Foreign Investment in Vietnam

Implementing renovation, building a socialist-oriented market economy, in the past years, Vietnam has issued a number of legal documents related to investment, including the Law on Foreign Investment in Vietnam, Law on Domestic Investment Promotion, Law on Construction, Land Law, Law on State Budget, Law on Enterprise etc. This set of laws has created an important legal framework regulating investment-related relations in line with the policies and viewpoints of the Party and Vietnam’s socio-economic development practice, as well as the requirements of the process of integration; helping create a conducive investment environment, attractive to investors of all economic sectors.

The 1987 Law on Foreign Investment amended and supplemented in 1990, 1992, 1996, and 2000 has created an increasingly attractive legal investment environment to draw and use FDI effectively. By the end of 2004, Vietnam had over 5,300 on-going FDI projects with the total registered capital of US$ 47 billion, performed capital accounted for US$ 31 billion. In 2004, the foreign invested sector made up 17% of the total social investment, constituting 14.5%GDP and accounting for 37% of the total industrial value, and nearly 54.6% of the country’s export turnover including oil export.

Since the start of renovation, the legal system related to investment and business has constantly been improving to make it appropriate for the building of a socialist-oriented market economy. In this process, the business and investment environment in Vietnam has also been improving toward equality, non-discrimination, creating “a level play ground” for all investment forms, all economic sectors, by issuing a range of new or amended laws. The gaps in terms of business and investment terms such as terms on market integration, factors related to input and output and enterprise management operations carried out by domestic and foreign invested enterprises, have been significantly narrowed; a great number of policies have already merged.

“A level play ground” in line with the Party’s policies and requirements for integration, however, had not created before 2005 due to the fact that laws related to foreign investment had promulgated separately, lacking uniformity in content and scope of adjustment. These discrepancies made Vietnam’s legal system on business and investment inconsistent, non-transparent; discrimination among investors and different forms of enterprises existed, which impeded the mobilization and use of resources. In addition, the dynamic and diversified development of enterprises of all economic sectors had revealed a lot of drawbacks of the legal systems which were designed separately for each of the different economic sectors.

Thus, it was a necessity to build and complete the legal systems, including Law on Investment, to serve international integration, which, on one hand, matched Vietnam’s legal system on investment with international commitments, reflecting an important message about the country’s renovation policy and its proactive international economic integration; on the other hand, took into consideration the typical features of Vietnam’s committed roadmap. Furthermore, Vietnam’s legal system on investment in the past seemed to be less competitive than the new policies on investment attraction applied by regional countries and others in the world

Therefore, Law on Investment which combined Law on Foreign Investment in Vietnam, Law on Domestic Investment was adopted by Vietnamese National Assembly on November 29, 2005 and has come into effect on July 1, 2006. The aims of this Investment Act are to broaden the freedom in making investment, to create a level playing field between investors, to go in line with international commitments and to improve the capacity of state management on investment.

Vietnam’s Law on Investment is now applied for all kinds of investors so as to continue improving the business and investment environment, particularly the legal environment aimed at consolidating the confidence of investors, creating favorable conditions draw investment to the maximum and effectively use investment activities. As a developing country, Vietnamese Government has tried its best to create a fair and attractive business environment through the legal system and has applied innovative approaches to draw more investments to develop the country’s economy and to improve the living standard of its people. However, in the competitive business world, other countries in the region are also adjusting their laws to be more effective in order to lure more foreign investments. Above all, it is China, a strategic neighbor of Vietnam, which has made significant efforts recently. As the result, China has been in the group of top reformers for recent years and in a report on ‘Doing Business 2007″ by World Bank it was ranked top reformer on the ease of doing business in East Asia. Surprisingly, there is no single Foreign Investment Law; instead China has a series of laws governing foreign investment. The Law of the People’s Republic of China on Chinese-Foreign Equity Joint Ventures, The Law of the People’s Republic of China on Chinese-Foreign Contractual Joint Ventures, and The Law of the People’s Republic of China on Wholly Foreign-Owned Enterprises are the three main laws governing foreign investment in China. Beijing has also gradually revise laws and regulations in order to make them more competitive and compatible with WTO rules or other international commitments.

Let’s take a look at some similarities and differences between Vietnam’s Investment Law and other Chinese laws governing foreign investment and draw some suggestions for the better improvement in Law on Investment in Vietnam to be more competitive in the changing business world.

