity. Average wait times at the country’s busiest ports surpass those of regional neighbours and have been trending upwards as more and more manufacturers have shifted their operations from China. 

Addressing shortages in space and container equipment is thus critical with container traffic at Cat Lai, Vietnam’s busiest port, expected to double by 2030 and cargo volumes between South Korea and Vietnam anticipated to further increase in the near future. 

Simultaneous investment is also essential to connect ports with railway and air cargo hubs to ensure connectivity and transport accessibility. 

South Korean President Yoon Suk-yeol at the Korea-Vietnam Business Forum on June 23, 2023 | Image: ROK Presidential Office

NAVIGATING COMPLEXITIES 

The urgency of developing and deploying infrastructure to support Vietnam’s ambition to become a higher-income, developed economy cannot be overstated. Despite having a sizable, relatively well-educated workforce whose labor costs are more affordable than regional competitors like Thailand and Indonesia, Vietnam faces challenges in talent acquisition, particularly at the executive and management levels. 

A report by Mercer and Talentnet highlighted that 61% of companies in Vietnam struggled with hiring last year, spotlighting a talent scarcity exacerbated by intense competition for qualified candidates. 

Bringing in foreign technicians is not always a straightforward option either, as Vietnam has in recent years strengthened regulations related to foreign workers, and requires employers to submit explanatory evidence of why foreign labor is needed.

Vietnam’s demographic trajectory is also poised to mirror that of South Korea, transitioning toward an aging population. The World Bank notes that Vietnam’s working-age population has been declining over the past decade, with projections indicating a peak in the demographic dividend by 2042.

At this juncture, Vietnam could face economic challenges linked to fiscal pressures, emphasizing the importance for South Korean companies to anticipate demographic shifts and adapt their strategies accordingly.

The emphasis on due diligence and risk management is paramount for South Korean businesses venturing into the Vietnamese market. The landscape offers considerable growth potential, provided companies can effectively navigate the complexities of the market.

Success in this emerging market hinges on strategic planning and fostering strong local relationships, enabling South Korean investors to mitigate risks and capitalize on opportunities.

Edited by John Lee