Investing In Vietnam - Overview

A key turning point was Vietnam’s accession to the World Trade Organization (WTO) in 2007, followed by its participation in the ASEAN Economic Community (“AEC”) in 2015. In addition, Vietnam successfully held APEC in November 2017, this has positioned the country to more investment opportunities.

Why Vietnam and Why Now?

Vietnam is at a tipping point in its economic development led by free trade agreements (FTAs) such as the EU-Vietnam FTA and an increasingly deregulated business environment.

Six major growth drivers will enhance opportunities for investors in Vietnam:

New Free Trade Agreements

Enhance Vietnam’s economic integration into the global economy, including major developed markets in North America, Europe and Asia.

Fast Growing Economy

Vietnam is one of the most dynamic economies in the world. GDP growth is expected to be between 6% and 7% from 2017 to 2019.

Cost Competitive Production Base

Labor costs in Vietnam are among the lowest in Asia. An ideal production base for companies thinking of shifting or diversifying out of China.

A stable Government Committed to Growth

Vietnam has a stable social-political environment with the government committed to creating a fair and attractive business environment for foreign investors.

Young Digitally-Savvy and Growing Workforce

Vietnam has an educated workforce and is now in a period of golden population structure - where 40% is under 25 years of age. The smart phone penetration is 26% of the population.

Infrastructure Development

Large scale infrastructure needs create investment opportunities. Vietnam’s construction output value grew 10% in 2016.

The south has been the traditional center of manufacturing and trade, and a major logistics hub. However, the northern region has become an increasingly popular destination for foreign manufacturers looking to diversify their production bases, notably for South Korean and Japanese companies.

Demographic

Vietnam is conveniently located in the center of South East Asia and is bordered by China to the north, Laos and Cambodia to the west.

The total area of Vietnam is over 331,212 square kilometers and its geography includes mountains and plains. Vietnam’s population is spread throughout the country.

Ranked as the 15th most populous country in the world, with a population of over 96 million people and a median age of 30, Vietnam represents a huge pool of both potential customers and employees for many investors.

Hanoi in the north is the capital of Vietnam and Ho Chi Minh City in the south is the largest commercial city. Da Nang, in central Vietnam, is the third largest city and an important harbor.

This demographic bonus provides Vietnam with a unique socio-economic development opportunity to take advantage of the young labor force and push its economic growth.

Legal and Regulatory Government

Vietnam is a one party state. As the only party in the political arena, the role and influence of the Communist Party is unique.

The President, as Head of State, represents the Socialist Republic of Vietnam in internal and foreign affairs. The Government is the highest administrative state body, and responsible for executing and managing political, economic, cultural, social, national defense, security and foreign affairs of the country.

Ministries are responsible for the execution of state power in a certain industry or sector.

The People’s Committee (province, district and commune) governs management affairs within its administrative location. The People’s Committee manages, directs and operates daily activities of local state bodies, and executes policies issued by the relevant People’s Council and higher state bodies.

Vietnam joined the World Trade Organization (WTO) in 2007. Under its accession commitments, Vietnam opened up various business sectors to foreign investment, in some cases under a phased approach. These commitments are generally referred to when assessing whether foreign investment in a particular sector is allowed.

There is a hierarchy of regulations in Vietnam, with laws being passed by the National Assembly, and their implementing decrees and circulars issued by the government and its ministries, respectively. A plethora of other legal instruments/guidelines are also issued by

various other authorities.

Infrastructure

Road System

In addition to the major national road, Highway No. 1A, stretching from the border with China in the north to the Mekong Delta Provinces in the south via Ho Chi Minh City and the Trans-Asia highway, the country is also progressing with the completion of Ho Chi Minh Road (known as Ho Chi Minh Trail during war time). This 3,167 km long road will run parallel to the existing national road No. 1A to connect the North with the South. Other notable highways linking key economic regions have also been upgraded.

Railway and Metro

Vietnam’s railway is 2,600 km long, 60% of which is in the Northern provinces. The rail network includes 15 main routes and branches connecting 35 provinces and cities, of which the North-South route is the longest and most important route. In addition, several railway

lines have been proposed for construction in recent years, notably the high speed North-South Express Railway.

