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U.S. Department of State

Diplomacy in Action

2009 Investment Climate Statement - Vietnam


2009 Investment Climate Statement
Bureau of Economic, Energy and Business Affairs
February 2009
Report
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Openness to Foreign Investment

Investment Policy

Vietnam strongly encourages foreign investment as part of its development strategy, and the Government of Vietnam (GVN) is committed to improving the business and investment climate. The GVN is counting on being able to attract overseas capital through foreign direct investment (FDI) in 2009 amidst the challenges of a global economic crisis that was beginning to impact Vietnam in late 2008 and early 2009. FDI and official development assistance (ODA) are integral parts of the GVN's growth target of 6.5 GDP for 2009.

Vietnam became the 150th member of the WTO on January 11, 2007. Vietnam's commitments in the WTO increase market access for exports of U.S. goods and services and establish greater transparency in regulatory trade practices, enhance economic freedoms and establish a more level playing field between Vietnamese and foreign companies. Vietnam undertook commitments on goods (tariffs, quotas and ceilings on agricultural subsidies) and services (provisions of access to foreign service providers and related conditions), and to implement agreements on intellectual property (TRIPS), investment measures (TRIMS), customs valuation, technical barriers to trade, sanitary and phytosanitary measures, import licensing provisions, anti-dumping and countervailing measures, and rules of origin.

In addition to WTO, the United States - Vietnam Bilateral Trade Agreement (BTA) provides a broad range of benefits for U.S. investment in Vietnam. The BTA and WTO commitments will continue to ensure fair access and treatment for U.S. investment, goods and services.

Vietnam's record in implementing its bilateral and international obligations has been good overall. Concerns remain in some areas, such as protection of intellectual property rights (IPR).

In 2008, Vietnam reported a record $64.01 billion in investment commitments, a growth of over 222% from 2007 ($21.3 billion). Since the country was opened to foreign investment in 1988, Vietnam has authorized $163.5 billion in foreign investment, of which $56.9 billion is actual investment.

In 2008, U.S. investment grew at a record pace, reaching a total of $1.4 billion in 55 investment projects, a single-year figure equivalent to over a third of all U.S. investment commitments over the previous ten years. Overall, the United States is Vietnam's 12th largest investor. In addition to these numbers, significant additional U.S. investment is credited to other countries. This is the case, for instance, with Intel's $2 billion investment commitment, which is credited to Intel's Hong Kong subsidiary.

The GVN holds regular "business forum" meetings with the private sector, including both domestic and foreign businesses and business associations, to discuss issues of importance to the private sector. Foreign investors use these meetings to draw attention to investment impediments imposed by Vietnamese law and regulation as well as by improper implementation. These forums, together with frequent dialogues between GVN officials and foreign investors have led to improved communication and have sometimes allowed foreign investors to comment on and influence legal and procedural reforms.

In December 2008, Vietnam's credit ratings remained unchanged (BB/B for foreign currency and BB+/B for local currency, Standard and Poor's). However, in 2008 both S&P and Moody's downgraded Vietnam's outlook to negative, with S&P noting "the risks to financial stability as banks face near-term asset quality deterioration with weakened balance sheets." In January 2009, the Economist Intelligence Unit rated Vietnam's sovereign risk at B grade, the currency risk at B, the banking sector risk at CCC, political risk at B, and economic structure risk at CCC.

Investment Regulations

The Investment Law regulates investment activities, investors' rights and obligations, allocation of incentives, state administration of investment activities and offshore investment. The Investment Law also provides for guarantees against nationalization or confiscation of assets and applies uniformly to all investors, foreign and domestic, replacing the previous investment regime which applied differently to domestic and foreign investors. Although the Investment Law sets criteria for prohibited and conditional investment sectors, there are specific laws that also apply to investment in conditional sectors such as banking, securities, and insurance.

The Investment Law has allowed more forms of direct investment to include investment in business development, shares purchases, capital contributions for participation in the management of investment activities, and mergers and acquisitions.

The Enterprise Law also applies to both foreign and domestic enterprises, and regulates the establishment, forms and procedures, organization, management and dissolution of enterprises in all economic sectors.

Investment Modalities

The four primary forms of foreign investment in Vietnam are Joint Ventures (JV); Business Contract Cooperation (BCC) agreements; build-and-operate agreements (BOT, BTO and BT); and, increasingly, as fully foreign-owned ventures.

JVs pair foreign and local companies sharing capital and profits. The Investment Law removed restrictions on the minimum percentage of foreign involvement in a JV. Many investors find JVs attractive because they can benefit from the assistance of an established Vietnamese firm in dealing with bureaucratic and administrative procedures. They also provide foreign investors with access to land that may otherwise be difficult to secure. Some sectors, such as distribution and retail up to 2009, require foreign investors to partner up with a local firm.

