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U.S. Department of State

Diplomacy in Action

2011 Investment Climate Statement - Vietnam


2011 Investment Climate Statement
Bureau of Economic, Energy and Business Affairs
March 2011
Report
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Openness to Foreign Investment

Vietnam encourages foreign investment as part of its development strategy, and the Government of Vietnam (GVN) is committed to improving the country’s business and investment climate. The Investment Law of 2005 provides the legal framework for foreign investment in Vietnam.

Vietnam became the 150th member of the World Trade Organization 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 as well as 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. Vietnam has made solid progress in implementing its bilateral and international obligations; however, concerns remain in some areas, such as protection of intellectual property rights (IPR) and effectiveness of the court/arbitration system.

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 in Vietnam. These forums, together with frequent dialogues between GVN officials and foreign investors, have led to improved communication and have allowed foreign investors to comment on and influence many legal and procedural reforms.

Despite the GVN’s commitment to improving the country’s business and investment climate, Vietnam is still transitioning from a centrally planned economy to a more market-oriented and private-sector based model. As indicated by the following indices, Vietnam’s business climate is generally improving, but the country still faces development challenges relevant for foreign investors, for example: poorly developed 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, a shortage of skilled personnel, and pervasive corruption. Some companies have experienced delays in obtaining investment licenses, and inconsistent licensing practices have been noted between provinces. Investors frequently face policy changes related to taxes, tariffs, and administrative procedures, sometimes with little advance notice, making business planning difficult. Because Vietnam’s labor laws and implementation of those laws are not well developed, companies sometimes face difficulties with labor management issues.

Following are Vietnam’s rankings according to various indices.

Index

2010 Rank

2009 Rank

Change in rank

TI Corruption Perceptions Index

116

120

+4

The 2010 Heritage Index of Economic Freedom:

144

145

+1

Index 2011 rank 2010 rank Change in rank
World Bank’s Ease of Doing Business 78 88 +10
Starting a Business 100 114 +14
Dealing with Construction Permits 62 70 +8
Registering Property 43 39 -4
Getting Credit 15 30 +15
Protecting Investors 173 172 -1
Paying Taxes 124 146 +22
Trading Across Borders 63 59 -4
Enforcing Contracts 31 31 0
Closing a Business 124 125 +1

Index

2010 score and % ranking in low-income peer group

2009 score and % ranking in low-income peer group

MCC Government Effectiveness

0.65 (92%)

0.42 (83%)

MCC Rule of Law

0.50 (85%)

0.33 (76%)

MCC Control of Corruption

0.25 (76%)

0.08 (58%)

MCC Fiscal Policy

-3.9 (27%)

-0.5 (58%)

MCC Trade Policy

68.9 (51%)

63.4 (36%)

MCC Regulatory Quality

0.13 (60%)

0.28 (72%)

MCC Business Start Up

0.96 (75%)

0.945 (79%)

MCC Land Rights Access

0.78 (91%)

0.796 (91%)

MCC Natural Resource Management

80.58 (95%)

80.49 (90%)

Investment Regulation

The 2005 Investment Law, together with its implementing decrees and circulars, regulates investment in Vietnam, including investors’ rights and obligations, investment incentives, state administration of investment activities and offshore investment. The Investment Law also provides for guarantees against the nationalization or confiscation of assets and applies to both foreign and domestic investors. The Investment Law designates prohibited and restricted sectors for investment, but there are additional laws that apply conditions to investments in sectors such as mining, public post, property trading, banking, securities, and insurance.

The Investment Law provides for five main forms of direct foreign investment: (1) 100 percent foreign-owned or domestic-owned companies; (2) joint ventures (JV) between domestic and foreign investors; (3) business contracts (such as business cooperation contracts (BCC), build-and-operate agreements (BOT and BTO) and build and transfer contracts (BT)); (4) capital contribution for management of a company; and (5) merger and acquisitions (M&A). Foreign investors can invest indirectly by buying securities or investing through financial intermediaries.

