Attracting and retaining Foreign Direct Investment, in Vietnam
The Vietnamese Government have been very successful in attracting Foreign Direct Investment (“FDI”) since the early 1990’s, although of course Doi Moi as a policy was introduced in 1986, but implementation was somewhat delayed because the first Foreign Investment Law was not introduced until 1988. The initial FDI projects were small, with the exception of the renovation of the Metropole hotel in Hanoi, but even that was less than US$ 10 million.
Việt Nam currently has more than 32,000 FDI projects, in operation, with a total capital of more than US$380 billion from 140 countries. Over the last 5 years FDI has shown consistent and steady growth, and in 2019, FDI hit a decade-long high at around $38 billion pledged, demonstrating justification of the government’s policies and regulations. This compared to US$ 35.4 billion committed in 2018 and US$ 35.9 billion in 2017.
To date the key investments have come from investors in Asia, with South Korea leading the field followed by Japan and Singapore. Of note is the fact that China has risen through the ranks in the last 3 years to the 5th largest investor at the end of 2019. This can partly be attributed to the US – China Trade spat but some analysts say that China is also pushing investment through Hong Kong, as Vietnam becomes more cautious about Chinese investment.
Out of 19 sectors receiving capital, in 2019, manufacturing and processing came on top with total capital of US$24.56 billion, accounting for 65 percent of total registered investment capital. This was followed by real estate at US$3.88 billion and then by retail and wholesale. In contrast the top 3 most favoured sectors for Private Equity were Fintech. Education, and Green/Renewable Energy.
In the first 7 months of 2020, in spite of the Covid 19 pandemic, Vietnam has attracted US$ 18.2 million of FDI which is only 6.9% down on the same period of 2019, in spite of the fact that borders have been closed since March 2020 and still remain essentially closed.
Whilst the future for FDI looks very good, the Government is looking at the strategy for future FDI and is listening to the challenges being faced by foreign invested and local businesses operating in Vietnam. The big drivers to the growth in FDI are the move of manufacturing from China to ASEAN generally and Vietnam in particular, which is expected to accelerate post-Covid 19, partly due to Vietnam’s success in containing the pandemic and community spread by swift action, testing and contact tracing. The other growth drivers are coming from and will continue to come from the EU-Vietnam FTA, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), and the growing Asean Economic community.
The EU-Vietnam FTA as well as offering reductions in taxes and tariffs, requires Vietnam to make significant institutional changes, which will over time make Vietnam a more attractive place for sophisticated foreign investors.
The rights and obligations under the CPTPP fall into two categories: Rules: for example, on how countries should make new food safety regulations or whether they can ban the transfer of data to other CPTPP members. These are the same for all CPTPP parties (including any new members that may join). Market access: how far each CPTPP member will cut its tariffs, open up its services markets, liberalise visa conditions for business travelers, and so on. Each member has its own schedules of commitments. In some cases the commitments are offered to all other members, while in others they are restricted to specific negotiating partners
The AEC initiatives will help ASEAN investors fully tap on the potential of ASEAN’s 600 million-market and enable companies in the region to access raw materials, production inputs, services, labor, and capital wherever they choose to set-up their business operations. This means companies can save on production costs, focus on its specialization, or maximize economies of scale without necessarily leaving high potential market areas within the region.
What is becoming very clear is that Vietnam is the preferred location for companies looking to move out of China because in part of its proximity to China; its growing skilled labour force; and the stable economic relations with major trading partners like North America, Europe and ASEAN. Major companies that have moved operations to Vietnam so far include names like Foxconn, TTI, and Nintendo.
Building on its current success Vietnam needs to finalise its strategy for Inward FDI, which looks to attract higher value add investment with higher technology standards and environmental controls in addition to lower cost labour manufacturing. This will help build supply chains and supporting industries, which have been slow to develop because of lack of policy support and the size and scale of the majority of local private sector businesses.
Of key concern to all foreign investors is economic and political stability, an area Vietnam scores well in. However, in order to attract higher quality investment Vietnam needs to focus on a few key issues in addition to the ease of doing business, which will be discussed later. These include: improved infrastructure and access to ports and airports from key industrial manufacturing areas and a reduction in logistics costs, which are still considered to be relatively high; improvement in training and in particular vocational training to ensure that there is a larger percentage of the workforce that have higher skill sets and are work place ready; more encouragement and incentives for investment in research and development.
One area of particular note is in the level of productivity in Vietnam which is one of the lowest in ASEAN although there has been some improvement over the last 2 years but to improve significantly, which Vietnam must to remain attractive, there needs to be more investment in high tech machinery and more skilled middle management to avoid significant wage inflation in this area.
Vietnam needs to develop and publicise investment incentives for investments into selected sectors, which they want to attract and accelerate to include electronics, electro-mechanical, hi-tech agricultural machinery and medical equipment to name a few. These incentives and the granting of them and the application needs to be totally transparent and binding. Some may recall in the past when tax incentives were granted but then there were problems in companies actually applying the incentives, so we need to learn from those experiences.
In terms of the ease of doing business, whilst the government has shown a strong intent to make both licensing and operations easier for both foreign invested and local companies, however this does not always translate down to local government levels although things are improving. Vietnam still only ranked 70 out of 190, in the World Bank’s Doing Business 2020 report, which represented a backward step from 69 in 2018, however there was a rise in investor confidence.
One of the major reforms has been to move to an electronic system managing the tax payment process for businesses. Investing in the information technology infrastructure used by the General Department of Taxation has made paying taxes an easier process for most businesses, saving days rather than hours. According to Vietnamese Customs, around 99% of import and export tax payments were made on line as of the middle of 2019. Such digitalization improves efficiency for most businesses and also reduces the exposure for having to make facilitation payments.
The World Bank’s Lead Economist and Program Leader of Vietnam – Jaques Morisset has noted that are several regulations and a lack of coordination across ministries when it comes to tax payments. For example, the same document and information is often required and requested multiple times for an application nor payment. The Vietnamese Government has worked on several proposals to amend the tax regulations to help clarify unclear tax issues and reduce the tax compliance burden on businesses operating in Vietnam and align the Vietnamese system with international best practice.
While Vietnam has made reforms in paying taxes and starting or licensing a new business there are still two aspects that Vietnam needs to work on. The country still ranks low in these 2 areas standing at 115 and 109 respectively in the World Bank ranking for Ease of Doing Business.
Improvements in the licensing system and approvals for the various permits that are required also needs improvements particularly for investments in conditional sectors and real estate and construction. The new Enterprise Law, due to come into effect at the beginning of 2021, will also help address some of the challenges raised by both foreign and local investors but not all. There is also a need to review all legislation and remove the conflicts that often exist due to the rapid development of the legal system, in Vietnam.
By continuing the improvements that address the concerns of foreign business, Vietnam will not only keep those companies that have already invested but also make the country more attractive to new investors. However, some sectors are “transient” for example footwear and clothing and Vietnam’s ability to retain these foreign investors will depend on labour rates and productivity.
Kenneth M Atkinson
Founder and Senior Board Adviser
Grant Thornton Vietnam
 Grant Thornton Vietnam Private Equity Survey September 2019
 Vietnam News Agency
 Dezan Shira Vietnam Briefing November 2019.
 Dezan Shira Vietnam Briefing November 2019