BCCs permit a foreign firm to pursue business interests in cooperation with a Vietnamese firm by investing capital and sharing revenues without conferring the right of establishment or ownership. In many respects, it is the most flexible arrangement Vietnam offers to foreign investors. However, a BCC license typically does not contain tax holidays or concessions given to other types of foreign investments. BCCs have predominated in the telecommunications sector and, as production sharing contracts, in the gas and oil sector, where the GVN limits foreign involvement.

BOT, BTO and BTs are the least commonly used forms of foreign investment. Although authorized under the Law on Foreign Investment the legal, regulatory, and financial framework for these forms of investment remains incomplete. Under a BOT agreement, the investor builds an infrastructure project, operates it for an agreed period of time to recover the investment and earn a profit, and then transfers it to the Government without further compensation. Under a BTO, the investor builds an infrastructure project and transfers it to the Government upon completion. The Government then allows the investor to operate it for certain period of time for a profit. A BT does not allow the investor to operate the project, and the investor is paid directly from the Government. Investment licenses under these modalities can take a long time to issue. The most intractable issues have been financing, product pricing, and Government regulatory and cost-recovery guarantees. To overcome these challenges, the GVN intends to revise existing regulations (Decree 78), to be enacted in the first quarter of 2009. Over time, the GVN intends to replace existing regulations with a Public-Private Partnership investment modality.

Doing business as a fully foreign-owned enterprise has become more popular recently, as investors learn to navigate the local system on their own, and WTO pries open areas hitherto closed to foreign businesses.

Conditional Investment Sectors

The list of sectors in which investment is conditional applies to both domestic and foreign investors and includes those dealing with national defense, security, social order and safety (a broadly defined area); culture, information, press and publishing (also broadly defined); financial and banking; public health; entertainment services; real estate; survey, prospecting, exploration and exploitation of natural resources; ecology and the environment; and education and training.

Upon WTO accession in 2007, Vietnam granted full trading rights (including the right to sell an imported product to any individual or enterprise having the right to distribute such product in Vietnam) to all foreign individuals and enterprises. These rights are accorded to foreign individuals and enterprises without any requirement to invest in Vietnam. Trading rights are granted for all products except for a limited number reserved for state-trading enterprises and those subject to a phased-in period. For the complete lists of goods that are subject to phase-in schedule for trading rights, see www.wto.org/english/thewto_e/countries_e/vietnam_e.htm

Foreign investors have the right to sell, market, and distribute what they manufacture locally, and to import goods needed for their investment projects, and inputs directly related to their production, provided this right is included in their investment licenses.

Foreign participation in commission agents' services, wholesale services, retail services and franchising opened to fully foreign-owned businesses in 2009. Exceptions are made for certain commodities such as rice, sugar, tobacco, crude and processed oil, pharmaceuticals, explosives, news and magazines, precious metals and gemstones. Distribution of alcohol, cement and concrete, fertilizers, iron and steel, paper, tires, and audiovisual equipments will not be opened for foreign investment until 2010.

Investment Licensing

The GVN has made a serious effort to simplify its licensing regime. The Investment Law requires licensing for projects where investment is subject to conditions or projects with invested capital of VND300 billion (approximately $17 million). Further approval by the Prime Minister's Office is required for key infrastructure projects (see below).

Provincial authorities are the issuing entities for most types of investment licensing, with the exception of most conditional sectors and build-and-operate projects, which are still licensed by the central government. Licensing is required to establish investment as well as to make significant changes to an ongoing enterprise, such as to increase investment capital, restructure the company by changing the form of investment or investment ratios between foreign and domestic partners, or add additional business activities.

The provincial governments and the management boards of industrial zones (Industrial, Export Processing Zones, High-tech and Economic Zones) also have authority to issue investment certificates (de facto investment licenses). Several provincial committees and industrial zone management boards have streamlined licensing procedures in their jurisdictions, significantly reducing the processing times. While this decentralization is frequently in the foreign investor's favor, it has also given rise to considerable regional differences in procedure and interpretation of relevant investment laws and regulations. For an overview on provincial investment climate perceptions, see the U.S.-funded Vietnam National Competitiveness Initiative website at: http://www.pcivietnam.org/

A number of investment projects that must be approved by the Prime Minister's office are:

- All projects, regardless of capital source and size, in airports and seaports; mining, oil and gas; broadcasting and television; casinos; tobacco; higher education; industrial, export processing, high-tech and economic zones; sea transportation, post and delivery services; telecommunication and internet networks; printing and publishing; and independent scientific research establishments; and

- All projects having capital in excess of VND1.5 trillion (approx. $86 million) regardless of capital source, in electricity, mineral processing and metallurgy, railways, roads and domestic waterways, and alcohol beverages.

