VIETNAM: Review of the Investment climate
HANOI: A recent survey by Vietnam Business Forum shows that foreign and domestic businesses alike find the current business environment in Vietnam satisfactory. Significant progress has been noted in areas like market-entry and infrastructure. The majority of the respondents plan expanding their operations over the next three years despite negative feedback on factors such as finance, licensing and enforcement of laws.
The VBF is an open dialogue forum between local investors (both domestic and foreign) and the Government to exchange opinion and propose actions toward outstanding issues, aiming to further improve the business environment in Vietnam. In its annual meeting in Hanoi in December 13, 2006, Vietnam Business Forum (VBF), an initiative facilitated by the International Finance Corporation (IFC) in collaboration with the World Bank & the Vietnamese Ministry of Planning & Investment, discussed Vietnam’s current business environment in most sectors.
Economic achievements in 2006
Before moving into details of the evaluation of the Vietnamese business environment, some major achievements of Vietnam’s economy in 2006 should be highlighted:
1. Strong GDP growth of 8.2% p.a.
2. High export turnover of USD 40 Billion, an increase of 22.1% compared to 2005
3. Total foreign direct investment (FDI) capital topped USD10.2 billion, representing a 49.1 per cent increase over 2005, the highest figure since the Law on Foreign Investment was passed in 1987. Particularly, fourth quarter of 2006 evidenced a boom in new licensed foreign investments since Vietnam has become an official WTO member from 2007.
Vietnam has a population of approx. 86 million of which two-thirds are under 30 years old. Fifty per cent of the population is under 25. Each year some 1,5 million new people enter the workforce. The (official) jobless rate is low, about 5 per cent. The export spurt (and the jobs it has generated) is fuelling a consumer boom that is expected to power on as affluence spreads and deepens.
Between January and November 2006 total Norwegian exports to Vietnam increased by almost 51 per cent to 155 million NOK. For fish products the increase was a 103,5 per cent.
Investment Climate
A survey of 202 registered private sector enterprises was conducted towards the business environment in Vietnam in August by the VBF. Participating companies include 76% foreign enterprises and 24% domestic companies, largely from three sectors: services (40%), manufacturing (28%) and trade (22%).
The general perception of the current business environment is that it is satisfactory for conducting business in Vietnam. The rating in 2006 is 2.25 (with a scale from 1-poor - to 4-excellent) which is slightly below the expected result of 2.35 points from the 2005 survey and in line with the observation over the last years that expectations always are more optimistic than actual performance results.
Looking forward, there was a slight drop in the survey’s ratings for the period from 2007-2009 which is contrary to the trends observed over the last four years. The possible explanation for the lower rating is that, in view of WTO accession, new legislation will be issued, but implementation may be delayed, leading to initial misunderstandings and confusion. The transition from the implementation of the old laws to the new ones therefore may create uncertainty for businesses in the short run.
Stronger international competition due to Vietnam’s accession to the WTO may have influenced the responses from the domestic enterprises negatively. So far domestic businesses have had less exposure to international competition. For foreign investors, the abolition of many current investment incentives once WTO membership is enacted by year end may be a possible reason behind the lower rate.
Areas in need of improvement
In the 2006 survey Vietnam is highly appreciated by the businesses for its political system and the ability to control inflation and manage foreign exchange. Despite this, some areas have been identified by investors to be in need of improvements:
1. Intellectual property rights protection
2. Regional competitiveness
3. Legal regulatory framework
4. Effectiveness of judicial system
5. Infrastructure
However, significant progress has been noted in areas like market-entry and infrastructure. 30% of those surveyed stated that administrative procedures are becoming less cumbersome and access to information is improving, but access to finance, licensing, operating costs and enforcement of laws received less positive feedback.
Most companies plan for expansion
Although most enterprises responded that they do not expect significant improvement to the business environment in the short term, the majority of responding enterprises (89%) still plan on expanding operations over the next three years. The main reasons behind this trend are positive current and long-term economic outlook, growing local market and reforms enacted under WTO.
And certainly, the political stability is an important factor behind this decision. However, the “reform undertaken due to WTO accession” took over the leading place of “Political Stability” in the 2006 survey. Interestingly, factors presumed to be advantageous for doing business in Vietnam (labor cost and export opportunities) were not as attractive as expected with only 20% respondents ranking them first.
3 main causes for concern
Common concerns for businesses that are cautious with their expansion plans in Vietnam are:
• Corruption and Bureaucracy
• Poor law enforcement
• Poor infrastructure
In conclusion, investors have ranked 10 criteria from (10) the least important to (1) the most important for further improvement to the business environment:
1. Prevention and control of corruption
2. Enforce law evenly and strictly
3. Further remove unnecessary permits and ease entry
4. Overhaul the tax regime
5. Improve employment regulations
6. Improve civil services efficiency and transparency
7. Reform financial sectors
8. Land administration
9. Further develop infrastructure
10. Reform and streamline customs procedures
Domestic businesses more positive
It is however notable that there are a difference in the evaluation between domestic and foreign investors. Apart from corruption control which was assessed by both as the most important action, removal of permits and improvement of employment regulations were viewed as second most important for the foreign investors while domestic enterprises ranked law enforcement and tax regime overhaul as second priority.
Domestic businesses were consistently more positive about the business environment in Vietnam for the past years as well as for the future and therefore their ratings were consistently higher than the latter’s.
In recent years, Japanese investors have moved their businesses to Vietnam. It may be worth while for Norwegian companies to listen to what the Japanese said about Vietnam and see what are relevant to their businesses. In a Survey on how Vietnam is viewed by Japanese companies as a destination for investment done by Japan Bank for International Cooperation Vietnam has moved up to the 3rd place in a list of promising countries after China and India, overtaking Thailand. Vietnam is viewed as a risk diversification given an increasing concern on a high concentration risk toward China.
For more information on the Survey, please log on to Innovation Norway Hanoi’s home page and look under "Related material" in the righthand bar (link http://www.innovasjonnorge.no/templates/
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