Vietnam has gradually opened some sectors for foreign investment through M&A. While foreign investors are allowed to buy shares in some domestic companies without limitation, examples where this has occurred are rare. The ratio of total foreign ownership permitted in a project depends on a number of factors, including Vietnam’s international commitments, the economic sector in question, and the type of investor, among others. There are ownership limitations for certain companies listed on the Vietnam stock exchange and service sectors. Foreign ownership cannot exceed 49 percent of listed companies and 30 percent of listed companies in the financial sector. A foreign bank is allowed to establish a 100 percent foreign owned bank in Vietnam but may only own up to 20 percent of a local commercial bank. Individual foreign investors are usually limited to 15 percent ownership, though a single foreign investor may increase ownership to 20 percent through a strategic alliance with a local partner.

Investment Sectors

The Investment Law distinguishes four types of sectors: (1) prohibited sectors; (2) encouraged sectors; (3) conditional sectors applicable to both foreign and domestic investors; and (4) conditional sectors applicable only to foreign investors.

The list of sectors in which foreign investment is prohibited includes cases where the investment would be detrimental to national defense, security and public interest, health, and historical and cultural values.

The list of sectors in which investment is encouraged includes high-technology, agriculture, labor-intensive industries (employing 5,000 or more employees), infrastructure development, and projects located in remote and mountainous areas.

The list of sectors in which investment is conditional applies to both foreign and domestic investors and includes those having an impact on national defense, security, social order and safety; culture, information, press and publishing; 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.

The sectors where certain conditions are applicable to foreign investors only include telecommunications, postal networks, ports and airports, and other sectors as per Vietnam’s commitments under international and bilateral arrangements.

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 license.

Foreign participation in distribution services, including commission agents, wholesale and retail services, and franchising opened to fully foreign-owned businesses in 2009. Vietnam has excluded certain products from its WTO distribution services commitments, including, 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 equipment opened to foreign investors in 2010. For additional details see www.wto.org/english/thewto_e/countries_e/vietnam_e.htm.

Investment Licensing

Provincial authorities in Vietnam’s 63 cities and provinces generally have the authority to issue investment licenses. Provincial authorities and the management boards of industrial zones (Industrial, Export Processing Zones, High-tech and Economic Zones) are the issuing entities for most types of investment licensing, with the exception of build-and-operate projects (BOT, BO, BTO), which are still licensed by the central government. Domestic investors with projects of less than VND 15 billion (approximately USD $770,000) do not need to acquire investment licenses.

The procedure to obtain investment certification is complex, requiring investors to get approval from several ministries and/or agencies, depending on ownership (foreign or domestic), size and the sector of investment. Projects deemed to be of “national importance” must be approved by the National Assembly. Key infrastructure projects must be approved by the Prime Minister's Office (see below). Investments in conditional sectors such as broadcasting, mining, telecommunications, banking and finance, ports and airports, and education are subject to a more complex licensing process.

Licensing is required to establish new 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.

Decentralization of licensing authority to provincial authorities has streamlined the licensing process and significantly reduced processing times; however, it has also given rise to considerable regional differences in procedures and interpretations 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/.

Investment projects that must be approved by the Prime Minister include:

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

- All projects having capital in excess of VND 1.5 trillion (approximately USD $81 million), regardless of foreign ownership, in electricity; mineral processing and metallurgy; railways, roads and domestic waterways; and alcoholic beverages.

- All foreign-invested projects in sea transport, post and telecommunication, publishing and independent science research units.

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 2005 Commercial Law and the implementing guidelines contained in Decree 72, which was issued by the Prime Minister in July 2006, allow foreign firms to establish branches or representative offices. Branches may engage in trading activities, while the representative offices are allowed to liaison with customers, negotiate and enter into contracts on behalf of their parent company and conduct market research, but not to engage in commercial or profit making activity.