Vietnamese authorities evaluate investment license applications using a number of criteria including the legal status and financial capabilities of the foreign and Vietnamese investors; the project's compatibility with Vietnam's "Master Plan" for economic and social development; the benefits accruing to the GVN or to the Vietnamese party, especially acquisition of new production capabilities, industries, technologies, expansion of markets, and job creation; projected revenue; technology and expertise; efficient use of resources; environmental protection; plans for land use and land clearance compensation; project incentives including tax rates and land, water, and sea surface rental fees.

The Commercial Law and the implementing guidelines contained in Decree 72, allow foreign firms to establish branches or representative offices. The former may engage in trading activities, while the representative offices are allowed to liaison with customers, negotiate and enter into contracts and conduct market research but not to trade.

Other Investment-Related Legislation

Vietnam's Bankruptcy Law allows parties other than creditors to participate in bankruptcy procedures and gives courts flexibility in dealing with insolvent businesses. The Law also creates favorable conditions for ineffective enterprises and business organizations to exit the market and to be replaced by more effective ones, making the business environment more healthy and transparent.

The Law on Competition creates and promotes an equitable and non-discriminative competition environment, and protects and encourages fair competition. The Law also stresses the importance of the rights of organizations and individuals to compete freely, and addresses anti-competitive agreements, state monopoly, economic concentration and unfair competition.

Taxation

In January 2009, the Government of Vietnam announced that it would lower corporate income tax rates from 28 to 25 percent. Tax incentives are the same for both foreign invested and domestic enterprises, and offered to investors in selected priority sectors and in remote areas. The GVN does not tax profits remitted by FIEs. A new personal income tax regime, placing Vietnamese and foreigners on the same tax rate schedule, became effective in January 2009. The taxation threshold is VND576 million ($33,000) of yearly income, and the lowest marginal tax rate is reduced from 10 percent to 5 percent, and the highest rate from 40 percent to 35 percent. The new law regulates all types of personal incomes, including ones that were previously subject to other laws such as income from individual businesses and from property sales. It levies a 20% rate on personal income from capital and securities transactions. Also for the first time, charity donations will be tax deductible. Some provisions of the new personal income tax regime have come under criticism from the business community and the GVN is mulling revisions in 2009.

Investment Challenges

Vietnam remains a poor country with per capita GDP of $1,023 (2008 estimate). The economy continues to evolve towards a free market system but some sectors have been slower to make the transition from a command economy. State-owned or state-controlled enterprises continue to take up a large segment of the economy (about 37% of GDP).

As the GVN engages in this complex process, foreign investors must cope with a wide range of challenges. These include poor infrastructure, underdeveloped and cumbersome legal and financial systems, an unwieldy bureaucracy, non-transparent regulations, high start-up costs, arcane land acquisition and transfer regulations and procedures, and shortage of skilled personnel. Issuance of investment licenses can be a lengthy process, and inconsistent practices have been noted between provinces. Investment projects in both pre- and post-establishment phases must cope with frequent changes in the investment environment in areas such as taxes, tariffs, import and export policies, and procedures.

Many investors cite red tape and corruption as significant challenges in establishing and running their businesses.

Judicial System

The Vietnamese court system has failed to adapt to the demands of a modern economy. Courts have so far proved unwilling or unable to enforce laws related to investor protection, in particular, the enforcement of arbitral awards.

Conversion and Transfer Policies

Foreign businesses are permitted to remit their profits in hard currency, revenues from joint ventures, and income derived from services, technology transfers, legally owned capital and intellectual property. Foreigners are also allowed to remit royalties and fees paid for the supply of technologies and services, principal and interest on loans obtained for business operations, and investment capital and other money and assets under their legitimate ownership. Approval by investment authorities is needed to increase or decrease the capital of a foreign-invested business.

In principle, foreign investors are expected to be "self-sufficient" for their foreign exchange requirements, although this sometimes proves impractical. GVN guarantees to assist in the balancing of foreign currency for foreign invested enterprises and foreign business cooperation parties that invest in the construction of infrastructure and certain other important projects in the event that banks permitted to trade foreign currency are unable to fully satisfy their foreign currency demand.

In 2008, the State Bank of Vietnam adjusted the official exchange rate (reference rate) and expanded the trading band for dollar and Vietnamese dong exchange transactions several times, effectively devaluing the dong by 7.25 percent. The trading band for dollar and dong is currently set at 3 percent. Commercial banks are allowed to determine the differential between currency selling and buying prices within the set trading band. Lower export growth coupled with projected declines in FDI and portfolio investments in 2009 have put pressure on hard currency availability, particularly dollars.

Expropriation and Compensation

The U.S. Mission knows of no recent instances of expropriation of a foreign investment by the GVN.

Under the BTA, in any future case of expropriation or nationalization of U.S. investor assets, Vietnam will be obligated to apply international standards of treatment - that is taking such an action for a public purpose, in a non-discriminatory manner, in accordance with due process of law, and with payment of prompt, adequate and effective compensation.

