Strengthening Linkages Between FDI and Local Firms to Sustain Growth Momentum

Vietnam is shifting from an FDI-led growth model toward stronger domestic capabilities through institutional reform

According to the World Bank's Vietnam Economic Update, foreign direct investment (FDI) firms and companies in global value chains make up only about 5% of all businesses but create half of total value added and jobs, while contributing up to 73% of exports, highlighting the sector's outstanding manufacturing performance. Using revenue-based total factor productivity (TFPR) to measure the technology gap, the findings also show that foreign-invested and importing firms have the highest productivity advantages.

Notably, companies that adopt foreign technology record larger TFPR gaps than those that do not use such technology. By contrast, the domestic business sector remains fragmented and less productive, with 98% of enterprises classified as small or operating informally, and only 17% participating in exports. This two-tier structure constrains productivity convergence, reduces the economy's ability to retain domestic value added, and weakens the spillover of growth into higher-quality, more inclusive employment.

According to the World Bank, the ongoing realignment of global supply chains has helped lift FDI inflows into Vietnam in 2025 to their highest level in five years. Total registered investment reached US$38.4 billion, up 0.5% year on year, while disbursed FDI hit a record US$27.6 billion, up 9% from 2024, reflecting strong confidence among foreign investors and the continued expansion of the manufacturing and processing sector.

However, deep structural imbalances between the FDI sector and the domestic economy remain evident. Since reciprocal tariffs were announced, exports from the FDI sector have surged 42% year on year, while exports by domestic enterprises fell 24.5% year on year in April 2026. This divergence stems from uneven tariff burdens: industries dominated by domestic companies, including textiles, footwear, and wood products, face effective tariff rates ranging from 15% to 38%, roughly four times higher than the 9% imposed on electronics and machinery, sectors dominated by FDI enterprises.

"The shock was asymmetrical due to the structure of production in the Vietnamese economy, and differing shock absorption capacities across FDI and domestic firms. FDI firms could draw on long-term buyer contracts that insulated them from immediate order cancellations, captive supply chains, and parent company financing to manage disruption, and pricing power derived from the complexity of their products. By contrast, domestic firms, mostly small and reliant on short-term bank credit had no such buffers. As such, the domestic private sector has borne a disproportionate share of the external shock with limited capacity to adapt," the report said.

The World Bank report identifies weak linkages between FDI enterprises and domestic firms as the underlying cause of Vietnam's dual economy, reflecting both structural constraints and firm-level limitations. FDI enterprises import more than 50% of the inputs used for exports, a much higher share than regional peers, while domestic firms lack the capacity to participate in these supply chains. Even in strategic industries, domestic supplier participation remains limited due to skills gaps, weak management capabilities, and low levels of technology adoption. The nature of FDI inflows, which are often concentrated in low-value-added assembly activities, also reduces incentives to source locally and transfer technology. At the same time, low spending on research and development, shortages of highly skilled workers, governance gaps, and legal barriers increase transaction costs and constrain the absorptive capacity of domestic enterprises. Uneven enforcement of labor regulations continues to impede knowledge spillovers and improvements in job quality.

To address Vietnam's dual economy, in which the FDI sector has expanded rapidly while spillover effects to domestic enterprises remain limited, the World Bank argues that stronger linkages between firms participating in global value chains and the domestic economy are needed. This requires a shift from an FDI-led growth model toward capability-driven integration, supported by enterprise-focused policies and continued institutional reform. Key priorities include supplier development programs, business-matching platforms connecting multinational corporations with domestic firms, regulatory simplification, and incentives to attract higher-quality FDI with deeper local sourcing.

Productivity gap of firms with GVC linkages relative to firms without linkages in Vietnam. Source: World Bank staff computations based on World Bank Enterprise Survey

In addition, supply chain finance mechanisms, greater investment in skills and innovation, and improved access to finance are essential to help domestic enterprises move up the value chain, enabling participation in global value chains to translate into broad-based productivity gains and better employment outcomes.

To strengthen the role of domestic private enterprises instead of relying primarily on the FDI sector, Mariam J. Sherman, World Bank Country Director for Vietnam, Cambodia, and Lao PDR, said: “This calls for further strengthening macroeconomic management, while accelerating reforms. The real test will be to implement, finance, and sustain the ambitious reform agenda now underway, while managing external risks and domestic vulnerabilities, and unlocking the full potential of the domestic private sector to create more and better jobs.”