Participation of Foreign Investors in the GVN “Privatization” Program

Foreign investors are allowed to buy shares in State-owned enterprises (SOEs) being “equitized” (converted to joint stock companies, but not necessarily privatized) by the GVN. Shares are typically offered through a price auction. Foreign ownership in certain specified sectors may not exceed 49 percent. The share price offered to foreign investors must be higher than the average auctioned price.

Other Investment Related Legislation

Vietnam's Bankruptcy Law of 2004 provides that parties other than creditors are able to participate in bankruptcy procedures and gives courts authority to deal with insolvent businesses.

The Law on Competition of 2004 aims to create an equitable and non-discriminative competition environment, and protect and encourage fair competition. The Law acknowledges 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

Vietnam lowered corporate income tax rates from 28 to 25 percent in January 2009. Corporate income tax for extractive industries varies from 32 to 50 percent depending on the project, and can be as low as 10 percent if an investment is made in selected priority sectors and in remote areas. Incentives are the same for both foreign invested and domestic enterprises.

Vietnam does not tax profits remitted by foreign-invested companies. However, companies are required to fulfill their local tax and financial obligations before remitting profits overseas and are not permitted to accumulate losses. A new personal income tax regime placing Vietnamese and foreigners on the same tax rate schedule took effect in January 2009. The new law regulates all types of personal income, including income previously subject to other laws such as income from individual businesses and property sales. The lowest and highest marginal tax rates are 5 percent and 35 percent, respectively.

Vietnam and the United States began discussions towards a bilateral agreement on the avoidance of double taxation in December 2010.

Conversion and Transfer Policies

Foreign businesses are permitted to remit profits in hard currency, revenues from joint ventures, income derived from services, technology transfers, and legally owned capital and intellectual property, after paying all relating tax liabilities. 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, investment capital and other money and assets.

According to the 2005 Ordinance on Foreign Exchange Control, all currency transactions between residents and non-residents of Vietnam shall be conducted freely. Residents are allowed to open foreign currency accounts. Exporters are required to remit all foreign currency earnings into a foreign currency account with an authorized credit institution in Vietnam. Retaining foreign currency earnings overseas requires approval of the State Bank of Vietnam (SBV).

Foreign investors are expected to be "self-sufficient" for their foreign exchange requirements. The laws stipulate that the GVN will assist in balancing foreign currency supplies for foreign investors in transportation infrastructure, energy, and waste management when banks are unable to satisfy their foreign currency requirements.

The SBV publishes daily average interbank exchange rates against the dollar, and then allows dollar/dong transactions to move in a band around this daily rate. The SBV has maintained a trading band of less than +/- three percent since November 2009.

Dollar shortages were reported at various times in 2009 and 2010, which the SBV claimed was a result of the global recession and Vietnam’s persistent trade deficits. Many enterprises reported difficulty in obtaining sufficient dollar funds, and claimed they were forced to purchase at higher black-market rates to pay for their imports or pay additional bank fees that resulted in an approximation of the black-market rate. Dollar shortages remained an intermittent problem at the end of 2010, at which time the black-market rate for dollars had remained approximately eight percent above the official rate for three months.

Expropriation and Compensation

The U.S. Mission knows of no recent instances of expropriation of a foreign investment by the GVN. During 2010, however, there were several incidents in which foreign investors were pressured by the provincial or national government to increase the pace of project development or risk the loss of their investment licensing.

Under the U.S.-Vietnam Bilateral Trade Agreement (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

The hierarchy of Vietnamese courts include: (1) Supreme Court; (2) Provincial Courts; and (3) District Courts. The courts operate in five divisions: criminal, civil, administrative, economic and labor. Parallel to the court systems is the People’s Procuracy, which is responsible for supervising the operation of judicial authorities. The People’s Procuracy can protest a judgment or ask for a review of a case. In addition, Vietnam has a system of independent arbitration centers, established under the Commercial Arbitration Ordinance (2003), which can grant enforceable arbitral awards.

