Close Ties: FDI Flows from Italy into Vietnam Reveal Key Economic Relationship
By: Erasmo Indolino
Italian investors are showing an increasing interest in Vietnam. The number of investments in the Southeast-Asian country are increasing year by year, as well as the size of overall trade between the two economic partners. According to the latest data provided by the Vietnamese-language website of the Foreign Investment Agency belonging to the Ministry of Planning, at the end of last September Italian investors were present in Vietnam with sixty-six active projects. Such FDI has a total value of US $391,660,000.
Investments by sector
According to updated data of the prior fiscal year, Italian investors had invested in eleven of the twenty-one economic sectors in which the classification system of Vietnam is divided. Among these, the manufacturing sector stands out in both number of projects both in size of investment: in this area, in fact, in December 2014 Italy was present with thirty-one projects with a total worth of US$ 268.62 million (corresponding to the 89.1 percent of the total investment of Italian capital in the Country).
The following sectors, by size of investment, are agriculture, forestry and fisheries – in this case, the amount of direct investment reached US $13.5 million. In third place, among the areas where Italian businesses have invested most, is wholesale and retail; in this sector, foreign direct investments have covered seven projects for a total amount of US $9.047 million. The other direct investments are divided between the construction industry, art and entertainment industry, the extractive industries, and science and technology. At the bottom of the list of Italian direct investments in Vietnam there are the transport and storage industries, as well as undefined “other services,” and the catering industry.
Investment by type
Data show that Italian investors prefer to invest mainly through projects in which all the capital invested is foreign or through joint ventures. Until December 2014, the form of direct investment with 100 percent foreign capital involved thirty-seven projects for a total value of over US $260 million (86.3 percent of the total Italian capital in country). The total number of projects carried out by joint ventures was eighteen, with a value of US $41 million (13.6 percent of the total). Only the remaining 0.1 percent of the Italian capital is invested through forms of contracts of business collaboration and joint stock companies.
Vietnam is becoming more attractive for foreign investment. It is reasonable to predict a further increase in investment as from the 1st of January 2016 as the Corporate Income Tax will be lowered to a rate of twenty percent.
Investments by geographic location
Italian investors have invested in 17 of the 63 administrative divisions (provinces and municipalities) in which the Socialist Republic of Vietnam is divided. By number of projects, until December 2014 the municipalities of Hanoi and Ho Chi Minh City were the most attractive for Italian direct investments (with 14 and 13 projects, respectively).
By size of investment, however, the municipality of Hanoi was only sixth with a total value of US $14.04 million while Ho Chi Minh City was third with direct investments amounted to US $50.4 million. Preceding Ho Chi Minh are the provinces of Vinh Phuc and Binh Duong. Between the municipalities of Ho Chi Minh City and Hanoi in total FDI there are the provinces of Hung Yen and Bac Ninh. Following the municipality of Hanoi, in descending order are the provinces of Dong Nai, Ben Tre, Khanh Hoa, Lam Dong, the city of Hai Phong, the provinces of Thua Thien-Hue, Quang Nam, Nghe An, Ninh Binh, the municipality of Da Nang and the Binh Thuan province.
Analyzing the number of investments, we can note that the most attractive region for Italian foreign direct investment is southeastern one of Đông Nam Bộ followed by the Red River Delta region and the South-central region of Nam Trung Bo. If we consider the size of the investment, the Red River Delta is the region that attracts the largest number (for an amount of US $165.34 million), followed, in descending order, by: Đông Bộ Nam (South-East) with US $115.050 million; Nam Trung Bộ (central-south) with direct investments of US $7.13 million; the region of the Mekong Delta with US $6 million; Bac Trung Bo (Mid-North Coast) with US $4.4 million; Finally, the region of the central highlands – where the value of the Italian direct investments amounted to US $3.5 million.
Overall balance of trade
Like foreign direct investment, also commercial relations between Italy and Vietnam have seen a continuous increase. In 2014, the total value of trade between the two economies exceeded US $4.08 billion. In the first eight months of this year, the value of the trade balance was US $2.9 billion, an increase of 6.34 percent over the same period last year. By comparing this data with the ones of other EU countries, we see that the only Countries having more business relationships more than Italy are Germany (in August the value of the trade balance with Vietnam was US $5.54 billion), the United Kingdom (US $3.5 billion) and the Netherlands (US $3.48 billion).
Despite imports from Vietnam having a higher value than the Italian exports into the economy of the Southeast-Asian state, it must be emphasized that in the first eight months of 2015 there was an increase in the percentage of Italian exports to Vietnam (up to 9.83 percent) much higher than the variation of the increased imports of Vietnamese products in Italy (up by 4.68 percent) compared to the same period last year. Overall, Italy is second only to Germany in total exports into Vietnam.
According to data provided by the Italian Trade Agency, in the first seven months of 2015 the leading industry among Italian exports into Vietnam was machinery and equipment, showing an increase of 97.6 percent over the same period last year. Next, among the most exported Italian products to Vietnam are leather goods, metal products, chemicals and food products (the latter increased by 81.6 percent over the same period of 2014).
The goods imported from Vietnam into Italy are mostly computers and electronic and optical products, medical equipment, measuring instruments and watches. With smaller overall trade flows, among the major sectors that Vietnam exports to Italy there are, in descending order, leather goods, agricultural products, fisheries and forestry, as well as garments. Despite recording lower values, the industries showing the greatest percentage increases of imports from Vietnam (compared to the first seven months of last year) are mining and quarrying products (+ 236.1 percent) and paper products (+ 135.2 percent) .
The implementation of the Free Trade Agreement between Vietnam and the European Union is expected to engender a further increase in trade relations between Italy and Vietnam. Once the agreement comes into force, 65 percent of import tariffs on European exports to Vietnam will be removed and the remaining duties will be liberalized within ten years. In return, the EU will eliminate many of the tax on imports from Vietnam over seven years.
Thus, Vietnam presents an opportunity which Italian investors cannot overlook. Getting Vietnam “right” at this early stage is essential for the operational success of global brands and small-and-medium sized enterprises (SMEs) alike. For this reason, the guidance of a professional services firm seasoned in the unique aspects of the Vietnamese market is support which can make the difference between success and failure in any new venture in the country.
Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email email@example.com or visit www.dezshira.com.
Stay up to date with the latest business and investment trends in Asia by subscribing to our complimentary update service featuring news, commentary and regulatory insight.
Import and Export: A Guide to Trade in Vietnam
In this issue of Vietnam Briefing Magazine, we provide you with a clear understanding of the current business trends related to trade in Vietnam, as well as explaining how to set up your trading business in the country. We also attempt to give perspective on what will be Vietnam’s place in the Association of Southeast Asian Nations (ASEAN) in 2015, and look at some of the country’s key import and export regulations.
Using Vietnam’s Free Trade & Double Tax Agreements
In this issue of Vietnam Briefing we explore how Vietnam’s Free Trade Agreements – and especially those via its membership in ASEAN – will affect foreign investment into Vietnam. We also go a step further and examine the specific, bilateral Double Tax Agreements that Vietnam has enacted, and how these can be further used to minimize profits and withholding taxes that would otherwise be levied upon foreign investors.
Developing Your Sourcing Strategy for Vietnam In this issue of Vietnam Briefing Magazine, we outline the various sourcing models available for foreign investors – representative offices, service companies and trading companies – and discuss how to decide which structure best suits the sourcing needs of your business.