Renewing Vietnam’s FDI strategy

Incentives are among the vital tools to make Vietnam more attractive to foreign investors

The Ministry of Planning and Investment (MPI) is now working on the latest draft of the next-generation foreign direct investment (FDI) strategy towards increasing investor confidence and the added value to the economy. The most important highlight of the strategy is the shift in the focus of FDI attraction from attracting investors suitable for products to attracting investors for products and kinds of investment that Vietnam needs in the future, thus contributing to maximising FDI influence and added value.

To this end, investment incentives are among the vital tools to make the country more attractive to foreign investors, amid growing competition and changes in key global trends, while low salaries will no longer be an advantage.

According to international experts, Vietnam relies heavily on profit-based incentives, like time-limited tax exemptions and tax reductions, as well as on preferential tax policies and import duty exemptions.

Though the current tax regime facilitated first-generation investment activities during a period when investors bet on such incentives and cheap labour costs as the main factors for their investment decisions, it is now starting to lag behind in a new era, which has the country focusing on attracting FDI which brings with it innovation and advanced technology, requires a highly skilled workforce, and increases business competitiveness.

“Given Vietnam’s interest in growing FDI in more innovative, high-tech fields, the use of tax exemptions and concessionary rates is likely to create a higher cost to the government while delivering fewer of the intended benefits. Vietnam needs to focus on revising its strategy to adopt more tailored and cost-efficient incentives in line with its new FDI strategy,” said an International Finance Corporation (IFC) document.

“Not all FDI priority sectors should necessarily receive incentives. Incentives should be focused on those investors who will be most responsive based on their motivations and an analysis of the cost-benefit trade-off,” said the document.

Echoing the IFC’s view, other international experts said that international best practices suggest the need for precise tailoring and targeting of incentive instruments. Investment incentives should be linked to clearly defined policy objectives. The choice of the instrument, its parameters, and eligibility criteria should then be tailored to these specific policy objectives.

Nguyen Mai, chairman of the Vietnam Association of Foreign-Invested Enterprises, also said that competitiveness in the region has changed, while key global trends have taken shape. “Investments from the EU and the US in Vietnam remain humble. If we do not have a new, effective approach to attract them, Vietnam’s FDI will mostly come from Asian nations like South Korea and Japan.”

“Offering investment incentives is okay for a certain time, but Vietnam should not rely on this to attract FDI anymore, because we have other effective tools,” he added.

The facts have proved that the application of time-limited tax exemptions and tax incentives based on profit can cause significant costs for the country, like fiscal losses, rent seeking, administrative costs, economic distortions (benefitting established businesses more than newcomers), and more.

Vietnam’s FDI attraction is forecast to be affected by global trends that are to have a great impact on FDI attraction over the next 12 years: Industry 4.0, the EU-Vietnam Free Trade Agreement, China’s “One Belt-One Road” Initiative, and others. Thus, the next-generation FDI strategy is extremely important for Vietnam for this new era, as low labour costs are no longer an advantage for Vietnam.

As part of the draft, Vietnam plans to focus on sectors in which the country has strong advantages and where foreign investors can offer high-technology, new branding, new marketing, and high value that domestic Vietnamese companies can not have. The sectors include high-tech/ICT, processing and manufacturing, supporting industry, tourism, and high-tech agriculture.

“It is an absolutely critical time for Vietnam. Wages are going up. That is one objective of the government. Meanwhile, other countries like Myanmar, Cambodia, Bangladesh, and South Africa offer much lower wages than Vietnam,” Simon Nihal Bell from Armillary, which provides investment consultancy specialising in emerging market investment strategies, told VIR. “If Vietnam continues to base its strategy on low wages, it will lose out. As salaries go up, Vietnam will no longer be successful in attracting people to set up factories in the country to cheaply produce T-shirts or phones. Vietnam needs to work out a way to attract people here because of its skills and high quality, excellent business environment, and high wages – not because of low wages.”

Bell cited the US and the UK as examples. They are the countries receiving the most FDI in the world and achieve this despite having very high wages. “Why do people go there? Because of skills and technology. That is what we want Vietnam to have.”

With a lever created by the World Trade Organization membership, Vietnam has made great achievements in FDI attraction thanks to the improvements in the business climate. In 2016, together with Indonesia, the country has emerged as one of the most successful nations in the ASEAN in FDI attraction.

In the first eight months of 2018, the country’s total newly-registered, added FDI and stake acquisitions rose by 4.2 per cent on-year to $24.35 billion.