The Metro systems which are under construction in Hanoi and Ho Chi Minh City are expected to alleviate pressure on existing road transportation and boost economic growth. The first metro lines are expected to commence operation in Hanoi by 2020 and in Ho Chi Minh City by 2023.

Airport

In recent years, the country has also witnessed a significant increase in air transportation. As the economy expands both domestically and internationally, the volume of freight and passengers carried by air transport has been increasing sharply. The government is expanding and modernizing the airport infrastructure, most notably the construction of Long Thanh airport in the southern province of Dong Nai. When completed, Long Thanh Airport will become the largest airport in Vietnam accommodating up to 25 million passengers and 1.2 million tons of cargo a year.

Seaport

Sea transportation remains a significant component of the Vietnamese infrastructure system. There are over 100 ports throughout the country, of which the major ones are located in Hai Phong, Da Nang and Ho Chi Minh City. In an effort to address the increasing demand of exporters, plans to upgrade and expand the existing capacity are underway, most notably the plan to develop the mega-port Hon Khoai in Ca Mau province, which is expected to be completed by 2020. Once completed, the port will accommodate ships with a capacity of up to 250,000 DWT.

Economic Environment and Inflation

The Vietnamese Government recognizes the importance of an efficient infrastructure for economic development. Recent years witnessed ambitious plans from the Government to expand and upgrade the existing transportation infrastructure system. Vietnam is considered to be one of the fastest and relatively stable-growing economies in Asia over the past years. Following 6.8% growth in 2017, GDP growth accelerated to 7.1% in 2018 and is projected to moderate to 6.7% in 2019.

Over the last 20 years, GDP growth has averaged approximately 7%. As well as enjoying strong export growth, which grew at more than 8.6% year-on-year in 2016, Vietnam is becoming an increasingly large importer of capital goods which is necessary to meet its large infrastructure needs.

Vietnam’s economic growth prospects are forecast to remain positive in the forthcoming years. According to the EIU report, the growth rate is forecast to accelerate at a rate between 6.4% and 6.5% during the period of 2018-2019. The country’s economic growth will be underpinned by rising consumption, increased foreign direct investment, robust export performance, deeper integration into global economy and improvements of the regulation system.

The rapid increase in demand for goods and services, increasing credit issuance and investment from the country’s economic growth pushed up inflation rate to 4.1% in 2017. The annual inflation rate in Vietnam decreased to 2.98% in 2018.

According to the forecast, the average rate of price rises between 2016 and 2020 will be estimated to remain modest at 4% which is well below the figure of 7% in 2011-2015.

Key Sectors and Trading Partners

Located in the heart of South East Asia and along the coastline of the Pacific Ocean, Vietnam offers numerous advantages in providing access to the world’s major trade routes. Natural resources and conditions allow Vietnam to develop the fundamental and seasonal structure of agricultural products and application of different cultivation in regions. Vietnam continues to diversify away from agriculture. Among the industrial sectors, services account for approximately 51% of GDP followed by manufacturing at 33%. The agricultural sector made up 16% of GDP in 2016. The growth in exports has been driven by the fast growing manufacturing, telecommunications, clothing and apparel sectors with major exports to EU (23%), US (21%), China (18%), ASEAN (12.8%) and Japan (8%). In 2018, much of the foreign direct investment into Vietnam came from Japan (24%), Korea (20%) and Singapore (14%).

Foreign Direct Investment (FDI)

Vietnam is one of the leading investment destinations in Southeast Asia. With the advantages of geography, natural resources, and an affordable labor force, Vietnam attracts a large amount of capital each year. Vietnam has a number of unexplored sectors and a growing consumer market.

With a stable exchange rate and reductions in inflation (which fell from a peak of 18% in 2011 to 2.6% in 2016), the macroeconomic environment has dramatically improved in recent years.

Vietnam therefore remains one of the most attractive destinations for foreign investors in South East Asia. It received $35 billion in foreign direct investment in 2018, equivalent to 98.8% of the previous year’s figure.