Dispute Settlement

Foreign and domestic arbitral awards are technically legally enforceable in Vietnam. Vietnam is a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, meaning that foreign arbitral awards rendered by a recognized international arbitration institution must be respected by Vietnamese courts without a review of the case's merit.

Under the investment chapter of the BTA, Vietnam gives U.S. investors the right to choose a variety of third-party dispute settlement mechanisms in the event of an investment dispute with the GVN. Vietnam has not yet acceded to the Convention on the Settlement of Investment Disputes between States and Nationals of other States (ICSID), but has asked the United States to provide advice in this area as part of the U.S. technical assistance program designed to assist Vietnam to fully implement the BTA. The Ministry of Planning and Investment (MPI) has submitted a proposal to the GVN to join to ICSID. This proposal is under consideration.

Vietnam's legal system, including its dispute and claims settlement mechanisms, remains underdeveloped and ineffective in settling disputes. Negotiation between the concerned parties is the most common and preferred means of dispute resolution. Although contracts are difficult to enforce in Vietnam, investors generally should negotiate and include dispute resolution procedures in their contracts. However, even with such provisions, resolution is not guaranteed.

In the event of an investment dispute, a number of domestic avenues are available. Economic courts, in addition to hearing bankruptcy cases, also have jurisdiction over cases involving business disputes. Administrative courts hear cases that concern alleged infractions of administrative procedures by government authorities. In such cases, the plaintiff must pay a bond to the court, half of which is forfeited if the dispute is resolved before the beginning of court proceedings. The court proceedings must begin within six months of the date of the dispute.

Outside of the court system, economic arbitration centers operate in a number of provinces and cities. However, it is not clear if these centers are legally competent to settle disputes involving foreign parties.

Another type of arbitration institution in Vietnam is the Vietnam International Arbitration Center (VIAC), which operates in close coordination with the Vietnam Chamber of Commerce and Industry (VCCI). VIAC has authority to settle disputes arising from international economic transactions including contracts on foreign trade and investment. However, it is not clear if investors would be free to choose foreign arbitrators or whether international standard arbitration rules apply, such as those of the International Chamber of Commerce (ICC) or the United Nations Commission on International Trade Law (UNCITRAL). VIAC decisions are final and cannot be appealed to any domestic court. The center does not yet have an established track record for competence or impartiality, and questions have been raised about the enforceability of its awards. For now, most foreign parties choose to stipulate "third party" arbitration in their contracts with Vietnamese parties and the government.

Performance Requirements/Incentives

Vietnam has removed performance requirements which are inconsistent with the TRIMS agreement. In particular, the Investment Law specifically outlaws the following requirements: giving priority to the purchase or use of domestic goods or services, compulsory purchase of goods or services from a specific domestic manufacturer or services provider, export of goods or services at a fixed percentage, restricting the quantity, value or type of goods or services that may be exported or which may be sourced domestically, fixing import goods at the same quantity and value as goods exported, requiring self-balance compulsory foreign currency, requirements to achieve certain local content ratios in manufacturing goods; stipulated levels or values on R&D activities, to supply goods or provide services in a particular location whether in Vietnam or abroad, or mandating the establishment of head offices in a particular location.

The GVN employs an extensive range of incentives in an attempt to attract foreign investment into certain priority sectors or geographical regions, such as mountainous and remote areas of the country with difficult economic and social conditions. The GVN specially encourages investment in production of new materials, new energy, manufacturing high-tech products, bio-technology, information technology, mechanical engineering, agricultural, fishery and forestry production, salt production, generation of new plant varieties and animal species, high technology, ecology and environmental protection, research and development, labor-intensive projects (using 5,000 or more full time laborers), infrastructure projects, education, training, health and sports development.

Foreign investors are exempted from import duties on goods imported for their own use and which cannot be procured locally, including all equipment, machinery, vehicles, components and spare parts for machinery and equipment, raw materials, inputs for manufacturing and construction materials that cannot be produced domestically.

Provinces provide numerous tax and other incentives to prospective investors.

Vietnam has also instituted a number of incentives designed to attract investment from Vietnamese expatriates and their families. In 2008, the GVN recognized dual citizenship for Vietnamese expatriates. They are allowed to choose the option of operating as domestic businesses or as foreign ones, whichever is more convenient to them. Real estate laws have also been amended to permit limited categories of these investors to buy land use rights to build homes.

U.S. citizens of Vietnamese descent may be treated as Vietnamese nationals unless they have formally renounced their Vietnamese citizenship. U.S. investors of Vietnamese origin should consult the U.S. Embassy in Hanoi or the U.S Consulate General in Ho Chi Minh City for more information.

Right to Private Ownership and Establishment

The right to private property was enshrined in Vietnam's Constitution in 1992, recognizing the "the right of ownership with regard to lawful income, savings, housing, chattel, means of production funds and other possessions in enterprises or other economic organizations" (Article 58).