Foreign and domestic arbitral awards are 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 implement the BTA. The Ministry of Planning and Investment (MPI) has submitted a proposal to the GVN to join the ICSID, which is still 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.

Under the 2005 Civil Code, all contracts are “civil contracts” subject to uniform rules over all contractual relations, including those with foreign businesses. In foreign civil contracts, parties are allowed to choose foreign laws as reference for their contractual agreement, provided that the application of the law does not violate the basic principles of Vietnamese law. In addition, commercial contracts between businesses are also regulated by the 2005 Commercial Law.

Performance Requirements and Incentives

As part of its WTO accession, Vietnam committed to remove performance requirements that are inconsistent with the TRIMS agreement. In particular, the Investment Law specifically prohibits 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; requirements to achieve certain local content ratios in manufacturing goods; stipulated levels or values on R&D activities; supplying goods or services in a particular location whether in Vietnam or abroad; or mandating the establishment of head offices in a particular location.

The GVN actively promotes foreign investment in 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 sources, manufacturing of high-tech products, bio-technology, information technology, mechanical engineering, agricultural, fishery and forestry production, salt production, generation of new plant varieties and animal species, ecology and environmental protection, research and development, labor-intensive projects (using 5,000 or more full time laborers), infrastructure projects, education, training, and health and sports development.

Foreign investors are exempt 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.

Remote and mountainous provinces are allowed to provide additional 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 their status as either domestic or foreign investors. 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 with 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 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. Certain foreigners can own apartments, durable construction, durable trees and planted forests for production purposes in Vietnam, but not the associated land.

Protection of Property Rights

The basis of the legal system related to property rights includes the 2005 Civil Code, the 2005 Intellectual Property Law, and implementing regulations and decrees. Vietnam has joined the Paris Convention on Industrial Property and the Berne Convention on Copyright and has worked to meet its commitments under these international treaties.

In 2009, Vietnam revised the Intellectual Property (IP) Law and IP-related provisions in the Criminal Code with respect to criminal penalties for certain acts of IPR infringement or piracy. These revisions reinforce previous criminal provisions set out in an Inter-ministerial Circular. The GVN also issued a Decree on Penalties on infringement of IPR, which increased the maximum fines to VND 500 million (approximately USD 30,000) plus seizure of any gains deriving from the infringing act.

Although Vietnam has made progress in establishing a legal framework for IPR protection, various forms of infringement and piracy of intellectual property continues to be widespread. Enforcement of administrative orders and court decisions on IP issues remains inconsistent and weak. In addition, the system of administrative enforcement is complex and rights holders have raised concerns regarding inconsistent coordination among enforcement agencies.

Most often, authorities use administrative actions such as warnings and fines to enforce IPR protection because they are less demanding on limited enforcement time and resources. The United States and other interested countries have conducted training for enforcement agencies, prosecutors and judges. Some businesses and rights holders have started to assert their rights under the law more forcefully. In recent years, the government pledged and then successfully implemented a plan to rid government offices of pirated software. Vietnamese enforcement bodies have investigated, and in some cases raided and fined, businesses suspected of using pirated software. However, Vietnam still has one of the highest rates of piracy in the world, and enforcement remains uneven, particularly for software, music and movies. Rights holders continue to seek additional enforcement actions against websites containing infringing digital content. However, to date, very little enforcement action has been taken to punish or prevent digital and Internet piracy.

Substantial compensation for IPR violations is only available under the civil remedies section of the IP Law. However, Vietnam's courts are untested in this regard, and concerns remain as to whether rights holders have adequate access to effective civil remedies under the IP Law. Criminal offenses are prosecuted under the Criminal Code, and criminal proceedings are regulated under the Criminal Procedure Code. In practice, however, criminal prosecutions are rarely used to prosecute IPR violations.