According to the current Vietnamese Investment Law, domestic and foreign investors presently have more freedom to decide the type of investment activities in the List of sectors where investment is prohibited or conditional. In addition, to ensure the freedom of doing investment, transparency, and conformity with international integration process, it is regulated that ministries, other relevant agencies and provincial authorities are not permitted to issue List of sectors where investment is prohibited or conditional. While Investment sectors of Law on Investment in Vietnam has Prohibited List and Conditional List; in China, investments are divided into “encouraged,” “restricted” and “prohibited” categories. In the Catalog for the Guidance of Foreign Investment Enterprises (Revised 7), the length of encouraged section is more than twice of the same section in the 2004 Catalog. This is an extremely positive incentive for investors; on one hand, that change promotes more investments, and on the other hand, it helps entrepreneurs diversify their investment portfolios. The idea of adding an “encouraged” list in the List of sectors is good for Vietnam as it guides investors directly into the sectors and industries which are in the top priority of investment and are encouraged by Vietnamese Government. Hence, entrepreneurs are likely understood that if they invest in “encouraged” list, they might have supporting advantage from the Government.

However, while Beijing had set “a substantial restriction on foreign investment in real estate and real estate brokerage firms” and “construction and operation of luxury hotels, villas, office buildings and conference centers” are in the restricted category or it can be interpreted as absolute prohibition in this context; the “real estate business” is placed in the Conditional List in Vietnamese Law on Investment. It is the right move from the Vietnamese side and has showed the positive impact in the real estate market in Vietnam. The domestic Vietnamese real estate market has been in the booming season in recent years and the total capital for this market in 2007 was estimated to reach $5 billons which mostly were FDI and overseas remittance. According to statistics, real estate accumulated 85% of FDI flown into Ho Chi Minh City in the first 11 months of 2007.

About investment forms, the current Law on Investment in Vietnam expanded the types of investment in comparison with those in the old Law on Foreign Investment. For foreign investors, direct investment forms stipulated in Chapter II of current Investment Law have also been expanded, under which, apart from limited companies (joint ventures, 100% foreign-invested enterprises), investors are allowed to form joint stock companies, franchised venture companies by Law on Enterprise; to join capital, buy shares in Vietnamese enterprises involved in some areas and trades mandated by the Government; obtain acquisitions, merging following regulations spelled out in the decree on competition and other related decrees. The indirect investment forms stipulated in Chapter II aims at facilitating the attraction of investment capital. Indirect investment activities, however, chiefly include short-term investment capital sources via transaction centers, not having direct control over the company. Consequently, many policies on indirect investment are different from direct investment forms. These restrictions are spelled out in specialized laws and in conformity with international commitments such as Law on Securities, Law on Banking and Credit Institutions, Law on Insurance.

Like Vietnam and other countries in the world, China has a variety of forms of foreign direct investment. And the most common forms of absorbing foreign capital in China are Chinese-Foreign Contractual Joint Ventures, Chinese-Foreign Equity Joint Ventures, and Wholly Foreign-Owned Enterprise. To order to facilitate investors’ business activities and to have an effective access to implementation rules governing the establishment and operation of each type of foreign direct investment, Beijing has built the dedicated laws for each of these three above forms. Besides these three main forms of foreign direct investment, there are many other investment forms such as Share Company with Foreign Investment, Foreign Invested Holding Company, Joint Exploitation, BOT, ect.

In addition, in the current Law on Investment of Vietnam, there are three kinds of projects: projects not belonged to investment registration, projects belonged to investment registration and projects belonged to investment evaluation. Actually the classification of projects does not only aim to make uniform the classification of domestic investment projects and foreign investment projects, but also satisfies the reform requirements that include streamlining administrative procedures, enhancing the proactive and self-responsibility role of the investor in his investment decision, enhancing decentralization in governance of investment activities, matching international commitments in the roadmap for opening investment market to foreign investors.

Under the new classification, many projects that formerly were to file up as investment projects to go through appraisal process before they could be given certificates, now need to fill in only simple forms for investment registration. Common conditional projects or important projects that do not need capital from the State of Vietnam do not need to compile Feasibility Study, they have to compile only Economic-Technical Report or just Pre-feasibility Study top submit for appraisal before being given investment certificates. The classification of projects has inherited and streamlined the process of classifying projects under the old Law on Foreign Investment and the Government’s Decree on Management of Domestic Investment; acting as foundation for the decentralized management of investment activities; at the same time matching the roadmap committed by Vietnam in international commitment, the registration for investment certificates for production projects with the scope of investment capital up to US$ 20 million, equaling VND 300 billion shall be applied. Furthermore, the decentralization of the authorities empowered with the right to give investment certificates and investment decision has been expanded to ministries, sectors and provinces, which makes the process of doing business of foreign entrepreneurs in Vietnam less complicated.

According to the Law on Investment in Vietnam, duration for issuing certificate for investment evaluation is no more than 45 days and for investment registration is no more than 15 days. In addition, some investment impediments, such as requirements on localization, export or import ratio, achieving certain ratio in research and development activities, providing goods and services at a certain location, and locating the head office at a certain are, have been removed. Although Vietnam paid efforts in designing a strong administrative reform, “single door, single paper” to create a more competitive and attractive business environment to lure foreign investment, the actual process of implementing the Law has not met the expectation. In the report on Doing Business 2008 of World Bank, it still takes 50 days to start a business as it did in 2007; while China had made big improvement in reducing the time to register a business from 48 to 35 days and cut the minimum capital required from 947 percent to 213 percent of income per capita and those enlighten moves helped China be the top reformer in East Asia. Finding the effective approaches and implementing them efficiently in order to support entrepreneurs start and operate their business easier are the rooms of improvement that Vietnam should focus on.

