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Investment Environment in Vietnam

Saturday - 03/12/2016 02:25
Doing business overseas plays a key role in the strategic plan of each multinational enterprise. In the past years, the European market was one of the most attractive investment environment in the world.
Investment Environment in Vietnam
However, in the current years, many business specialists consider the South East Asian (Asean) market as a promising market for investors.
 
The rapid economic growth in some developed Asian countries, such as Japan, China, led to the economic growth in some developing and underdeveloped countries in Asean countries through the “flying geese” model. Consequently, Asean countries are now rising as a destination of investment. Among Asean countries, in the last ten years,Vietnam is now becoming an attractive place for investors with its unique competitive advantages, such as a cheap labor market and stably political economy as well as high economic growth.
 
In business, especially in different countries, a firm should do research about the local market because each country has different characteristics as well as policy frameworks. For instance, a business model of Starbucks in China shows that Starbucks had to change its menus to please Chinese customers, such as adding more tea menus. It can also be seen by a failure of Wal-Mart model when it did business in Korea. It is demonstrated that the cost leadership strategy of Wal-Mart was not successful in Korea.
 
Koreans traditionally consider cheapgoods as not quality ones, so they would not prefer to purchase. Two mentioned cases were not primarily successful to do business in Asia because they overlook the cultural differences in consumer behavior. An example of the development chain of Seven Eleven in Japan and China should be mentioned. In this case,while the pattern of continuous creative adaptation resulted in the transfer from the US to Japan, the pattern of standardization with some partial adaptation led to transfer from Japan to China.
 
It is also demonstrated that the process of setting up and operating business of Seven Eleven in Japan was different toin China. There are differences in format operations and supply chains due to adaptation with different characteristics of each country. Nike and Intel aretwo business models in the manufacturing industry in Vietnam. Before doing business in Vietnam, they had many consultations with government agencies and fieldtrips as well in order to do research and collect information about political economy and business cost in Vietnam with aims to build an effective business plan in Vietnam.
 
As a result, it pointed out that that Intel gained many government incentives, such as tax incentives, which Intel has not paid corporate taxes for the first four years of operation and will enjoy a 50% tax break the following nine years. Additionally, the representatives of Nike and Intel in Vietnam are also Vietnamese, so it could help them more understand the regulations and build a good relationship with local partners as well.
 
Based on some statistics, surveys of some international organizations and secondary resources, this report will show some potentialities and challenges of doing business in Vietnam. This report focuses on the political economy and economic growth of Vietnam. For political economy,the key elements could be political and legal systems.
 
It is because they arebases of the investment environment and may also have negative or positive effects on operating business. In terms of economic growth, the report will consider some elements namely infrastructure and labor market. They are needed to mention because while the infrastructure may motivate or impede the nation’s economic growth and international competitiveness (The World Bank, 2006), labor market is one of twelve pillars of economic growth (World Economic Forum,2010).
 
1. Political economy
 
Political economy consists of the political, economic and legal systems and factors that have an influence on the economy and business activities. Therefore, a good understanding of the political economy of a country is a basic foundation of doing business successfully. A political economy in general and legal systems in particular in each country is basically different. Therefore, a firm may take more risks if it does not clearly understand the political economy of local country. It is more needed for an international firm when it does business in a developing country like Vietnam, an emerging market with an inadequate legal system.
 
1.1. Advantages
 
Firstly, in terms of political economy, Vietnam has stable politics in many years. It is because Vietnam is a one-party state run by the Communist Party Secretary-General, the Prime Minister and the President. By a unique leadership party, Vietnam can maintain political stability more effectively than other countries in the region, such as Thai land, which often has political disputes. Therefore, the production or operation of firms may not be interrupted or affected negatively by them.
 
Secondly, in an attempt to call for more foreign investment inflows, Vietnam is making efforts to improve its investment climate. Before, Vietnam was a centralized economy but up to now, Vietnam has changed to a socialist-oriented market economy. The 1986 open policy was an initial point of this change when the Government has opened the market for foreign investors. Since that moment, Vietnamese Government has made some positive changes with aims to keep up with the changing global business environment.
 
In Vietnam, foreign and domestic investors are fairly treated when Government applies a unique Law on Investment for both of them. It is one of many reasons that United Nations Conference on Trade and Development (UNCTAD, 2011) ranked Vietnam among the top of the fifteenth attractive economies for foreign investors. Following the Vietnamese Law of Investment and Decree on Business registration, it has one-stop-shop in each provincial Departments of Planning and Investment where are authorized to handle the related issues of receiving, reviewing, returning the application of registered business and investment certification. Following this, for theproject with investment capital of less than 15 million dollars, the standard process of registration for investment certification is within 15 days.
 
Moreover,Vietnam Government also has some specific investment incentives for foreign investors, such as tax, land lease, in some sectors, especially for high tech manufacturing industry. According to DecreeNo.218/2013/NĐ-CP guiding the implementation of Law on the Corporate IncomeTax, the standard CIT rate is reduced from 25% to 22% in 2014, and further reduced to 20% from 2016. For enterprise using less than 200 workers with tota lrevenue of less than 20 billion Dong (approximately US$1 million, it is applied the CIT rate of 20% from 2014 (see more detail in the Law on corporate income tax dated June 3 2008, the Law amending and supplementing a number of articles of the Law on corporate income tax dated June 19, 2013 and Decree No.218/2013/NĐ-CP guiding the implementation of Law on CIT).
 