Transparency of the Regulatory System

Vietnam has improved its process for making and publicizing laws, particularly with major national laws and regulations. The Law on the Promulgation of Legal Normative Documents requires all legal documents and agreements under the drafting process be published online for comments for 60 days, and published in the Official Gazette before implementation. However, there are reports of regulations sometimes being issued without public notification or with little advance warning or opportunity for comment by affected parties.

Substantial foreign assistance, including by the United States, continues to be provided to assist Vietnam’s own efforts to establish a legal structure compatible with international standards. USAID’s Support for Trade Acceleration (STAR) I and II Projects made a significant contribution to Vietnam's successful efforts to draft the new laws and regulations required under the BTA and the WTO. The USAID Vietnam Competitiveness Initiative (VNCI) Project provides technical assistance to the Ministry of Justice to implement the requirements under the Law on Laws for regulatory impact assessments for all new laws, decrees and ordinances to improve regulatory quality and provide opportunity for public comment, e.g., by the private sector and civil society, on draft legislation. The Office of Government of Vietnam, with assistance from USAID/VNCI, has launched a new National Database of Administrative Procedures (AP) to improve and simplify the administrative procedures required to establish and conduct business in Vietnam.

Since June 2010 investors have been able to register new businesses online through a government web portal, following the Prime Minister’s Decree 43/2010. Although there have been some initial implementation problems, the business community has largely welcomed this new development and expects the business registration process will be more efficient and transparent as a result.

Efficient Capital Markets and Portfolio Investment

Vietnam's financial system is in the early stages of reform, and to date the financial markets remain weak and poorly regulated. A lack of financial transparency and non-compliance with internationally accepted standards among Vietnamese firms is among the many challenges facing Vietnam’s plan to expand the domestic stock and securities markets as a venue for firms to raise capital domestically.

The banking sector is underdeveloped. Only 17 percent of Vietnamese have a bank account and an estimated 50 percent of personal savings are held outside the banking system (in gold or cash, including foreign currency). Most domestic banks are under-capitalized and believed to hold a large number of non-performing loans (NPLs) though, under Vietnamese accounting standards, the official NPL rate is reported at only 2.5 percent. Due to a lack of transparent auditing or financial reporting, it is difficult to estimate the true proportion of non-performing loans. It is expected that in 2010, the size of non-performing loans will be significant in a number of banks following the near-bankruptcy and subsequent default of the Vietnam Ship Building and Industry Group (Vinashin), which may represent as much as four percent of outstanding loans in the banking system. State-directed lending under non-commercial criteria remains a source of concern with state-owned commercial banks (SOCBs).

Vietnam’s banking market is highly concentrated at the top and fragmented at the bottom. The four largest banks (Vietcombank, Vietinbank, the Bank for Agriculture and Rural Development, and the Vietnam Investment Bank for Investment and Development) are state-owned or majority state-owned, accounting for 65% of domestic lending, 62% of capital mobilization, and 58% of the total assets of the banking sector in 2009. Among these, the Bank for Agriculture and Rural Development is the largest with total assets of VND 470 trillion (USD 24 billion). Vietnam’s 38 joint stock commercial banks are much smaller than the state-owned commercial banks.

Vietnamese banks are now required to maintain minimum chartered capital of VND 1 trillion (about USD 50 million). This requirement will increase to VND 3 trillion (about USD 154 million) effective December 31, 2011; extended at the end of 2010 from the original deadline of December 31, 2010.

The GVN has initiated banking reforms intended to improve the stability of the banking system, especially via the equitization (or privatization) of State-owned commercial banks. Vietcombank and Vietinbank conducted initial public offerings (IPO) in December 2007 and December 2008, respectively, and both were listed on Vietnam’s stock market in 2009. The state remains the controlling shareholder in both banks (roughly 90% of the charter capital).

In 2008, the State Bank of Vietnam for the first time granted licenses to wholly foreign-owned banks: HSBC, Standard Chartered Bank, ANZ, Hong Leong and Shinhan Vina. The current ceiling for a foreign shareholder and a strategic shareholder in a local joint stock bank are set, respectively, at 30% and 15% of the total charter capital.

