30 years of foreign investment policy improvement

December 07, 2017 | 14:00
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Over the past 30 years of foreign direct investment (FDI) attraction, due to the global shifts in demand and supply, FDI policies have been constantly changing, leading to fluctuations in the capital inflows to Vietnam.
Prof. Nguyen Mai, chairman of VAFIE

Significant progress of laws on investment

Vietnam’s Law on Foreign Investment 1987 has been evaluated as an open and attractive law, heralding an era of FDI inflows and promoting economic growth and improving the efficiency of the country’s international integration. The law was subsequently amended in 1990 and 1992 to create a better legal environment.

In the first three years (1988-1990), FDI inflows remained limited. However, investors’ appetite quickly picked up, bringing the first FDI wave in 1991-1997 with 2,230 projects and the total registered capital of $16.244 billion, of which $12.98 billion was disbursed.

“While FDI capital had a positive impacting on economic growth, the Law on Foreign Investment was amended in 1996 to cut and decrease incentives for FDI enterprises. In particular, it removed import tax exemption for some materials, equipment, and transportation vehicles, among others, in the process of business establishment. In the following time, the government issued regulations to recover these incentives,” said Prof. Nguyen Mai, chairman of the Vietnam Association of Foreign Investment Enterprises (VAFIE).

In 2005, the promulgation of Law on Investment and Law on Enterprises marked a milestone in creating a legal framework befitting investment and business activities, offering non-discriminatory incentives and promotion policies. This brought about the second FDI wave with the total registered capital of $6.839 billion, of which $3.3 billion was disbursed.

The two laws were amended in 2014 to alter the roles of investors and entrepreneurs. The government created a favourable business environment, with supervision and inspection. Particularly, the laws replaced "investment licences" with "investment certificates.”

As compared to other laws, the Law on Investment has seen the most changes of all laws to follow the evolving general rules, international practices, and the country's socioeconomic development, improving FDI attraction and effectiveness.

"From the 1987 Law on Foreign Investment to the 2014 Law on Investment and the Law on Enterprises, the business community saw a significant progress in the Vietnamese legal system, contributing to FDI inflows arriving from over 100 nations and territories with $165 billion of disbursed capital, contributing 19 per cent to domestic budget revenue, 19 per cent to the GDP, over 55 per cent to industrial output value, and 70 per cent to total export turnover in 2017," confirmed Prof. Nguyen Mai.

Vietnam is now considered an attractive destination by many foreign investors, due to low costs, suitable incentive policies, the stable political environment, and tax rates. Article 13 of the Law on Investment 2014 grants the highest available privileges to the investors upon any change in laws or regulations.

As of November 2017, there were over 24,500 FDI projects with a total registered capital of over $316 billion, disbursed capital of over $170 billion (54 per cent). Of this, $33 billion was attracted in the first 11 months, up 53.4 per cent compared to the same period last year. Notably, additionally registered capital made up 50 per cent, as a positive reaction to foreign investors’ performance and evaluation of the Vietnamese business climate.

"Vietnam needs to revise its FDI strategy to improve the management of FDI, create higher added-value, increase contributions to economic development in particular and sustainable development in general," noted Nguyen Noi, deputy director general of the Foreign Investment Agency (FIA) under the Ministry of Planning and Investment.

FIA deputy director general Nguyen Noi, director of VCCI's Legal Department Dau Anh Tuan, and AmCham executive director Adam Sitkoff co-chairing the Workshop on Policy Challenges and Regulatory Changes for Foreign Investors in Vietnam

Legal shortcomings

In addition to creating FDI waves, there are still shortcomings in the process of amending and enforcing the Law on Investment.

"We believe that it is vital that laws and rules be designed to be enforced fairly and equally. Better results in this area will improve consumer trust in the marketplace. It is also an important issue in attracting high-quality investment and strengthening the private sector," stated Adam Sitkoff, executive director of AmCham, at the Workshop on Policy Challenges and Regulatory Changes for Foreign Investors in Vietnam on December 7, 2017 in Hanoi.

The business community remains optimistic about prospects in Vietnam. However, they are concerned with recent changes in policy and regulations, which expose many foreign investors to considerable risks and obstacles in executing their investments.

Sitkoff gave the example of the draft Law on Cybersecurity which requires that foreign service providers maintain servers in Vietnam, and this will create unnecessary burdens for foreign businesses.

The imposition of excise tax on sweetened drinks is also uncommon. Most countries do not impose this tax because it harms the economy and has not been proven to protect health.

Meanwhile, the requirement on certification of announcement of conformity with food safety regulations in Decree No.38/2012/ND-CP guiding the implementation of the Law on Food Safety is highly disruptive to the operations of the food and beverage industry, resulting in higher costs while not bringing any value to food safety management.

Related to cash payments, as stipulated in Circular No.19/2016/TT-NHNN on bank cards, the business community looks forward to a dialogue with the State Bank of Vietnam to address the key issues that have been consistently raised by foreign payment companies, banks, and industry associations regarding the operation of the National Payment Gateway.

Most recently, Circular No.23/2014/TT-NHNN and Circular No.32/2016/TT-NHNN disallowed certain foreign agencies to directly open bank accounts in Vietnam. In addition, Circular No.39/2016/TT-NHNN limits the ability to source for flexible and affordable funding through uncommitted facilities and impacts local banks’ ability to partner up with foreign lenders to meet the needs of Vietnamese borrowers.

Besides, the policy on reducing costs for foreign investors and unifying service prices between foreign invested and domestic firms has been enforced too slowly.

"We need greater reform efforts that help create a fairer and more competitive environment where decisions are made faster, procedures are less complicated, rules are fairly enforced, and companies compete on their merits, including for access to land and opportunities," said Sitkoff.

Vietnam’s FDI reaches $33b until November
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Working on new ways to lure FDI
VN mining investors seek long-term returns
Long-term US FDI in Vietnam is on an upward trend
Hosting APEC opens up new FDI opportunities

By By Nguyen Huong

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