A New Wave of FDI into Vietnam
By Rosario Di Maggio
Jul. 18 – Although it is still too early to tell, many observers agree that the worst of Vietnam’s economic dip is over, its economy will bounce back in the coming years, and a new wave of foreign direct investment is likely to flow into the country.
We can definitely confirm a strong interest among foreign investors with regards to investment into Vietnam today, especially from those looking at integrating Vietnam into their Asian supply chain. Business delegations are frequently seen in the many five-star hotels in Hanoi and Ho Chi Minh City, visiting the cities to scope out industrial zones or conduct B2B meetings with local entrepreneurs.
These foreign investors are drawn by Vietnam’s key advantages, including cheap labor (Vietnamese low-skilled labor might cost 2.5 times less than China), tax efficient trading (thanks to an extensive network of double tax treaties and free trade agreements), as well as extremely advantageous geographic and sector-specific tax incentive policies for newly-established businesses.
Vietnam is a particularly strong draw for enterprises involved in the low-end manufacturing sectors, such as textiles and garments, footwear, seafood processing and aqua products, furniture and electronics. Foreign investors in Vietnam commonly manufacture, source finished and semi-finished products, or sell raw materials, parts or machineries. Interestingly enough though, we now receive daily inquiries from foreign investors from a variety of sectors, all looking at Vietnam as a potential fit for their expansion strategy.
Foreign investors showing interest in Vietnam include large multinational companies (MNCs) that want to set up manufacturing plants to export to other ASEAN countries (as well as into Korea, Japan and other countries in the area). Foreign small and medium-sized enterprises (SMEs) are also following previous waves of MNCs as part of the supply chains or those simply looking to delocalize their production to a lower cost country, as well as service providers interested in entering a relatively low competition environment. At this stage, relatively few foreign investors seem to look to sell consumer products to the still emergent Vietnamese middle class.
On the other hand, Vietnam is still a developing country and, as is the case with other places in emerging Asia, one of the key points foreign businesses should keep in mind is that the country is going through a very deep reform process, which means that regulations are continuously changing. In practice, this means, for example, that local authorities still have a relatively high level of discretion in interpreting policies and regulations, making the business environment more challenging for many foreign investors.
Research shows that the challenge of conducting business in Vietnam is not currently improving. For example, Vietnam ranks 98 over 183 countries in the World Bank’s “Doing Business 2012” overall ranking, down 8 positions from 2011. Moreover, when ranked by topic,
- “Paying Taxes” is down 22 positions year-on-year to a staggering 151
- “Protecting investors” ranks even lower at 166 (up 6 positions year-on-year)
- “Starting a business” is ranked at 103 (down 3 positions year-on-year)
- “Resolving insolvency” ranks at 142 (down 13 positions year-on-year)
Whether this is the beginning of a new era for FDI flowing into Vietnam is something we will be able to tell within a few years. However, this may be the right time for those companies looking at sizing opportunities to check whether Vietnam fits their global or regional strategies.
Portions of this article appeared in the July issue of the Vietnam Economic Times.
Dezan Shira & Associates 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 emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.
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