Foreign
investment in Vietnam has had a rocky ride since 1996.
Recent statements by Hanoi, however, indicate that the
ride will be much smoother from now on. True, the
economy is healthier now than a decade ago, and
investments are coming in at a stronger rate than in the
dismal late 1990s. But several business people with long
experience in the country suggest that cautious optimism
is the wise man's creed when considering investing in
Vietnam. A look back at the unstable investment patterns
of the past eight years will additionally help any
would-be investor grasp the lay of the land.
1996-97 When Vietnam published its
Foreign Direct Investment (FDI) Law in December 1987,
its Soviet-style command economy began to wither, albeit
slowly. The law allowed for several types of businesses:
1) business cooperation contracts, 2) 100 percent
foreign-owned enterprises, and 3) joint-venture
companies (JVCs or JVs). Although the government
expanded the law to include build-operate-transfer
projects at a later date and also allowed revenue
sharing agreements for oil and gas investments, the
government encouraged JVs over all else.
FDI
trickled in at first, but poured in by 1995 and 1996.
Licensed projects were valued at US$6.6 billion for '95
and $8.6 billion for '96. Actual inflows were lower -
$2.67 billion and $2.64 billion, respectively - but
inflows are typically a third lower than pledged
projects. Additionally, some of these monies represented
massive proposed real-estate development projects in
Hanoi, Dalat and Ho Chi Minh City, some worth more than
$500 million. According to Chris Freund of Mekong
Capital, these projects were not done deals, but "more
like options to develop the projects at a later date if
the property market increased in values significantly".
This phenomenon inflated licensed Vietnam FDI figures
slightly, and some foreign business people assert that
the government took advantage of this to skew investment
statistics. However, the figures overall represented an
enthusiasm on behalf of the foreign investment community
to invest in Vietnam.
Foreign investment
appeared so prosperous that in 1996, Hanoi declared that
it wanted FDI to account for 40 percent of its
investment needs from 1996-2000. That amounted to $40
billion. Major firms set up shop in Vietnam to market
their products and services. All business pioneers, they
included Pepsi, Coca-Cola, Grand Metropolitan
Distilleries, Unilever, LG Chem, Proctor and Gamble,
Nissho Iwai, IBM, J Walter Thompson advertising and SRG,
a major market-research firm. Downtown Ho Chi Minh City
teemed with Japanese, Taiwanese, South Korean, US,
British, German and French business people. Gainfully
employed Vietnamese benefited from increased purchasing
power, and the quality of life in Vietnam's largest
cities visibly increased.
But there were
numerous developing problems. The banking sector was
weak, and many lending institutions collapsed because of
corruption. Government policy required many foreign
investors to invest in JVs along with state-owned
enterprises (SOEs), which by Western standards were
inefficient. Further, excessive red tape stifled
business operations and contract negotiations. Starting
a business required as many as 10-20 permits, and
maintaining operations required similar efforts each
year. Even bureaucrats that had little to do with
business asserted themselves in the system to milk
foreign investors.
More, Hanoi's propensity to
create restricting business laws overnight likewise
created substantial barriers. For example, in 1997,
Hanoi outlawed cigarette advertising and the import of
various consumer goods such as shampoo, soap,
toothpaste, televisions and radios. This was the
government's attempt to encourage the domestic industry
and increase its labor force, but foreign investors saw
it as command economy politics. Lawmakers applied a
similar policy to industrial sectors such as sugar,
cement and steel, which reflected Hanoi's continued
interest in import substitution.
But by spring
1996, a rumor circulated through Hanoi and Ho Chi Minh
City that suggested the 8th Party Congress, to be held
that summer, might not expand FDI policies established
so far. There was a short pause in hiring as the foreign
investment community held its breath, waiting for the
verdict at the Congress's conclusion. In the end, the
verdict was not good for FDI. The government put the
brakes on further expansion of FDI policies, something
the foreign business community needed in order to breach
existing barricades.
Having said this, Chris
Freund states that the Vietnamese government was not
entirely at fault regarding the downturn of FDI. He
asserts, "Many foreign investors deserve much of the
blame for their failures in the mid-'90s. This is
because they routinely overestimated domestic demand in
Vietnam. They got excited about the 80 million people in
Vietnam and the idea that [it] was going to be the next
Asian Tiger but didn't consider the per capita GDP
[gross domestic product] was around $320." He also says,
"Much of this investment was predicated on the
assumption of a rapidly ongoing reform process, but they
were often being unrealistic about this."
