Attitude toward Foreign Direct Investment
Vietnam is focused on attracting foreign investment, especially in sectors that will bring advanced technology, increase the labor market skillset, and improve Vietnam’s labor productivity. Vietnam’s attractiveness as an FDI destination has grown as the country continues to make key legal reforms related to the business climate. Other FDI draws are Vietnam’s stable political system, strategic location near global supply chains and China, and an abundant labor force that is less expensive relative to China.
Foreign invested companies continue to play an important role in the economy. According to the Vietnam General Statistics Office (GSO) the FDI sector contributed 70 percent of total exports in 2015 (up from 47 percent in 2000) and foreign invested enterprises’ contribution to GDP increased to 18 percent from 13 percent over the same period. Vietnam has maintained registered FDI levels of around $18.5 billion per year over the last five years. Concluding the four FTA’s in 2015-2016 has already increased FDI in Vietnam. While Vietnam has made great strides to connect to the global supply chain and is committed to improving the business environment, it remains a developing economy with many areas for improvement. Key challenges include corruption and weak legal infrastructure, a shortage of skilled labor that can meet the demands of an increasingly sophisticated global market, low labor productivity, a weak judicial system, the need for better infrastructure, and a cumbersome bureaucracy that still focuses on monitoring and control rather than business facilitation.
In 2015, according to Vietnam’s Foreign Investment Agency (FIA), the United States was the 16th largest FDI source with a total investment of $224 million, down from 11th in 2014. Malaysia beat out Japan as the second largest FDI source in 2015 due to a large investment in the Duyen Hai 2 thermal power plant south of Ho Chi Minh City. The top three FDI sources in 2015 were South Korea, with newly registered capital of $2.7 billion in 702 projects, Malaysia with $2.4 billion in 27 projects, and Japan with $1.3 billion in 299 projects, according to the FIA. China FDI excluding Hong Kong increased to $744 million (10th largest source) in 2015 from $427 million in 2014. However, data may be inaccurate as some investment is registered through a third country.
Other Investment Policy Reviews
In the past three years, has the government/authority conducted an investment policy review (IPR) through:
World Bank 2035 Report:
Provincial Competitive Index:
WTO review of Vietnam’s trade policies and practices, 2013
OECD’s Investment Policy Review, 2010.
UNCTAD’s Investment Policy Review, 2008. http://unctad.org/en/Docs/iteipc200710_en.pdf
Laws/Regulations on Foreign Direct Investment
In December 2014, Vietnam passed a new Investment Law with breakthrough changes aimed at improving the investment environment. Previously, Vietnam used a “positive list” approach, meaning that foreign businesses were only allowed to operate in a list of specific sectors outlined by law. Starting in July 2015, Vietnam implemented a “negative list” approach, meaning that foreign businesses are allowed to operate in all areas except for six prohibited sectors. Additionally, there are 267 sectors that are now open to foreign investment provided that the investor satisfies certain conditions.
Under the new Investment Law, businesses must apply for an investment license when establishing a new company, and update their business license when they: 1) make significant changes to an ongoing enterprise, such as increasing investment capital; 2) restructure the form of investment or investment ratios between foreign and domestic partners, 3) change the foreign management structure, or 4) add new business activities. The law also requires foreign and domestic investors to be treated the same in cases of nationalization and confiscation. However, foreign investors are subject to different business licensing processes and restrictions, and Vietnamese companies that have a majority foreign investment are subject to foreign investor business license procedures. In general the new Investment Law has not provided clearer and speedier processes for investors to complete necessary investment license paperwork.
Conformity with Economic Master Plans
As restated in the new Investment Law, most FDI projects must conform to one or more sectoral master plans. Master plans are economic development policies that set five- to ten-year targets for an industry. The requirement for projects to conform to relevant master plans can be problematic for foreign investors, as the grounds for assessing compliance with a particular plan are unclear, and master plans may overlap as they are issued by both ministries at the national and provincial level.
Vietnam is a member of the U.N. Conference on Trade and Development’s (UNCTAD) international network of transparent investment procedures: http://vietnam.eregulations.org/. Foreign and national investors may be able to find information on administrative procedures applicable to investment and income generating operations including the number of steps, name and contact details of the entities and persons in charge of procedures, required documents and conditions, costs, processing time, and legal bases justifying the procedures for the following provinces:
Danang - http://danang.eregulations.org
Ho Chi Minh City - http://hochiminhcity.eregulations.org
Binh Dinh - http://binhdinh.eregulations.org
Hai Duong - http://haiduong.eregulations.org
Phu Yen - http://phuyen.eregulations.org
Vinh Phuc - http://vinhphuc.eregulations.org
Hanoi - https://hanoi.eregulations.org
In reality, the business registration process is often longer than the standards mentioned online. Also, foreign investors are required to notarize their documents, creating an additional burden. The Ministry of Planning and Investment (MPI) has an Investment Promotion Department to facilitate all foreign investments, and several provinces and cities such as Hanoi also have investment promotion agencies.