The Vietnamese stock market includes two stock exchanges: Ho Chi Minh Stock Exchange (HOSE) and Hanoi Stock Exchange (HNX). At the end of 2010, 275 stocks were listed in the HOSE with total market capitalization of approximately USD 29 billion and 363 companies were listed in the HASTC with total market capitalization of approximately USD 6.8 billion. The majority of listed firms are former SOEs that have undergone partial privatization (equitization). A new trading floor for unlisted public companies (UPCOM) was launched at the Hanoi Securities Center in June 2009, drawing the participation of 107 companies. In September 2009, a separate trading floor for government bonds was established. The GVN caps foreign equity in both listed and UPCOM Vietnamese companies at 49 percent, except for banks which are subject to 30% ownership limit.

Competition from State-Owned Enterprises (SOEs)

SOEs continue to play a prominent role in the economy, accounting for approximately 37.8 percent of GDP in 2009. SOEs are dominant in all strategic sectors, such as oil and gas, telecommunications, electricity, mining, and insurance.

In 2005, the GVN established the State Capital Investment Corporation (SCIC) to represent GVN state ownership in SOEs, with the responsibility to manage, restructure and trade State interests in such SOEs through the process of equitization and privatization. By 2015, SCIC plans to privatize or equitize more than 1000 state-owned enterprises, but the process has been slow. To date, SCIC has largely been given responsibility only for small and medium-sized SOEs. SCIC is also charged with accelerating SOE reforms, improving management in companies in its portfolio.

The 2005 Law on Enterprises requires all SOEs to change their corporate structures to operate, as of July 1, 2010, under the same legal and regulatory framework as all other business entities. However, there are additional SOE reforms needed in order to put the private sector on a level competitive field with SOEs, including preferential access to land and capital and conflict between the competing corporate ownership and regulatory functions of SOE management.

In 2010, Vietnam experienced the near-bankruptcy of state-owned shipbuilder, Vinashin, due to mismanagement and substantial investment outside its core business sectors. The incident has raised both domestic and international concern about the efficiency and continued viability of an economic model driven by a dominant state sector.

Vietnam allows foreign investors to participate in the equitization process (per Decree 109 issued in 2007), subject to the provisions of other laws that may restrict foreign investors’ participation in the process, such as ceilings on capital ownership. The GVN recently announced it would allow the selling of stakes to strategic foreign investors before their initial public offerings (IPO), and would consider new changes in the criteria for foreign strategic investors based on WTO commitments. Currently, local firms can sell shares to a strategic investor only after the IPO, and the ceiling price must not be lower than the average IPO winning price.

Corporate Social Responsibility

Many multinational companies implement Corporate Social Responsibility (CSR) programs in Vietnam. Although awareness of CSR programs appears to be increasing among domestic companies, only the largest Vietnamese companies implement CSR programs.

Political Violence

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

Corruption

Vietnam’s 2005 Anti-Corruption Law, considered by the World Bank as among the best legal frameworks for anti-corruption in Asia, requires GVN officials to declare their assets and set strict penalties for those caught engaging in corrupt practices. Implementation, however, remains problematic. The GVN signed the United Nation Convention on Anti-Corruption in July 2009.

The Government has tasked various agencies to deal with corruption, including the Steering Committee for Anti-Corruption (led by the Prime Minister), Government Inspectorate, and line ministries and agencies. However, few corruption cases have been detected, investigated and prosecuted.

The 2010 Transparency International Corruption Perceptions Index ranked Vietnam 116 out of 178 countries. Corruption in Vietnam is due in large part to a lack of transparency, accountability and media freedom, as well as low pay for government officials and inadequate systems for holding officials accountable for their actions. 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.