Real estate rights in Vietnam are divided into land ownership, which is collective, and land-use and building rights, which can be held privately. All land in Vietnam is owned collectively and managed by the state and, as such, neither foreigners nor Vietnamese nationals can own it. In addition to land, collective property includes "forests, rivers and lakes, water supplies, wealth lying underground or coming from the sea, the continental shelf and the air, the funds and property invested by the State in enterprises and works in all branches and fields - the economy, culture, society, science, technology, external relations, national defense, security - and all other property determined by law as belonging to the State."

The Land Law of 2003 extended "land-use rights" to foreign investors, allowing title holders to conduct real estate transactions, including mortgages. Foreign investors can lease land for (renewable) periods of 50 years, and up to 70 years in some poor areas of the country. Starting in 2009 foreigners who meet the following criteria can own apartments in Vietnam:

- Individuals who invest directly in Vietnam or who are hired for management positions by local or foreign-invested companies in the country;
- Foreigners who receive certificates of merit or medals from the president or government for their contributions to the country;
- Foreigners who work in socio-economic fields hold a bachelor's or higher degree and possess special knowledge and skills that Vietnam needs;
- Foreigners who are married to Vietnamese residents; and
- Foreign-invested enterprises operating in Vietnam that need to buy housing for their employees.

Protection of Property Rights

The basis of a legal system that protects and facilitates property rights have been established but the Vietnamese legal system remains in a state of transition. Much more work needs to develop the laws and enforcement mechanisms needed to adequately protect property rights in Vietnam.

Vietnam has made progress over the past few years in establishing the legal framework for IPR protection but infringement continues to be widespread and enforcement of administrative orders and court decisions finding IPR infringement remains problematic. In addition, IPR administration is complicated and coordination between concerned agencies is loose. The Vietnamese authorities have investigated and intervened with IPR violators but overall enforcement actions continue to be sporadic and insufficient.

Transparency of the Regulatory System

Vietnam's ongoing transition to a full market economy has and will continue to require profound legal changes. Vietnamese officials have limited experience drafting legislation, and new laws and regulations sometimes are contradictory or unclear. Not all officials, especially those at the provincial and local levels, are fully up-to-date on all the new laws and regulations that affect their area of responsibility. Nor are all laws and regulations readily available to business and the public. Officials, sometimes even within the same agency, may interpret laws differently. There is a shortage of practicing lawyers, judges, and law professors.

In recent years, Vietnam has improved its process for making and publicizing laws, particularly with major national laws and regulations. However, regulations at the ministerial, sub-ministerial and local levels are often issued without public notification and with little advance warning or opportunity for comment by affected parties.

The Law on the Promulgation of Legal Normative Documents requires that all legal documents and agreements to international conventions be published in the Official Gazette. The Gazette has been published on a daily basis since 2003.

Substantial foreign assistance, including that funded by the United States, is being devoted to assist Vietnam to establish a legal structure compatible with international standards. The USAID-funded Support for Trade Acceleration (STAR) project has made a substantial contribution to Vietnam's successful efforts to draft the new laws and regulations required under the BTA and the WTO.

Efficient Capital Markets/Portfolio Investment

Vietnam's financial system is in the early stages of reform, and the financial markets are poorly managed and regulated. A continued lack of financial transparency and non-compliance with internationally accepted standards among Vietnamese firms continues to pose problems for GVN plan to expand stock and securities markets to raise capital internally.

The banking sector is underdeveloped. Only 10% of Vietnamese have a bank account and 50% of personal savings are held outside the banking system (in gold or cash). Most of the domestic banks are under-capitalized and hold a large number of non-performing loans. (Because of lack of transparent auditing or financial reporting, it is difficult to know the exact proportion of non-performing loans.) State-directed lending under non-commercial criteria remains a source of concern with state owned commercial banks (SOCBs). The four largest banks (Vietcombank, Vietinbank, the Bank for Agriculture and Rural Development (Agribank), and the Vietnam Investment Bank for Investment and Development in Vietnam (BIDV)) are state-owned or majority state-owned.

The GVN has embarked on a comprehensive banking reform program that relies on market-based action that is intended to ensure the stability of the banking system. In the medium-to-long term the reforms should promote better mobilization of domestic resources by improving allocation of those resources to commercially viable activities and should expand banking services throughout Vietnam, but progress has been slow. In 2008, the State Bank of Vietnam for the first time granted licenses to wholly foreign-owned banks HSBC, Standard Chartered Bank and ANZ. State-owned Vietcombank and Vietinbank conducted initial public offerings (IPO) in December 2007 and December 2008, respectively, and plan to list on Vietnam's stock market. The state remains the controlling shareholder in both banks.

A number of major international accounting firms have opened offices in Vietnam and, unlike foreign law firms (which are subjected to restrictions including advising clients on Vietnamese law and hiring Vietnamese lawyers), can provide advice on accounting and business issues directly to foreign clients in Vietnam.