FDI
decreased accordingly. While disbursements increased to
$3.25 billion, likely as a result of 1996's momentum,
the worth of proposed projects fell to $4.6 billion,
down $3.99 billion from the previous year. This
indicated the foreign investment community's disdain for
Vietnam's FDI policy turnaround, and, as Freund stated,
their unrealized, overoptimistic assumptions.
To
add insult to injury, the Asian economic crisis of 1997
began to rear its ugly head, severely injuring regional
economies, which also penalized Vietnam. Largely immune
from the crisis's direct blow because of its
inconvertible currency, the dong, Vietnam instead
suffered indirectly because its biggest investors -
regional players such as Thailand, Japan and Taiwan -
had less to invest as they propped up their own
economies from the effects of currency devaluations and
capital flight. Nevertheless, as investors fled in what
signified the end of Vietnam's first investment wave,
Michael J Scown suggested that the international
community adopt a long-term investment view and
summarized the country's key FDI problems as follows:
1. Lack of a coherent government FDI policy. 2.
Weak domestic banks. 3. Lack of security for foreign
lenders. 4. The impact of the Asian economic crisis.
1998-99 Vietnam spent 1998-99 reeling
from the "one-two punch" of '96 and '97. Foreign
investors hoped for a Doi Moi II - that Hanoi might
reverse the policies of 1996 and once again encourage
investment with more progressive investment laws. But
Vietnam's investment policies remained muddled, and
corruption and an excessive bureaucracy made doing
business tough.
One specific policy that
restricted investment in Vietnam was its
currency-surrender law that seized up to 50 percent of a
business's foreign money. According to a US Foreign
Commercial Service and US Department of State study
dated 1999, "strict controls on the holding of foreign
currency [made] it difficult for investors to retain US
dollars in order to pay salaries, [repay] loans and
repatriate profits". As a result, investment suffered.
The most significant FDI policy step forward was a
1998-99 law that stated that foreign joint-venture
partners could buy out local partners. This marked a
major policy turnaround from 1996, when the government
allowed but discouraged 100 percent foreign-owned
enterprises. Two major companies took advantage of the
new law, Colgate-Palmolive and Coca-Cola. According to
press accounts, each had been experiencing losses and
high-profile managerial disputes with their foreign
partners.
Otherwise, that was it for noteworthy
investment moves. In 1998, proposed projects amounted to
$3.897 billion, down $76 million from the year before.
Actual disbursements fell to $1.9 billion. And for 1999,
the FDI situation deteriorated still more with a major
drop in proposed projects to $1.54 billion, a staggering
39 percent drop from the previous year. Disbursements
fell to $1.53 billion. While Vietnam's GDP did not
suffer terribly as a result, it did not expand much,
either. In dollar terms, from 1998 to 1999, Vietnam grew
from $25.7 billion to $26 billion. A study of press
articles from the 1998-99 time period noted the
following difficulties with FDI in Vietnam, with the
Asian economic crisis being the lesser obstacle: 1.
Corruption. 2. Excessive business "red tape". 3. A
difficult-to-interpret and ever-changing investment
legal system. 4. The Asian economic crisis.
2000-01 In both 2000 and 2001, Hanoi
took positive steps to rectify its dismal FDI record,
first by joining the foreign business community in its
criticism, and second by proposing numerous FDI legal
reforms. By this point, the government likely realized
that its 1996 policy of FDI supplying Vietnam with 40
percent of its investment needs by 2000 - $40 billion -
had not been achieved. In reality, it had provided only
$13.8 billion, some $26 billion off the mark.
The National Assembly acted first. It debated
investment reform in 2000 over a proposed investment
law, but that law did not see fruition until the 9th
Party Congress in 2001. Regardless, various assembly
ministers such as Pham Chuyen and Nguyen Duc Chinh
argued that while Vietnam's investment laws were
adequate on many levels, many local administrative
bodies hindered FDI via corruption and impending
bureaucratic roadblocks. They also cited unduly high
personal income taxes for foreign investors, some equal
to those in Japan. Specifically, Vietnam imposed a 25
percent corporate income-tax rate, and with incentives
it was acceptable to some, but the 50 percent tax rate
for those in the oil-and-gas sector, major money-makers
for Vietnam, were driving business away.
Perhaps
reacting to the likelihood of near-future positive
policy changes, FDI numbers went up. In 2000, proposed
FDI projects tallied $1.9 billion, up $424 million from
the year before. Disbursements rose to $1.8 billion, an
increase of $264 million from the year before. These
reflected a trend of smaller FDI projects away from $20
million deals such as real estate to smaller-scale
manufacturing projects that sometimes required less than
$5 million.