Vietnam’s 2009 Provincial Competitiveness Index (PCI), supported by USAID’s VNCI Project in partnership with VCCI, surveyed 9,890 Vietnamese businesses and measured how much firms pay in informal charges; 59% of respondents believed that firms are subjected to requests for payment of informal charges by government officials. Vietnam’s 2010 PCI survey data report is scheduled for release later in 2011.

Bilateral Investment Agreements

Vietnam has 57 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, Iran, Japan, Kazakhstan, Kuwait, Laos, Latvia, Lithuania, Malaysia, Mongolia, Mozambique, Netherlands, North Korea, Philippines, Poland, Qatar, Romania, Russia, Singapore, South Korea, Spain, Sri Lanka, Sweden, Switzerland, Taiwan, Tajikistan, Thailand, Ukraine, United Kingdom, Uruguay, Uzbekistan, United Arab Emirates and Venezuela.

In December 2008, Vietnam and the United States began negotiations of a Bilateral Investment Treaty (BIT), concluding the third round of talks in November 2009.

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.

On November 9, 2010, the Prime Minister issued Decision 71 to regulate pilot projects under the Public-Private Partnership (PPP) model for infrastructure development. Sectors to have PPP investments include transportation infrastructure, airports, seaports, clean water supply, power plants, hospitals, waste treatment, and other infrastructure projects identified by the Prime Minister. The value of the government’s contribution in a PPP project will not exceed 30 percent of total investment capital.

The estimated annual U.S. dollar value of local currency used by the U.S. Mission in Vietnam is about $55 million. This currency is purchased at the commercial bank rate, which is closely linked to the official government rate. It is not purchased at the black-market/free market rate, which regularly exceeds the official rate by about 10 percent. The SBV devalued the VND by five percent in November 2009, by three percent in February 2010, and by another two percent in August 2010. There remains a risk of further devaluations in 2011 as indicated by the VND continuing to trade at the weaker edge of the official trading band.

Labor

One of Vietnam's main investment advantages is its labor force, which is large (over 46 million people), literate (GVN reports a literacy rate of 94 percent), inexpensive, and young (nearly 69 percent of the population is under 40). The labor pool is expected to increase by 1.5% annually between 2010 and 2015.

The GVN sets minimum wages depending on the ownership structure and location of the company. From January 1, 2011, state-run and domestic private workers’ minimum wages will rise to VND 1,350,000 (USD $69), VND 1,200,000 (USD $61), VND 1,050,000 (USD $54) and VND 830,000 (USD $42) per month in four different geographic zones. Minimum wages for workers of foreign direct investment enterprises will rise to VND 1,550,000 (USD $79), VND 1,350,000 (USD $69), VND 1,170,000 (USD $60) and VND 1,100,000 (USD $56), also in four different zones. By 2012 all businesses, foreign and domestic, will pay a single nationwide minimum wage.

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 revised 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. In practice, these procedures are often not used. 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 percent in industries with 300 workers or more.

For the first 10 months of 2010, there were 328 labor strikes, compared to more than 700 strikes in 2008 and 310 in 2009. Over 80% of the strikes in 2010 occurred in Ho Chi Minh City, Binh Duong, and Dong Nai. The GVN rarely takes action against "illegal" strikers.

Employers are required by law to establish labor unions within six months of establishment of any company, a requirement many employers fail to meet. 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 forced labor as a means of political coercion and discrimination or Conventions 87 and 98 on freedom of association and collective bargaining, but is considering doing so. Under the Declaration on Fundamental Principles and Rights to Work, however, all ILO members, including Vietnam, have pledged to respect and promote core ILO labor standards, including those regarding association, the right to organize and collective bargaining. A number of technical assistance projects in the field of labor sponsored by foreign donors, including USAID, are currently underway in Vietnam.

Foreign Trade Zones/Free Ports

Vietnam has 234 industrial zones (IZs) and export processing zones (EPZs), most of which are located in Vietnam’s key economic zones. Projects in IPs and EPZs often enjoy investment incentives by sectors and geographical areas. Enterprises 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.