In Vietnam micro enterprises are classified as those employing less than 10 employees. Small enterprises are those employing less than 50 employees and capital less than VND10 billion ($448,000) in trade and services, and businesses employing less than 200 employees with invested capital less than VND20 billion ($897,000) in other sectors. Medium sized enterprises employ between 50 and 100 employees with capital investment between VND10 billion to VND50 billion ($448,000 and $2.2 million) in trade and services, and businesses employing between 200 and 300 employees with invested capital between VND20 billion to VND200 billion ($897 thousand and $9.0 million) in other sectors. The government provides various mechanisms to assist SME’s through loan guarantees, low corporate income taxes and simplified accounting bookkeeping, and MPI is currently drafting a new law to better assist SMEs that is expected to go to the National Assembly this year. However, these benefits are not applied to foreign invested companies.
Vietnam promotes foreign investment in certain priority sectors and geographic regions, such as mountainous and remote areas that have difficult economic and social conditions. The government encourages investment in the production of new materials, new energy sources, metallurgy and chemical industries, manufacturing of high-tech products, biotechnology, 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, knowledge-based services, processing and manufacturing, labor-intensive projects (using 5,000 or more full-time laborers), infrastructure projects, education, training, and health and sports development.
Limits on Foreign Control and Right to Private Ownership and Establishment
The ratio of total foreign ownership permitted in a project depends on a number of factors, including Vietnam’s international commitments and the sector in question. There are also strict foreign ownership limits for certain listed companies and service sectors. Foreign investors must negotiate on a case by case basis with the government on market access in sectors that are not explicitly open through a trade or investment agreement.
In addition, the lack of substantive regulations on merger and acquisition (M&A) activities makes such transactions risky. For example, when a foreign investor buys into a local company through an M&A transaction, it is difficult to determine which business lines the acquired company is allowed to maintain. The reason for the lack of clarity is while the GVN allows foreign investors to invest in all but six prohibited sectors, and regulates investment in 267 sectors, there are more than 6,400 conditions relating to these sectors, of which 3,299 conditions will be unlawful from July 1, 2016. Therefore, if companies operate within the 267 conditional sectors, determining the potential status of foreign investors will be very difficult.
Vietnam’s stated goal of equitizing (i.e. converting SOEs to joint stock companies) more than 432 SOEs between 2014 and 2015 was not met. While the Government of Vietnam classifies an SOE as equitized if it completes its equitization plan, in practice the only time an SOE is equitized is when the shares are sold to the private sector. Also, while foreign investors are allowed to buy shares in SOEs in accordance with WTO commitments, the majority of SOEs that were privatized in 2014-2015 offered such a small percentage (often just 2-3 percent) to private investors that most SOE’s failed to attract more than nominal interest from foreign investors.
Additional drawbacks to foreign investment in SOEs include an overall lack of transparency, weak corporate governance, and unclear management structure. Domestic and foreign investors are permitted to buy shares through a public auction, or invest as a strategic shareholder. However, Vietnam has had a difficult time attracting strategic shareholders due to specific requirements placed on these shareholders, such as the transfer of technology or expertise. Overall, the low equitization percentage of SOEs has led many to question whether equitization will indeed result in a level playing field for domestic and foreign companies, or bring substantive changes in SOE corporate governance.
Screening of FDI
Vietnamese authorities evaluate investment license applications using a number of criteria, including: 1) investor’s legal status and financial capabilities; 2) the project’s compatibility with Vietnam’s “Master Plan” for economic and social development and projected revenue; 3) technology and expertise; 4) environmental protection; 5) plans for land use and land clearance compensation; 6) project incentives including tax rates, and 7) land, water, and sea surface rental fees.
Licensing authority decentralization to provincial authorities has in some cases streamlined the licensing process and reduced processing times. It has also, however, given rise to considerable regional differences in procedures and interpretations of investment laws and regulations. Insufficient guidelines and unclear regulations sometimes cause local authorities to consult national authorities, creating delays. In addition, the approval process is often much longer than the time frame mandated by law. Many U.S. firms have invested successfully, though a lack of transparency in the procedure for obtaining a business license at times makes investing riskier.
Investment projects that must be approved by the National Assembly include:
Projects with a large environmental impact;
Projects that change the land usage purpose in national parks;
Projects located in protective forests larger than 50 hectares; or
Projects that require relocating 20,000 people in remote areas such as mountainous regions.
Investment projects that require Prime Ministerial approval include:
Projects to build airports, seaports, or casinos; to explore, produce and process oil and gas; or to produce tobacco;
Projects having investment capital more than 5,000 billion VND ($233 million);
Projects with foreign investors in sea transportation, telecommunication or network infrastructure, forest plantation, publishing, or press; and
100 percent foreign-owned scientific and technology companies or organizations.
Projects which are not approved by the National Assembly or the Prime Minister will be approved by the provincial People’s Committee.
The Vietnam Competition Administration (VCA) of the Ministry of Industry and Trade (MOIT) reviews transactions for competition-related concerns. In 2014 (latest available), the VCA launched 10 investigations related to competition restriction. The VCA continues to receive and process M&A cases in crucial sectors of the economy, such as food processing and trading; production, trading, and transmission of electricity; and import, export, and distribution of steel.