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Vietnam loses appeal to foreign investment amid economic woes

Vietnam, once seen as on its way to joining economic tigers Taiwan and South Korea, has seen foreign investment decline sharply amid labor problems, crumbling roads, and the global financial crisis.

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Men work at Haya furniture factory outside Hanoi, Vietnam, June 15. Haya boss Nguyen Manh Hung said he reduced production capacity by half compared with the same period last year due to the poor market situation and lack of financial sources as he continues to pay a 24.5-percent annual bank loan. As Vietnam fights to beat back raging inflation, many of its small and mid-sized businesses – disadvantaged even in good times – are struggling to survive the battle.

Kham/Reuters

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Vietnam's economic future is on the rocks.

Foreign firms in this ramshackle but once booming factory district just outside Ho Chi Minh City are watching bottom lines and studying other markets closely, both of which have become threats to Vietnam's economic growth.

But after the global financial crisis, foreign direct investment pledges fell from $66.5 billion in 2009 to $20 billion in 2010. Now, the number of foreigners leaving Vietnam slightly exceeds those entering, contrasting a 4-to-1 ratio favoring arrivals in 2008, says Ralf Matthaes, regional managing director with market research firm TNS Global.

Nightclub clientele has dropped, foreign patrons say, bubble tea shops popular with Taiwanese business people have closed, and Bien Hoa’s four-star hotel is barely half full.

“Most foreign firms will wait,” says Nguyen Xuan Thanh, public policy director with the Fulbright Economics teaching program in Ho Chi Minh City. “Of course some will choose [to invest] elsewhere. There are serious structural problems [in Vietnam]." He adds that there's some concern among investors about whether Vietnam will ever return to the type of growth it once knew.

What happened?

Five years of struggles with inflation, a slipping currency, and intractable labor problems have squeezed profits for the thousands of foreign firms that came to the impoverished country in 1987 when the Communist government suddenly opened to outside investment with the promise of cheap land and labor.

Investors built up this industrial heartland, filling its potholed roads with 24-hour truck traffic and lifting economic growth nationwide to an average of 7 percent per year during the past decade.

Now, foreign business people who flocked to invest in Vietnam's budding economy, particularly in manufacturing, say that since 2007 they have been hit by a volatile mix of economic pressures.

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