Foreign investors generally meet their foreign currency credit needs offshore or with foreign bank branches, although availability of foreign currency to convert dong assets to cover dollar liabilities can be, at times, uncertain. The State Bank of Vietnam (SBV) raised the dong deposit ratio for all foreign banks in line with Vietnam's WTO commitments, to be phased in until 2010. By 2011, foreign banks will receive national treatment on dong deposits, i.e., the same requirements as applied to local banks. The SBV and the Ministry of Finance conduct sales of state bonds denominated in local currency, but Vietnam only has an informal secondary market for such instruments.

Over 300 companies are listed in the Ho Chi Minh Stock Exchange (HOSE) and in the Hanoi Securities Trading Center, with a joint capitalization of approximately $16 billion in January 2009. The majority of listed firms are former SOEs that have undergone partial privatization (equitization). The GVN plans to conduct IPOs of a number of large SOEs in 2009, including three of the four large state-owned commercial banks (SOCBs) mentioned above. The GVN's initial timeline for SOE equitization has slowed since the market cooled in mid-2008, and strategic investors have become less enthusiastic given poor market performance.

The GVN caps equity held by foreign investors in listed Vietnamese companies at 49 percent. Net foreign portfolio investment estimates were in the $100 million range by the end of 2008. Share prices of stocks in the HOSE cannot increase or decrease by more than five percent per trading session.

Political Violence

The Mission knows of no incidents of violence against investors in Vietnam.

Vietnam remains a one-Party state that brooks no overt criticism and restricts basic political freedoms to varying degrees. A limited amount of dissent is allowed.

In 2008, labor strikes increased and land rights protests occurred in both HCMC and Hanoi but none of these overtly challenged the political establishment and overall political stability. Political stability is likely to continue into 2009.

Corruption

U.S. and other foreign firms, as well as domestic private sector firms, have identified corruption in Vietnam in all phases of business operations as an obstacle to their business activities. Despite pledges to tackle corruption, in 2008 the GVN detained reporters and their sources for exposing public corruption. In December 2008, the Government of Japan made the unprecedented announcement that it was suspending low-interest loans to Vietnam until it takes "meaningful" steps to eliminate corruption in public works programs. The 2008 Transparency International's Corruption Perception Index listed Vietnam with a low ranking of 2.3, placing 121 out of 180 countries surveyed.

These failings are in large part due to a lack of transparency, accountability and media freedom. Competition among GVN agencies for control over business and investments has created a confused overlapping of jurisdictions and bureaucratic procedures and approvals that in turn create opportunities for corruption. Low pay for government officials and inadequate systems for holding officials accountable for their actions compound the problems.

Anti-corruption laws require GVN officials to declare their assets and set severe penalties for those caught red-handed. An anti- corruption steering committee led by the Prime Minister is tasked with coordinating the fight against corruption.

The United States is working with Vietnam on an ambitious administrative reform program that will compel provincial governments to justify licenses and regulations, or have them "guillotined."

Bilateral Investment Agreements

Vietnam has 52 bilateral investment agreements with the following countries and territories: Algeria, Argentina, Armenia, Australia, Austria, Belarus, Belgium and Luxembourg, Bulgaria, Burma, Chile, China, Cuba, Czech Republic, Cambodia, Denmark, Egypt, Finland, France, Germany, Hungary, Iceland, India, Indonesia, Italy, Japan, Kuwait, Laos, Latvia, Lithuania, Malaysia, Mongolia, Mozambique, Netherlands, North Korea, Philippines, Poland, Romania, Russia, Singapore, South Korea, Spain, Sweden, Switzerland, Taiwan, Tajikistan, Thailand, Ukraine, United Kingdom, and Uzbekistan. In December 2008, Vietnam and the United States began negotiations of a Bilateral Investment Treaty (BIT). The BTA also contains an investment chapter that closely resembles U.S. BITs and contains many of the principal obligations common to such agreements.

OPIC and Other Investment Insurance Programs

The Overseas Private Investment Corporation (OPIC) has a standing bilateral agreement with Vietnam that provides the protections and guarantees necessary for OPIC to operate in Vietnam.

Vietnam joined the Multilateral Investment Guarantee Agency (MIGA) in 1995.

Labor

One of Vietnam's main investment advantages is its large (over 45 million people), literate (GVN reports a literacy rate of over 90 percent), inexpensive and young (over 75 percent of the population is under 40) labor force. The labor pool continues to increase by over 1.6 million workers annually due to the post-war population explosion.

However, inflation above 20% is driving up demands for wages, sometimes resulting in strikes. Slowing exports at the end of 2008 was reportedly forcing some industries to close, a trend that will require special attention throughout 2009.