Then in January 2001, Vietnam
Investment Review (VIR), one of that country's flagship
business weeklies, published portions of internal
government documents that discussed Hanoi's criticism of
its own FDI policies. The documents focused on two key
points: 1) the government's lack of agreement on the
benefits of FDI, and 2) the government's
misunderstanding of how to manage FDI policy.
After the publication, the government held the
9th Party Congress in spring 2001 and laid the
groundwork for a new investment law that would be
published in the autumn. Part of its motivation for
doing so lay within preparing for the economically
liberal Bilateral Trade Agreement (BTA) with the United
States and taking steps to prepare the country for
possible entry into the World Trade Organization (WTO)
in the mid-2000s.
Nevertheless, at the meeting,
the Communist Party stated in broad terms that recent
economic reforms had benefited the country by reducing
poverty, but further reform would help to realize the
full potential of the nation's resources and human
capital. It indicated that FDI was an important part of
realizing that goal. Additionally, the party cited
strategic drags on the economy that needed reform. The
culprits included domestic business inefficiency, lack
of competitiveness, slow industrial modernization, low
purchasing power, a weak banking sector and
"irrationalities in the investment structure" to name
but a few.
The resulting Party Congress
resolution, simply titled 09/2001/NQ-CP, came out in the
autumn. It included improvements and transparency in FDI
law; opened medical, travel and tourism sectors to
foreign investment; declared its intent to change to a
"common tax system"; and granted foreign businesses the
ability to hire local staff on their own accord and not
via local hiring agencies. Perhaps the most significant
change was a lower foreign-currency surrender rate of 40
percent, down from 50 percent. (In May 2002, the
government lowered this to 30 percent, and in April
2003, it disposed of this policy.)
By the end of
2001, the value of proposed FDI projects had risen to an
estimated $6.3 billion, which was $4.3 billion more than
2000. Disbursements also climbed slightly to $2.3
billion, an increase of $500 million. These increases
seem to have occurred in anticipation of Vietnam
achieving the BTA with the US and Hanoi's reformist
tack. Beginning a four-year FDI-reform movement with
such criticism was a positive step in gaining investor
confidence. Only time would tell.
2002-03 When time did tell in 2002,
statistics did not reflect an upswing. On the contrary,
the worth of both proposed projects and disbursements
fell by nearly 50 percent. Proposed projects were valued
at an estimated $3.6 billion, disbursements at a meager
$1.3 billion, the lowest figures since before 1995. This
most likely occurred because of the global economic
downturn that began showing signs in the US economy in
spring 2000 and had gradual ripple effects throughout
the world in the years that followed.
But as the
year went on, good news arrived. Based on its commitment
to the BTA, a continually touted desire to join the WTO,
and also the Association of Southeast Asian Nations'
Free Trade Area, Moody's upgraded Vietnam's
creditworthiness from "stable" to "positive" in 2002.
Hanoi's slow but tangible FDI reforms probably
contributed. According to a speech made by Prime
Minister Pham Van Khai in early 2002, Vietnam was
working on improving the FDI sector, which included
creating "... a clear-cut, uniform and stable legal
environment", reforming the banking sector, increasing
Vietnam's foreign-currency reserves, and enhancing and
speeding up investment. These were not hollow words.
Several past hindrances to FDI, such as myriad permits
required by investment authorities, had by this point
been removed. On the other hand, there remained gripes
about FDI policy: 1. Expensive
telecommunications. 2. A high top income tax of 30
percent. 3. High import tariffs for various product
components that cost more than the final product. 4.
Forced purchase of locally produced parts for some
products.
Despite its slow but significant
FDI-reform measures to date, Vietnam's economy improved
dramatically in 2002. GDP expanded at about 7.4 percent.
Individual sectors such as agriculture grew at 5
percent, and money made off exports to the United States
skyrocketed into the billions of dollars.
Depending on the source, economic figures for
2003 varied. FDI figures seemed to have improved
slightly in 2003. Projects totaled $3.1 billion, a
slight drop from 2002, but disbursements rose to $1.95
billion, a $6 million increase. The World Bank said GDP
growth was about 7 percent, but Vietnamese figures said
7.5. Despite these numbers, Le Dang Doanh, a leading
Vietnamese economist, warned early in the year for
Vietnam to make rapid investment reforms or lose
competition to China.
