HANOI — Fueled by the latest investment boom, Vietnam is one of the world’s fastest-growing economies.

Japanese companies are flocking to Vietnam with massive investments, whether as a hedge against China, widely known as the China-plus-one strategy, or as a country beginning to rival the so-called BRICs emerging economies of Brazil, Russia, India and China.

Indeed, Vietnam, which joined the World Trade Organization in January, has achieved remarkable economic growth in recent years.

In 2005, Vietnam’s economy grew by 8.4 percent, followed by an 8.2 percent spurt in 2006. Growth in 2007 is projected at 8.3 percent.

“It’s a boom country. Condominiums for foreigners are in short supply (in Hanoi) because people from overseas, including Japan, are flocking to the city,” said Kenjiro Ishiwata, director for the Japan External Trade Organization’s Hanoi office.

Massive foreign direct investment in Vietnam is grabbing the spotlight as the driving force behind the communist country’s rapid economic growth.

Vietnam attracted $9.22 billion in investment in terms of commitment from foreign companies in 2006, more than double the amount from the previous year, according to JETRO.

New investment from Japanese companies amounted to a combined $1.06 billion in terms of registered capital in 2006, more than double the previous year and roughly 6.5 times the amount registered in 2001.

Preparations for its entry into the WTO accelerated the Vietnamese government’s efforts to liberalize trade and facilitate foreign investment.

Many Japanese companies are beginning to shift their production from China to Vietnam based on the China-plus-one policy to diversify their investment and reduce their dependence on China.

The trend is said to have become prominent especially after a series of violent anti-Japan demonstrations in China in 2005.

In contrast, Vietnam is regarded as a politically and socially stable country with little political, religious or ethnic tensions.

The country’s proximity to China and to fellow members of the Association of Southeast Asian Nations also makes it an attractive base for exporting to these markets.

But on top of those favorable factors, the popularity of the country all comes down to low labor costs.

“Cheap labor is the most attractive part for Japanese companies to choose Vietnam as an investment destination,” Ishiwata said.

A survey conducted by JETRO in November 2006 found that monthly salaries for ordinary workers ranged from $87 to $198 in Hanoi and $122 to $216 in Ho Chi Minh City, as compared with $164 in Thailand and $134-$446 in China’s Guangzhou.

In addition, Japanese firms agree that Vietnam has plentiful young, qualified labor.

“As many Japanese companies here say, Vietnamese workers are diligent and skillful with their fingers,” said Shunsuke Saito, head of distribution company Logitem Vietnam Corp. No. 2, a subsidiary of Japan Logistic Systems Corp.

Japan Logistic expanded into Vietnam in 1994 along with a move by its Japanese corporate clients to expand overseas.

The carrier’s business in Vietnam dramatically expanded in line with the growth in the number of Japanese companies going there. Sales grew nearly five times over the past five years to $12.2 million in 2006.

When Canon Inc. set up a manufacturing plant in Hanoi in 2001 as a base for exporting its ink-jet printers, Logitem Vietnam won many customers that are supplying electronic parts to Canon.

In Vietnam, the southern region centering on Ho Chi Minh City and the northern part centering on Hanoi have long been the major destinations for foreign companies. But in recent years, they are moving to the central part of the country.

Micromotor maker Mabuchi Motor Co. is one such company. Last September, it chose Danang as the location for its second plant in Vietnam. The first plant, located near Ho Chi Minh City, went into operation 10 years ago.

“We came here because we are seeing a labor shortage in the south,” said Mabuchi Danang President Takashi Kamei. “Personnel costs are rising in the south, while it is about 10 percent cheaper here.”

About 500 people are engaged in assembling small components to build motors at the plant in Danang, most of whom are under 22 years of age.

Kamei said China was initially the major production site for Mabuchi Motor, but the firm is expanding into Vietnam, where labor costs are much cheaper, to increase its sales network outside China.

While Vietnam is still largely regarded as a manufacturing base, economist Takashi Kadokura, president of BRICs Research Institute, said the country is beginning to attract attention as a market with thousands of potential customers.

“The population is growing and the country’s economic growth is giving rise to an increasing number of people in the middle-income class,” Kadokura said, noting that companies are beginning to cash in on the expanding Vietnamese market.

According to Kadokura, the potential of the market for such high-priced products as cars, refrigerators and washing machines is huge because only about 15 percent of the population have them.

Vietnam’s population, which currently stands at about 83 million with roughly half under 25, is expected to reach 88.3 million in 2010.

One prominent example is a recent buyout of a local life insurer in January by Dai-ichi Mutual Life Insurance Co., the first Japanese insurer to enter the Vietnamese market.

The Japanese insurance market is leveling off mainly due to the shrinking and aging population. Hence the move into the Vietnamese market, where the population is increasing, Dai-ichi Life said, adding the country’s rapid economic growth and the composition of the population are also appealing.

But while the communist government has pledged in its five-year economic development plan through 2010 to maintain 7.5 percent to 8 percent growth, skeptics abound.

“I hope this time around, the boom will not die out soon,” JETRO’s Ishiwata said, citing the first investment boom more than a decade ago, which flattened out only a few years later.

Back in the mid-1990s, the country experienced the first investment boom after its communist government began working to open up to foreign investment under the Doi Moi reform policy.

However, disappointed by little progress in reform coupled with the 1997 Asian financial crisis, many companies pulled their money out of Vietnam.

Ishiwata said Vietnam must move away from an economic model that depends on foreign investment.

To this end, the country, which is often hit by blackouts, needs to improve its poor infrastructure, speed up lengthy administrative procedures and eradicate the rampant corruption that are hindering the country’s economic efficiency, he said.

In addition, Ishiwata stressed that Vietnam needs to find something other than cheap labor to make itself appealing to foreign companies if it is to make its development sustainable.

“Labor costs are sure to increase in the future in line with rising consumer prices. I wonder what will be the attractiveness of the country then.”

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