Many foreign investors note that it is easier to implement projects in industrial zones because they do not have to be involved in site clearance and infrastructure construction. Foreign investment in the industrial zones is primarily in the light industry sector, such as food processing and textiles.

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

FDI statistics in Vietnam are still unreliable. By November 2010, only four out of 63 provinces had submitted their required annual FDI report to the Ministry of Planning and Investment (MPI). In 2008, FDI statistics were revised twice with significant changes due to such low compliance rates. Further, MPI generally uses and reports figures for “registered” foreign investment rather than actual (“implemented”) foreign investment. Because a significant portion of registered FDI projects are never realized, this reporting practice can distort the investment picture in Vietnam.

Foreign Direct Investment 2005-2010

(all amounts in billions of U.S. dollars)

2010

Number of new projects authorized: 969

Authorized Investment (including new and extended projects): $18.6

Implemented Investment: $11

2009

Number of projects authorized: 1,155

Authorized Investment: $22.6

Implemented Investment: $10

2008

Number of projects authorized: 1171

Authorized Investment: $64.01

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

Implemented investment: $4.1

2005

Number of projects authorized: 970

Authorized investment: $6.8

Implemented investment: $3.3

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 phase of a project is 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 Major Sector 1988-2010

(all amounts in billions of U.S. dollars)

Sector: Industry and manufacturing

Number of Projects Authorized: 7,305

Authorized investment: $93.9

Sector: Real estate

Number of Projects Authorized: 348

Authorized investment: $47.9

Sector: Hotels and tourism

Number of Projects Authorized: 295

Authorized investment: $11.3

Sector: Construction

Number of Projects Authorized: 674

Authorized investment: $11.5

Sector: Communications

Number of Projects Authorized: 636

Authorized investment: $4.7

Sector: Extractive

Number of Projects Authorized: 68

Authorized investment: $2.9

Sector: Agriculture, forestry and fishery

Number of Projects Authorized: 479

Authorized investment: $3.0

Sector: Transportation and Warehouse

Number of Projects Authorized: 300

Authorized investment: $3.1

Sector: Finance and banking

Number of Projects Authorized: 73

Authorized investment: $1.3

Sector: Education

Number of Projects Authorized: 133

Authorized investment: $0.3

Source: GVN's Foreign Investment Agency

FDI by Top Ten Investors in 2010

(all amounts in billions of U.S. dollars)

Country: Number of new projects/Authorized Investment (in billions of U.S. dollars)

1. Singapore: 88/ $4.4

2. Korea: 256/ $2.356

3. Netherlands: 14/ $2.3

4. Japan: 114/ $2.209

5. United States of America: 52/ $1.965

6. Taiwan: 95/ $1.275

7. British Virgin Islands: 23/ $0.76

8. Malaysia: 19/ $0.416

9. Cayman Islands: 5/ $0.565

10. British West Indies: 1/ $0.475

Source: GVN's Foreign Investment Agency

Vietnam’s Overseas Investment

Note: Statistics on Vietnam’s investment overseas are unreliable and inconsistent.

According to preliminary statistics, in 2010 Vietnam had 107 investment projects abroad with total registered value of USD 2.97 billion. Laos is the largest destination for Vietnamese overseas investment (total investment is more than $3.1 billion). Other top destinations for Vietnamese FDI include Russia, Malaysia, Cambodia, Algeria, and the United States.

Total overseas investment by Vietnam

(All amounts in billions of U.S. dollars)

2010

Number of projects: 107

Authorized capital: $2.97

2009

Number of projects: 81

Authorized capital: $1.7

2008

Number of projects: 112

Authorized capital: $3.1

2007

Number of projects: 80

Authorized capital: $1.0

2006

Number of projects: 36

Authorized capital: $0.15 billion

2005

Number of projects: 36

Authorized capital: $0.54 billion



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