In case of legal capital, Law on Investment in Vietnam indicates that a foreign investor has the right to establish an enterprise as stipulated in the Law on Enterprise. Hence it is rather easy to establish an enterprise, no capital requirement is needed and it is not necessarily linked to a certain project when formulating an enterprise as spelled out in the current Law on Foreign Investment in Vietnam. It is said that the rule is too lax because the fact that the investor is not required to register capital when establishing an enterprise would restrict the fulfillment of the objective of luring foreign investment. While, according to China’s Laws, when establishing an enterprise in the investment recipient country, the investor must attach it to a certain project and register capital.

However, from the point of view of Vietnam Government, the aim of compiling the Law on Investment and Law on Enterprise is to create a legal system open to all economic sectors and is in conformity with international commitments. The segregation of enterprise formation from investment projects will create favourable conditions for the investor to carry out different projects without the need to establish many enterprises and facilitate market integration, at the same time streamline investment procedures for investment activities that do not attach to investment projects. And, it is the task of the enterprise to seek for projects and capital sources for its projects. Moreover, in such a small economy like present Vietnam, foreign investors coming to invest in the country are likely to expect foreign investment sources rather than those in Vietnam. The practice of foreign investment activities in the past 20 years has proved this.

In China, foreign investors received more investment incentives when investing in Special Economic Zone (SEZ) and Development Zone. Benefits that China grants to foreign investors are not given in the form of grants but in the form of tax benefit, including value added tax, customs and income tax benefits. There are five SEZs in the south of China where investors can enjoy a benefit of “2 + 3 years” or they are not subject to tax for the first two years and play a tax rate of 12.5% for the next three years. Investment incentives in the Law on Investment in Vietnam concerning taxation, fast depreciation, loss transfer, land use, etc. and investment assistance related to training, service development, technology transfer, development of infrastructure of industrial zones, are applies with reference to related laws and designed on the basis of non-discrimination among investors, and in conformity with WTO rules. Furthermore, in order to carry out administrative reforms, making them synchronous with other related laws, investment incentives practice is done under the two following forms:

+ For investment projects belonging to forms of investment registration and certification (Articles 46, 47), investors need only to list their incentive-related conditions at a relevant State authority in order to enjoy incentives as regulated.

+ For projects that need investment appraisal or conditional investment (Article 48), all incentive measures enjoyed by the investor shall be printed on the business-investment certificate.

The promulgation of tax incentives in Vietnamese Investment Law can be seen as the policy of promoting investment incentives to be enjoyed by the investor when carrying out investment activities in Vietnam, assuring the predictability of the effectiveness of investment activities so that the investor can make a decision to invest. The stipulation of tax incentives and other incentives concentrated in the Law on Investment aims to assure consistency, transparency and steadiness of Vietnam’s investment incentive policy.

Moreover, the stipulation of investment incentives in investment certificate and investment registration certificate reflects the long-term highly-legal commitment made by Vietnamese Government to investors; creating transparency and safety for investors during the whole project implementation process; avoiding random, inconsistency in granting investment incentives; easing ask-give mechanism and implementing the single-door policy in granting incentives, at the same time satisfying the need and aspiration of the majority of investors.

In sum, the current Law on Investment in Vietnam reflects more clearly and transparently the policies on investment guarantee, investment incentive promotion, streamlining administrative procedures and removing investment-related barriers such as restrictions on investment areas, investment-related trading terms, enterprise organization and management, investment forms, lack of freedom in choosing investment activities. However, the competition on attracting foreign investment in the world in general and among countries in the region in particular is now becoming tougher. Countries in the region, especially China, are carrying out strong reforms of their investment environment toward liberalizing investment and trade policies with powerful economic partners with the aim to lure their investment capital and technologies.

Furthermore, Vietnam’s current socioeconomic development goals include speeding up the process of industrialization and modernization, removing the risk of lagging behind regional countries and the world, bringing Vietnam out of the list of low-income developing countries. To this end, the demand for development capital is enormous in the coming years. Hence, Vietnam should combine mobilization of internal resources with external resources, combine domestic reforms with integration in order to seize opportunities and overcome challenges in the coming period as well as build a comprehensive socialist-oriented market economy through continuing completing the legal system, especially Vietnam’s Law on Investment, and integrated solutions aiming at luring and using resources effectively, strengthening and ensuring equality and freedom in business and investment, enhancing competitiveness, and making it attractive to investors of all economic sectors .

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