Foreign Investment in Vietnam Soars Thanks to SEZs, but Local Firms Lose Competitiveness

Special Economic Zones (SEZs) have successfully attracted foreign investment and created jobs in Vietnam. However, this success has been accompanied by other consequences, ranging from the weakening of domestic private companies to the deterioration of local government governance.

These findings were published by the Asian Development Bank (ADB) in the report ‘The Role of Special Economic Zones in Shaping Viet Nam’s Local Business Environment’, released in May 2026. The research shows that provinces with broader SEZ coverage experienced an increase in the number of foreign companies, corporate revenue, and labour absorption. Conversely, the number of domestic private companies and their revenues actually declined.

“Provinces with wider SEZ coverage experienced increases in employment, revenue, and the number of foreign-invested companies. In contrast, domestic private companies experienced a decline in both revenue and the number of firms,” wrote the study’s author, Katariina Nilsson Hakkala.

The research found that SEZ exposure is linked to increasing difficulty in accessing land, decreased transparency in policymaking, and an increase in informal levies. The approval of the first SEZ development in a province was also associated with increased preferential treatment for foreign and large-scale companies. This condition indicates a strengthening of rent-seeking practices.

Hakkala explained that special economic zones create two distinct business environments. Companies operating within the zones obtain various incentives and facilities, whereas most domestic companies outside the zones do not enjoy similar benefits.

“Special economic zones create a dual business environment, where companies inside the zones, which are mostly foreign-owned, enjoy various privileges, while companies outside the zones, which are generally domestic, do not obtain those advantages,” wrote Hakkala.

The study also highlighted the dominance of foreign investors in Vietnam’s economy. In 2023, foreign companies contributed 73 per cent of Vietnam’s total exports. In contrast, only 18 per cent of Vietnamese companies are connected to global value chains, a figure that has dropped from 35 per cent in 2009.

The research utilised panel data from 63 provinces in Vietnam over the period from 2006 to 2020. The analysis was conducted using the two-stage least squares instrumental variables (2SLS IV) method to address potential causal relationships between SEZ development and the quality of local governance.

The researchers combined three main data sources: SEZ data from Vietnam’s Ministry of Planning and Investment, over 5.5 million observations of manufacturing companies from the Vietnam Enterprise Surveys for the period 2000 to 2020, and the Provincial Competitiveness Index (PCI) indicators, which measure the quality of local economic governance.