Investing in ASEAN: Vietnam
“Vietnam has emerged as one of the most attractive destinations for foreign investments. Foreign investors are beginning to regard Vietnam as a key strategic investment location to achieve cost-effectiveness of their global supply chains. Already over half of the US Fortune 100 companies have establishments in Vietnam. Vietnam is becoming more attractive with its continuing tax incentives, low-cost labour, and long coastline with increasingly modern and sophisticated port infrastructure,” says a 2013 report from KPMG, one of the largest professional services companies in the world and a ‘Big Four’ auditor.
Over the last 30 years, Vietnam, has recovered from the ravages of war, the loss of financial support from the old Soviet Bloc, and the rigidities of a centrally planned economy. The country launched economic reforms (Doi Moi) in 1986, which have transformed the country from one of the poorest in the world to a developing lower-middle-income country within a quarter of a century.
While Vietnam’s economy remains dominated by the state-owned enterprises that account for roughly 40% of GNP, the government has reaffirmed its commitment to economic liberalisation and international integration,” says a report from PwC Thailand entitled South East Asia – Investment Opportunities, Tax & Other Incentives.
“The government has sped up privatisation of state-owned enterprises to make the country’s privatisation process more comprehensive. In particular, the Vietnamese government has an ambitious plan to extend the privatisation process to major state-owned conglomerates in sectors such as power and telecommunications. By 2014, the state aims to transform the current monopoly and subsidised power situation with a competitive power-generation market. In seaport construction, the Public-Private Partnership (PPP) form of investment is encouraged and is becoming increasingly popular”.
A developing country, Vietnam suffers from poor infrastructure, but has begun to make significant investments. The government is committed to increasing infrastructure development, which is reflected in numerous projects to build new container ports, roads and highways, bridges, power plants, and water supply networks.
Last month, the US Trade and Development Agency clinched two deals with the Vietnamese Management Authority for Urban Railways to fund two feasibility studies on modernizing the transit systems in Ho Chi Minh City and developing smart power grid systems for the entire country.
On the legal side, says PwC, “with the government’s continuous efforts to improve its institutional systems, Vietnam’s legal system has improved remarkably, resulting in a higher ranking for the country in rule-of-law indicators, and enabling it to catch up with its more developed peers in the region”.
Though various measures have been taken to improve the administrative environment, this remains an issue that has diluted foreign investors’ interest in Vietnam’s business environment. However, the government is committed to continuing change and has undertaken several major reform initiatives that have brought significant changes in Vietnam’s business environment, for example, in the area of customs, with the introduction of e-customs and the implementation of one-stop-shop customs procedures, which have allowed businesses to save time and cut costs.
“After its accession to the WTO in 2007, Vietnam has become a magnet for foreign investment and is evolving rapidly from an agricultural economy to one focused on higher-value manufacturing and services,” says PwC. Exports have historically been the most significant driver of GDP, notably garments and textiles, crude oil, footwear, agricultural products and seafood.
“Vietnam has transformed itself into a dynamic market-based economy in which industry and services have been playing increasingly important roles,” says PwC. “With progressive measures to liberalise Vietnam’s market, the economy has seen a structural shift from one that was agriculturally driven, to one that is increasingly industrial and services-focused. The industrial and service sectors are now responsible for a much larger share of GDP and have been expanding at a higher rate than the overall economy, reflecting the critical role of these sectors in boosting the country’s overall performance”.
As disposable income rises, PwC notes, Vietnam’s economy is increasingly driven by personal consumption and more of the population is moving up the economic ladder. With Vietnam’s young and well-educated workforce, this trend is expected to continue.
Vietnam is also one of the most popular tourist destinations in the region and its tourism industry has been growing dramatically for the past few years. The government has been readily spending on promotional activities across the world to boost the sector further, presenting numerous opportunities in the hospitality area as well as related services.
“Vietnam wants to involve itself more deeply in the global manufacturing chain and the government is shifting focus from quantity to quality in attracting foreign direct investment (FDI),” says PwC. “Aiming to improve the quality of FDI, the government wants to attract projects that effectively utilise natural resources, reinforce linkages with domestic enterprises, and lure more investment into auxiliary industries, agriculture, preferential services, information and technology, and high-tech industries”.
“The government of Vietnam,” says KPMG, “is seeking to attract increased investment across a wide array of sectors”. According to the Law on Investment, the sectors being encouraged are:
- Production of new materials and new energy; manufacture of high-tech products, bio-tech and info-tech, and mechanized production.
- Breeding, growing and processing agricultural, forestry and aquaculture products, salt production, creation of man-made varieties, new plant and animal varieties.
- Use of high-tech, protection of the ecological environment, research, development and creation of high-tech.
- Labour-intensive industries.
- Large-scale construction and development of infrastructure facilities and important industrial projects.
- Development of education, training, health, sports, physical education and ethnic cultures.
- Development of traditional crafts and industries.
Foreign investors are encouraged to invest in areas with difficult socio-economic conditions, high-tech zones and economic zones.
“Apart from investments in certain industries,” PwC explains, “the country also wants to attract investments in remote areas of the country that are still underdeveloped and need investment. Tax and customs duty incentives, as well as land rental incentives, are mainly available to investments in the encouraged sectors, and/or investments in encouraged geographic locations”.
Is it Vietnam’s Time?
Vietnam is stabile, with a dynamic market economy that is growing: between 1991 and 2010, economic growth averaged 7.5% each year and, despite the many difficulties the country faced between 2011 and 2013, GDP growth still rose by 5.6%. Several international forecasts suggest that this trend will continue in 2014-2015 and beyond.
Sixty percent of the population is currently of working age, the country is situated in the heart of East Asia, is a member of the WTO, and a party to numerous frameworks for international economic integration, including free trade agreements within and outside the region.
Meanwhile, the Vietnamese government is committed to creating a fair and attractive business environment for foreign investors, constantly improving its legal framework and institutions, and working hard on restructuring the economy and its model for growth, as well as enhancing national competitiveness.
Vietnam recognizes that foreign direct investment is an important part of the country’s economy, and the hard work seems to be paying off: there are currently more than 16,300 active foreign direct investment projects in the country worth USD 238 billion. These investors are from 100 countries and territories, and include are some of the world’s leading multinationals. The signs from the numbers are that Vietnam has become a choice destination among foreign investors.