Minimum wages vary depending on the composition of the ownership and the geographical zone. By 2012 Vietnam will set a single nationwide minimum wage. The GVN suspended the implementation of most minimum wage increases in early 2009, concerned that it may worsen the business climate amidst a worsening economic situation. In foreign-invested enterprises, the current minimum monthly salaries are VND1,200,000 ($70) in Zone 1 (part of Ha Dong of Hanoi and Ho Chi Minh City)), VND1,080,000 ($64) in Zone 2 (Gia Lam, Dong Anh, Soc Son, Thanh Tri, Tu Liem, Thuong tin, Hoai Duc, Dan Phuong, Thach That, Quoc Oai and Son Tay of Hanoi; Thuy Nguyen and An Duong of Haiphong; Districts of Danang; Ninh Kieu, Binh Thuy of Can Tho; Halong of Quang Ninh; Bien Hoa and other districts of Dong Nai, Vung Tau and Tan Thanh District of Ba Ria Vung tau; Thu Dau Mot and Thuan An, Di An, Ben Cat, Tan Uyen of Binh Duong; and the suburbs of Ho Chi Minh City), VND950,000 ($56) in Zone 3 (cities belongs to provinces, other districts of Hanoi; Bac Ninh and Tu Son, Que Vo, Yen Phong of Bac Ninh; Bac Giang, Viet Yen, Yen Dung of Bac Giang and some other districts of Hung Yen, Hai Duong, Vinh Phuc, Hai Phong, Tay Ninh, Binh Duong, Dong Nai, Long An, Can Tho, Ba Ria Vung tau) and VND920,000 ($54) in Zone 4, that is, in all other areas. Minimum wages are lower for domestic enterprises: VND620,000 ($47) in Zone 1, VND740,000 ($43) in Zone 2, VND690,000 ($40) in Zone 3 and VND650,000 ($38) in Zone 4. The government may temporarily exempt certain joint ventures from paying the minimum wage during the first months of an enterprise's operations or if the enterprise is located in a very remote area, but the minimum monthly wage in these cases can be no lower than VND800,000 ($50).

Foreign investors can hire and recruit staff directly, but only after exhausting a 15-day period using a state-run employment and recruitment bureau. In practice, many employers omit this step and hire their personnel directly without going through the bureau. All personnel must be registered with the GVN.

The 2007 Labor Law introduced an extensive process of mediation and arbitration to deal with labor disputes. According to the Labor Law, workers cannot go on strike until mediation procedures have been exhausted. New sections of the Law also require that at least 50% of the workers in enterprises with fewer than 300 workers must vote for the strike and 75% in industries with 300 workers or more.

In 2008, there were a record 762 labor strikes -- most of them in the southern industrial zones and most of them "illegal" under Vietnamese laws (by law, any "legal" strike has to be conducted through the labor union and use the lengthy and complex set of conciliation and arbitration steps). The GVN rarely takes action against "illegal" strikers. The failure of wages to keep pace with high inflation, which was running at over 20% through 2008, and poor industrial communications are often cited as the two principal causes of labor disputes.

Employers are required by law to establish labor unions within six months of establishment of any company -- something that, in practice, many employers fail to do. All labor unions must be members of the Vietnam General Confederation of Labor; a state-run organization under the Communist Party-affiliated Fatherland Front that labor experts note has particularly weak capacity at the provincial and enterprise level.

Vietnam has been a member of the International Labor Organization (ILO) since 1992, and has ratified five core labor conventions (Conventions 100 and 111 on discrimination, Conventions 138 and 182 on child labor, and Convention 29 on forced labor). Vietnam has not ratified Convention 105 dealing with labor as a means of political coercion and discrimination, but is considering doing so. The GVN has also not ratified Conventions 87 and 98 on freedom of association and collective bargaining and is not expected to do so in the near future. Under the Declaration on Fundamental Principles and Rights to Work, however, all ILO members, including Vietnam, have pledged to respect and promote all the core ILO labor standards, including those on association, right to organize and collective bargaining. A number of technical assistance projects in the field of labor sponsored by foreign donors are underway in Vietnam. Support from the U.S. Department of Labor for an ILO project to strengthen Vietnam's industrial relations mechanisms ended in 2006, but has continued with funding from another donor.

Foreign Trade Zones/Free Ports

Industrial zones (IZs) have been developed to offer tax advantages for establishing factories within the zones. Companies can produce within an IZ for the domestic market or for export. The companies pay no duties when importing raw materials, if the end products are exported. Vietnam committed to eliminating prohibited export subsidies on its accession to the WTO.

Vietnam has 194 IZs and export processing zones (EPZs). There were 3,325 foreign invested enterprises licensed in the zones with a total registered capital of $39.3 billion. IZs and EPZs employed approximately 1.1 million people.

Many foreign investors note that it is faster and more convenient to implement their projects in industrial zones than outside the zones as the land use is already planned and they do not have to be involved in site clearance, compensation works and the construction of necessary infrastructure, which are time consuming and sometimes difficult. Foreign investment in the industrial zones is primarily in the light industry sector, such as food processing and textiles and garments. The number of heavy industry projects is still modest.

