Foreigners find perks in investment

VNS – August 23, 2008

HCM CITY — Although this year’s rate of investment attraction to Viet Nam is lower than last year’s, the country is still the fifth most attractive destination for manufacturing among emerging markets, according to the second annual PricewaterhouseCoopers (PwC) Emerging Market 20 Index.

The index shows that the BRIC countries (Brazil, Russia, India and China) continue to offer good opportunities for investment. However, the results of PwC’s innovative country risk and reward model also point to a range of other locations as alternatives.

Based on an Index Value of 85, Viet Nam’s 5th ranking for manufacturing investments is down from its pole position last year. The drop mainly reflects changes in PwC’s selection of countries considered for the update.

Based on macroeconomic data, a number of countries studied last year, including the Czech Republic, Hungary and Saudi Arabia, no longer meet the criteria for inclusion in the Risk and Reward Model. On the other hand, three of the four countries ranked higher than Viet Nam, namely Egypt (Index Value 95), Bulgaria (93) and Serbia (88), did not qualify for inclusion in the index calculations.

Beyond the obvious importance of low production costs, the index also factored in a country’s risk premium, distance from key export markets and local taxes.

Among the Asian countries on the Manufacturing Index, India was the highest, at the 4th spot. Thailand (11th/Index value 82), Malaysia (13th/81) and China (14th/81) also made the cut. Cambodia did not quality for inclusion in the top 20 because of the small size of its current manufacturing base, but it was identified as a promising investment destination due to the wide availability of low-cost labour and a falling country risk premium.

Although countries like Viet Nam and Cambodia still have relatively small economies, their low-cost bases can sometimes offer higher profit margins to manufacturers.

Despite being a lucrative investment location, China did not break the top 10. Given the massive amounts of manufacturing-based foreign direct investment (FDI), its 14th place may even seem counterintuitive to some. It is worth noting, however, that as the incomes of Chinese workers rise, they will become more avid consumers for service providers such as retailers and hoteliers in the coming years.

Ian Coleman, UK head of emerging markets for PricewaterhouseCoopers LLP, said: “The main reason why China trails countries such as India and Viet Nam is that the EM20 risk-reward index is a ratio measure which does not take into account the absolute size of a country’s market. If a company was looking to develop a very large-scale manufacturing facility, the labour capacity and physical infrastructure required would arguably rule out some of the countries at the top of the Manufacturing Index and would increase China’s relative attractiveness.”

The rankings apply only to direct investment, not to investment in equity markets or other financial assets. — VNS