Contrary to this line of
reasoning, in September 2003, Vietnam instated a 25
percent import tax on automotive parts kits for foreign
manufactures with assembly plants in the country.
Lawmakers wanted to force car makers such as Toyota to
purchase domestically made parts, which some believe are
of low quality. Politicians assert that it is designed
to decrease the number of cars on Vietnam's increasingly
traffic choked roadways. Regardless, some auto makers
have declared their intent to raise domestic prices per
unit and to scale back investment until more optimal
conditions evolve.
Conclusion FDI in
Vietnam has indeed experienced dramatic fluctuations,
and the journey from command economy to the present has
been a bumpy ride. Hanoi admitted in 2001 that its
policies and hazy laws were the root cause, but that
corruption and excessive bureaucracy by local
administrators also served as significant impediments.
The resulting fallout has hurt the Vietnamese economy
and contributed to its unnecessary sluggish growth and
poorly utilized resources and workforce. All of this is
unfortunate, because FDI is vital to Vietnam's
modernization and poverty alleviation.
But what
about the bottom line? Has FDI stabilized in Vietnam?
Chris Freund says yes. "In terms of the number of
projects licensed, the rate of implementation of the
projects that get licensed, the number of jobs created
and the tax payments of the FDI sector, it has
stabilized. It is just that the nature of the projects
being licensed has shifted dramatically away from
capital-intensive industries and domestically oriented
business like consumer products towards labor-intensive
manufacturing for export, an area where Vietnam does
have a competitive advantage."
Hanoi's policy
turnaround has helped stabilize FDI. Freund states, "The
government was very receptive to feedback on the Law for
Foreign Investment in Vietnam and has made revisions
several times." Further, "The legal framework as well as
tax incentives for FDI in Vietnam is generally
favorable." Finally, Freund comments that the numerous
industrial zones around the country have made it easy to
set up a factory with a small degree of red tape and
bureaucratic interference. In short, the government has
reformed FDI policy for the better, not by leaps and
bounds, but by smaller steps. But the remaining problems
are serious. Protectionist policies such as the
automotive-parts tax still threaten
investments.
What about the future? Will the FDI
climate change for the better, and at what pace? If the
seven years of reform since 1996 is any indicator, then
Vietnam shows promise, but unless policymakers achieve
an epiphany of capitalist prowess, then the pace will
drag. In this case, investors must consider investment
sectors carefully and not overestimate the country's
potential, especially in the domestic market, as in
1996-97. Today, the name of the game is small
manufacturing projects and export-oriented businesses,
similar to what Taiwan has established. Tomorrow,
Vietnam will have to compete more with China, what one
Ho Chi Minh City lawyer refers to as "an overwhelming
challenge", and not just for Vietnam, but for the rest
of Southeast Asia as well. This will likely entail
accelerating reform and developing niche sectors where
FDI can both generate profits and benefit the country's
labor force, foreign-currency coffers and technology
intake. Similarly, government FDI policy will have to
continue to change to attract FDI in an ever-increasing
competitive global market. But Hanoi knows this and
seems to be making a real effort to meet investor
demands. For example, last April, Vietnam abandoned its
foreign-currency-surrender policy for exporters a year
ahead of the International Monetary Fund's suggested
timeline.
Additionally, many of the BTA's
statutes phase in over time, which will automatically
open up the country to foreign investment and require it
to follow internationally recognized standards of
conduct. Hanoi's bid for entry into the WTO will have a
similar effect. But while policy improvements will help
better the economy, Sesto Vecchi, a longtime Ho Chi Minh
City lawyer, asserts that it is time for Vietnam to look
past simply improving FDI policy and work on improving
the business environment.
In all likelihood,
Vietnam's conservative penchant against change and
protectionist proclivities will continue to butt heads
with economic reform and the multitude of national
changes that come with it. Because of the environment
this situation creates, however, Keith Schulz, a former
longtime Ho Chi Minh City business consultant, says that
future FDI assessment "in general does not exist for
Vietnam. It will depend on what one is investing in, and
the terms one can receive. Individual opportunities for
those intimate with particular conditions will continue
to emerge."
As for the big picture, with the
Vietnam-US BTA well under way, an increasingly
economically competitive region, and possible entry into
the WTO next year, the ground is set for a major leap in
FDI policy at the next Party Congress in 2006. This
could occur sooner if China diverts too much FDI from
Vietnam. It will be up to Hanoi to seize the day.
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