The role of the private sector and foreign investors in the Vietnamese economy has increasingly been emphasized. “Business forum” meetings and dialogues between the Government and the private sector and foreign investors are frequently held, and provide great opportunities for businesses - especially in the foreign sector - to make themselves heard on important legislative issues.

Free Trade Agreements (FTAs)

Vietnam officially became the WTO”s 150th member on 11 January 2007. WTO accession has created both opportunities and challenges for Vietnam to become an attractive investment destination. Despite the uncertain fate of the Trans Pacific Partnership (TPP), Vietnam is still getting increasingly integrated to the global economy, as well as the Comprehensive and Progressive agreement for Trans-Pacific Partnership (CPTPP).

Vietnam has entered into or completed the negotiation of a number of Free Trade Agreements (FTAs) including both collective FTAs as a member of ASEAN, and bilateral FTAs (such as FTAs with the EU, Japan, Chile and Eurasian Economic Union).

The EU - Vietnam FTA is expected to be the next major milestone for Vietnam from a trade perspective. It is expected to be effective for Vietnam by 2020; and this FTA is expected

to liberalize 90% of imports from both sides in a 10 to 15 year time.

Laws on Investment and Enterprises

In late 2014, the National Assembly passed a new Law on Investment (LOI) and a new Law on Enterprises (LOE), both of which come into effect on 1 July 2015. A series of mplementing regulations were issued in late 2015 (including Decree 78/2015/ND-CP guiding enterprise registration, Decree 96/ND-CP guiding the implementation of the LOE, and Decree 118/2015/ND-CP guiding the implementation of the LOI). These two new laws contain major changes to the former laws (passed in 2005), and are creating more favorable conditions for investors into the future.

Investment

A series of regulations were issued or came into effect in 2016 in relation to the Law on Investment, including Decree 135/2015/ND-CP on overseas indirect investment, Circular 16/2015/TT-BKHDT on templates for investment registration, Decree 50/2016/ND-CP on administrative fine for violation to planning and investment regulations, and Circular 83/2016/TT-BTC on investment incentives.

Enterprises

Decree 50/2016/ND-CP above is also applied for enterprises.

Workforce and Cost of Living

The number of people of working age in employment in Vietnam totaled over 55 million representing 58.5% of total population in 2018 with an official unemployment rate of 2%.

Labor force remains a key competitive advantage of Vietnam to attract foreign investment as well as sustaining future growth. Vietnam is famous for its young, hard- working, highly a literate and easy-to-train labor force.

Wages and salaries in Vietnam vary widely across occupations and geographic locations. In 2018, the average annual income per person was over $2,900.

In comparison with other countries in Asia, the cost of living in Vietnam remains relatively low.

Better quality training provided by professional experts is required for Vietnamese workers to meet increasingly sophisticated requirements of investors.

Business Etiquette and Culture.

Many Vietnamese are more comfortable using their native language rather than English. However, many English speakers can be found in Vietnam, especially in the larger cities.

Presenting business cards is an important ritual in the Vietnamese business world. Cards are exchanged at the beginning of a meeting using both hands. Translating written materials into Vietnamese shows respect for Vietnamese colleagues and business partners.

Face to face business meetings are important in Vietnam and an appropriate level of respect must be shown according to rank and seniority.

The Future

As a member of the WTO, Vietnam continues to improve its business and investment environment and bolster its legal system to meet WTO requirements. Vietnam has made significant efforts to ensure that foreign investors are not disadvantaged compared with their local counterparts, including an overhaul of the legal framework governing investments and protection of intellectual property.

Furthermore, the government has taken measures to simplify administrative procedures in areas such as import and export, company establishment and making tax payments.

According to the latest World Bank annual ratings, Vietnam is ranked 69 among 190 economies in the ease of doing business, foreign investment in Vietnam continues to grow, and the Government shows its commitment to market-oriented reforms through its ongoing efforts to attract foreign direct investment.

Source RSM Vietnam

(AGBT search)