Jakarta. Vietnam’s economy grew 8.02% in 2025, outpacing Indonesia’s 5.11% expansion despite having a gross domestic product nearly three times smaller, as stronger manufacturing and more efficient investment helped the Southeast Asian neighbor accelerate growth.

Indonesia’s nominal GDP reached $1.45 trillion in 2025, compared with Vietnam’s $514.7 billion, according to World Bank data. Yet Vietnam’s faster growth highlights the challenges facing Indonesia as it seeks to break out of a prolonged period of expansion around 5%.

Mohammad Faisal, executive director of the Center of Reform on Economics (CORE) Indonesia, said Vietnam’s success reflected its ability to make manufacturing a key engine of economic growth.

“Countries that can develop their manufacturing industries more quickly will also drive faster economic growth,” Faisal told Beritasatu.com on Monday.

Vietnam’s manufacturing sector expanded 9.97% in 2025, helping drive overall economic growth to 8.02%.

The country has moved beyond traditional labor-intensive industries such as textiles and footwear, expanding into electronics and technology manufacturing through investments by multinational companies including Samsung and Foxconn. Vietnam has also begun developing its electric vehicle industry.

Faisal said Vietnam’s ability to attract foreign investment was supported by adequate infrastructure, more efficient logistics, a business-friendly environment, and an available workforce.

Consistent policies and regulatory certainty have also helped give investors confidence to make long-term commitments, he said.

“Vietnam also offers various incentives, policy certainty, and effective policymaking, which are very important,” Faisal said.

Indonesia, meanwhile, faces the challenge of attracting more investment into industries that generate greater value-added production, Faisal said.

Breaking out of its current growth range would require more fundamental changes, particularly in industrial development and investment conditions.

Indonesia also needs to expand its downstream processing industries into higher-technology products, including electric vehicle batteries and solar panels, rather than focusing primarily on processing raw materials, he said.

Such efforts would need to be accompanied by improvements in logistics, workforce skills, and regulatory certainty to ensure industrial investment delivers a stronger contribution to economic growth.

Investment Efficiency

Beyond manufacturing, the efficiency of investment is another factor distinguishing Indonesia from Vietnam.

Nailul Huda, director of digital economy at the Center of Economic and Law Studies (CELIOS), said Vietnam was more efficient in converting investment into economic output, making it more competitive in attracting foreign capital.

“The biggest difference between the Indonesian and Vietnamese economies is efficiency,” Nailul told Beritasatu on Monday.

Indonesia’s Incremental Capital Output Ratio (ICOR) stands at 6.4, compared with about 4.2 in Vietnam, he said.

ICOR measures how much investment is required to generate additional economic output. A higher ratio indicates that more capital is needed to produce the same amount of growth, reflecting lower investment efficiency.

“The higher the ICOR, the less efficient the economy is. As a result, investors will prefer Vietnam over Indonesia,” Nailul said.

He attributed Indonesia’s relatively high investment costs to a range of business obstacles, including formal and informal levies and difficulties importing raw materials.

These costs increase production expenses and weaken the competitiveness of domestic manufacturers, he said.

“Indonesia is considered a high-cost economy, from formal and informal levies to problems with importing raw materials,” Nailul said.

He also criticized Indonesia’s industrial policy, arguing that it had yet to fully support the development of manufacturing.

Government spending, he said, should generate greater benefits for domestic industries by strengthening production capacity and making the country more attractive to investors.

Competing for Industrial Investment

The contrasting growth performances underscore the importance of manufacturing development and investment efficiency as Indonesia seeks to improve its competitiveness against Vietnam.

While Indonesia has pursued downstream processing to capture more value from its natural resources, Faisal said the country needed to move further into higher-value and technology-intensive industries.

At the same time, reducing business costs and improving the efficiency of capital allocation could help Indonesia attract investment that generates more output and jobs.

Without improvements in industrial capacity, logistics, workforce skills, and regulatory certainty, Indonesia may struggle to achieve faster growth despite its much larger economy.

The challenge, economists said, is not simply attracting more investment but ensuring that capital is deployed efficiently and supports industries capable of delivering sustained productivity gains.

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