John West writes: Vietnam began its transition from central planning towards a market economy in the mid-1980s with reforms known as “Doi Moi” or “Renovation“. This was not a philosophical choice. With famines ravaging the country, and the loss of Cold War support from the former USSR, the government had to do something to get the country moving.

A long series of policy changes have included opening to international trade and investment, and allowing private property rights and private enterprise. Reform is an ongoing process, with important milestones being a free trade agreement with the US in 2000, and membership of ASEAN in 2004, the World Trade Organisation in 2007, and the Trans Pacific Partnership (TPP) in 2015.

Vietnam also has an education system that delivers impressive results, at least until the high school level, according to the OECD.

Policy reforms have stimulated large flows of foreign direct investment (FDI). Vietnam’s stock of FDI (foreign direct investment) surged from $243 million in 1990 to $82 billion in 2012, representing some 47% of GDP — around the same rate as Malaysia and Thailand, which both started the period at higher levels.

Investors have been attracted by Vietnam’s strategic location near global value chains (GVCs), its lower cost structure than China, and its political and economic stability. Japanese companies have been the leading investors in Vietnam, supported by the Japanese government. Singapore, Korea and Taiwan have also been important sources of FDI. In 2014, Vietnam attracted FDI from world class companies like Samsung, Nokia and LG.

These inflows of FDI have enabled Vietnam to join GVCs for products like garments, shoes, and electronics. The FDI sector contributed 62% of exports in 2014, up from 47% in 2000, and some 18% of GDP in 2014, an increase from 13% over the same period. Trade has doubled to 160% of GDP over the past two decades, reflecting the active trade in parts and components that characterise GVCs.

But despite this excellent performance, Vietnam’s exports are dominated by unsophisticated products with low domestic value added, and limited technological spillover from foreign to domestic enterprises. Domestic manufacturers have proved unable to move along the supply chain to capture higher value. And the potential benefits of FDI have been greatly compromised by widespread tax cheating by multinational companies.

There are good prospects for continued high inflows of FDI in light of Vietnam’s membership of the TPP.  Vietnam