Vietnam and the Philippines are two of the fastest-growing economies in the world. Over the past few decades, they have been competing fiercely to attract foreign investors. Both countries have introduced various policies and incentives to draw in foreign direct investments (FDI). However, despite their efforts, one country has clearly pulled ahead, and that country is Vietnam.
According to official data, Vietnam has become the preferred destination for foreign investors over the Philippines. From 2010 to 2019, Vietnam received over $112 billion in FDI, while the Philippines only attracted $57 billion. In 2021, Vietnam continued to lead with an inflow of about $19.7 billion, compared to the Philippines’ $10.5 billion.
This consistent preference for Vietnam over the Philippines is evident not only in FDI but also in economic growth. Vietnam’s GDP growth from 2013 to 2021 averaged 5.8 percent, while the Philippines managed only 4.6 percent. Looking further back, from 1986 to 2019, the Philippines had an average GDP growth of 4.6 percent per year, while Vietnam’s was 6.5 percent. These numbers have led many to ask: Why is Vietnam outperforming the Philippines?
There are several reasons for this, but we can focus on some key factors. First, let’s look at the taxation system in both countries. A country’s tax rate can significantly influence its attractiveness as an investment destination. Vietnam’s corporate income tax is just 20 percent, with a further 10 percent for Medium and Small Enterprises (SMEs).
In contrast, the Philippines had a 30 percent corporate tax rate since 2010, which was only recently reduced to 25 percent. This difference makes Vietnam a more appealing environment for productive investments. However, taxes are not the only reason corporations prefer Vietnam.
Another critical factor is electricity prices, which are especially important for manufacturing companies. According to GlobalPetrolPrices in March 2022, the average electricity cost in the Philippines was about 0.174 US cents per kilowatt-hour, while in Vietnam, it was only 0.08 cents per kilowatt-hour.
This significant difference further explains why Vietnam is ahead. Lastly, the quality of infrastructure plays a crucial role. While the Philippines has been investing in infrastructure recently, global rankings show it still lags behind Vietnam. Quality infrastructure is vital because it boosts productivity, enhances market access, and allows for economies of scale. According to USNews, Vietnam scores 14.0 in Entrepreneurship, influenced by its infrastructure score of 5.2 and its digital infrastructure score of 4.5. In comparison, the Philippines has an entrepreneurship score of 10.3, with digital infrastructure at 2.5 and basic infrastructure at 4.9. The entrepreneurship score also reflects how innovative and competitive a country is.
In conclusion, these three factors—taxation, electricity prices, and infrastructure—highlight Vietnam’s superiority in attracting investments. While there are other aspects to consider, such as education where the Philippines scores higher according to USNews, the overall ranking still favors Vietnam. However, the Philippines is actively working on improvements, and it remains to be seen if it can close the gap with Vietnam.