Customs warehouse keepers can provide transportation services and act as distributors for the goods deposited. Additional services relating to customs declaration, appraisal, insurance, reprocessing or packaging require the approval of the provincial customs office. In practice the level of service needs improvement. The time involved for clearance and delivery can be lengthy and unpredictable.

Most goods pending import and domestic goods pending export can be deposited in bonded warehouses under the supervision of the provincial customs office. Exceptions include goods prohibited from import or export, Vietnamese-made goods with fraudulent trademarks or labels, goods of unknown origin, and goods dangerous or harmful to the public or environment. The (inbound warehouse) leasing contract must be registered with the customs bond unit at least 24 hours prior to the arrival of goods at the port. Documents required are a notarized copy of authorization of the holder to receive the goods, a notarized copy of the warehouse lease contract, the bill of lading, a certificate of origin, a packing list, and customs declaration forms. Owners of the goods pay import or export tax when the goods are removed from the bonded warehouse.

Foreign Direct Investment Statistics

Foreign investment statistics as follows:

Foreign Direct Investment 2004-08 (all amounts in billion U.S. dollars)

2008
Number of projects authorized: 1171
Authorized Investment: $64.01.27
Implemented Investment: $11.5

2007
Number of projects authorized: 1544
Authorized Investment: $21.3
Implemented Investment: $8.03

2006
Number of projects authorized: 833
Authorized investment: $12.00
Implemented investment: $4.1

2005
Number of projects authorized: 970
Authorized investment: $6.8
Implemented investment: $3.300

2004:
Number of projects authorized: 811
Authorized investment: $4.5
Implemented investment: $2.900

Source: GVN's Foreign Investment Agency
Note: GVN authorities routinely revise or revoke investment licenses that have not been utilized, and some investment licenses contain automatic expiration clauses that take effect if a project or certain phases of a project are not implemented by a certain date. Statistics on the number of licensed projects and the value of licensed projects are then adjusted accordingly.

FDI by Sector 1988-2008 (all amounts in billion U.S. dollars)

Sector: Industry and manufacture
Number of Projects Authorized: 6,303
Authorized investment: $87.8
Implemented investment: $29.66

Sector: Oil and gas
Number of Projects Authorized: 48
Authorized investment: $14.47
Implemented investment: $4.65

Sector: Hotels and tourism
Number of Projects Authorized: 250
Authorized investment: $15.41
Implemented investment: $4.46

Sector: Agriculture and forestry
Number of Projects Authorized: 976
Authorized investment: $4.79
Implemented investment: $2.29

Sector: Transportation and Communications
Number of Projects Authorized: 235
Authorized investment: $6.25
Implemented investment: $3.47

Sector: Finance and banking
Number of Projects Authorized: 68
Authorized investment: $1.05
Implemented investment: $0.99

Sector: Fisheries
Number of Projects Authorized: 138
Authorized investment: $0.47
Implemented investment: $0.26

Sector: Service
Number of Projects Authorized: 2,524
Authorized investment: $57.18
Implemented investment: $20.05

Source: GVN

FDI by Country 2008 (all amounts in billion U.S. dollars)

Country: Number of projects / Authorized Investment
1. Malaysia: 55 / $14.93
2. Taiwan: 132 / $8.86
3. Japan: 105 / $7.28
4. Singapore: 101 / $4.466
5. Brunei: 19 / $4.40
6. Canada: 9 / $4.23
7. Thailand: 32 / $3.99
8. British Virgin Islands: 49 / $3.94
9. Cyprus: 3 / $2.20
10. South Korea: 292 / $1.80

Vietnam's Overseas Investment

There is little data available on Vietnam's direct investment abroad. Vietnamese has over 250 investment projects abroad values at over $14 billion. Vietnam's largest overseas investment is in Venezuela, a PetroVietnam project in the Orinoco field with a total projected value of $11.4 billion. PetroVietnam also has six investment projects in Asia, four in Africa and six in Latin America. Vietnam is the leading investor in Laos. Vietnam also has investments in Russia, Cuba, Singapore, Japan, Hong Kong, Cambodia, Tajikistan, the Middle East, the United States, Uzbekistan, and Taiwan. In addition to oil and gas, investments were concentrated in mining, transport, communications, construction, food processing, hydro-power production, hotel, restaurant, and agriculture sectors. The Investment Law has a chapter governing Vietnam's investment overseas.

Note: Statistics, including those on investment, are often difficult to come by and are generally based on definitions that differ from internationally accepted standards. Those published in government statistical surveys are generally incomplete and are often inconsistent from publication to publication and over time. It is the policy of the Ministry of Planning and Investment to respond only to written requests for statistics or information on how they are compiled and calculated, a process that is cumbersome and very time consuming. Additional statistical data is often released in the local press but is difficult to confirm and update year-to-year, because it is not provided in a database, which is readily available to the public.



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