1.2. Disadvantages

 

In contrast to some positive points above related to the legal system, Vietnam also has some weaknesses that a firm should be cautious when it starts doing business inVietnam. It was claimed that Vietnamese legal systems are insufficient, lack guidance and coherence. It is also supported that Vietnamese legal system has an issue of conflicts between the central authorities and the provincial governments. In some cases, some provincial authorities would pursue independent economic policies regarding the foreign investment, such as exceeding the authorities of a province. It could lead to confusion and unfairness for the investors because some of them may get more incentives than others.Another issue in Vietnamese legal system is that it is a bureaucracy in not only central Government but also provincial authorization agencies.

 

Followingthe Vietnamese Law on investment, the investment certification procedures officially take about 15 days after receiving registration document. However, due to bureaucracy of government, it often takes longer in setting up ventures or issuing the investment license. Therefore, it may increase cost of the firms because time is value for any firms. Moreover, in order to keep up with changes in global business environment, the Vietnamese regulations relating to business framework may be normally reformed or set every five years by the Party congress and adjusted twice a year by plenary meetings of the Central Committee. Therefore, a firm needs to take into account the changes and the time of the meetings of Party congress in order to reduce some unexpected risks from any changes of the regulations. Besides, having consultations with government agencies is necessary to comply with regulations.

 

2. Economic Growth

 

In the current situation affected by the global crisis, Vietnam still has an impressive economic growthin recent past five years. According to World Bank statistics, the average economic growth of Vietnam in recent five years is 5.88%. Asian Development Bank (ADB, 2013) also forecast that Vietnam GDP growth is 5.2% in 2013, and picking up to 5.6% in 2014. In fact, one of many elements causing the impressive GDP growth in Vietnam is from foreign direct investment in Vietnam. It still attracts many multinational enterprises because of advantages of labour market and production cost that may make an economic growth of Vietnam.

 

Firstly, according to the research of ASEAN Secretariat in 2010, Vietnam’s population was over 90 million, which brings a large market for any firms. Additionally,the 20-54-age population (working age) was 50.9% and the population from 5 to19 years old accounted for 28.7%. Therefore, it is clear that Vietnam has a young population with ahuge and potential labour market for enterprises. Also, Vietnam labour market is not only large but also inexpensive. It is also supported that Vietnam labour force is relatively young and has lower costs than other countries in the Asian region. Based on JETRO’s 22nd surveyas below, it was pointed out that the cost of labour in the Vietnamis relatively lower than other countries in Asia and Europe as well

 

In the manufacturing industry, with the lower cost of labour force, a firm could take an advantage of a lower price. Moreover, the labour force inVietnam is fairly well-educated, with a literacy rate of 90%. This brings competitiveness to Vietnamese worker’s environment because the enterprises can not only use well-trained labours but also reduce the production cost (labour cost). According to statistics of Vietnam Foreign Investment Agency, a large number of the FDI companies are doing in the manufacturing industry inVietnam in order to take competitive advantage of cheap labour force inVietnam.

Table 1. FDI in Vietnam bytop 7 sectors

No.

Sector

Number of projects

Registered capital (USD)

1

Manufacturing and processing industry

 9207

131.645.680.262

2

Real Estate

430

50.075.353.027

3

Accommodation and Food service

353

11.024.644.824

4

Construction

1119

10.843.478.198

5

Production, Distribution of electricity, gas, water and air, conditioning

96

9.748.600.705

6

Information and telecommunication

1024

4.072.337.569

7

Transportation and Storage

417

3.659.179.774

Source: Vietnam Foreign InvestmentAgency, up to 8/2014.

In fact, many branded companies, such as Samsung, Toyota, and Intel already invested in Vietnam in order to use cheap labour to reduce cost of manufacturing.

Despite impressive economic growth in current years, Vietnam still has a problem pertaining to infrastructure. Actually, the infrastructure in Vietnam is underdeveloped and it is still in the process of upgrading and developing. Infrastructure in Vietnamis inadequate and leads to some difficulties in operating business, such as transportation.

 

For example, for a distance of 1750 km between Hanoi and Ho Chi Minh city, it normally takes around three to four days. Therefore, it may result in higher cost of logistics or transportation for a manufacturing firm when it transports its products to ports or other warehouses. Even, most of ports and terminals in Vietnam are poorly developed as it takes a manufacturing firm longer time to ship its goods to other countries or imports inputs of production. Although infrastructure in some big cities, such as Ha Noi, Ho Chi Minh and Da Nang, has been vastly changed and modernized, it is still unequal to infrastructure development in rural areas.

 

The outages of electricity or water stoppages are popular because the development of power sector does not keep up with the growth of power demand (World Bank, 2009). The firm needs to be aware of this,which may have interrupt its production and lead to negative effects on productivity and increase the production cost of a manufacturing firm. Although Vietnam government prioritizes the infrastructure development (ADB, 2013), it still takes a long time to build and develop the adequate infrastructure. Moreover, due to the limitation of government budgets,the investment in infrastructure is not enough and the government is nowcalling for investment from the private sector (ADB, 2013). It could affect negatively the infrastructure development in Vietnam in upcoming years.

 

Based on political economy and economic growth of Vietnam, this report identified some advantages and disadvantages of doing business in the manufacturing industry in Vietnam. The main findings are thatVietnam is considered as a potential market with many opportunities for foreign companies to do business. Vietnam has political stability with impressive economic growth. In addition, labormarket of Vietnam is large, cheap and well educated so that it is quite attractive and may help a firm to reduce cost of production. However, Vietnam regulations are inadequate and the government is still bureaucratic.

 

Inaddition, infrastructure in Vietnam is poor and underdeveloped. These weaknesses could increase a firm’s cost when it does business in Vietnam. Despite these disadvantages, Vietnam is still rising as an attractive and potential investment climate for foreign enterprises. The firm before doing business in Vietnam should consult with government agencies to comply with the regulations and policy framework. Additionally, it should cooperate with somelocal companies to do business in order to get more understandings of the local market and adapt with some new changes.

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