Rolling out the red carpet for those that make a difference

In 2019, the flow of foreign investment into Vietnam contained a number of noticeable new trends. In terms of investment, mergers and acquisitions (M&As) increasingly account for a large proportion and rapid growth rate. Although capital is still focused on manufacturing and processing, it is growing faster in infrastructure services. Meanwhile, investment in agriculture is still low.

Dr. Phan Huu Thang, former director of the Foreign Investment Agency under the Ministry of Planning and Investment

The statistics on foreign investment attraction results in the first 12 months of 2019 reflect such a fact. Specifically, the total newly-registered and added capital reached $22.8 billion, and decreased compared to the same period in 2018. Meanwhile, investment capital through M&As reached nearly $15.5 billion, up 56.4 per cent on-year. It is understandable that foreign investors increasingly prefer M&A deals, as they take a shorter time for completing procedures for transferred projects compared to directly establishing new legal entities to implement projects.

When investing directly, for projects with a scale of several tens of millions of US dollars or more, or with a land use scale of a few dozen hectares or more, it usually takes at least a few years to carry out investment procedures.

In addition, it is quite difficult to estimate the cost of direct funding, while investing through M&A often consists of a clearer budget package. Thus, it is also easy for the investor’s representative to report to the shareholders council or a higher level with the authority to approve the decision on the cost of the deal.

Regarding international partners, as of December 20, 2019, investors from South Korea ranked first with the registered capital of over $7.92 billion, followed by those from Hong Kong ($7.87 billion) and Singapore ($4.5 billion).

It is worth noting that the number of registered capital from markets such as China and Hong Kong saw a breakthrough compared to previous years, and Hong Kong ranked first in the ranking of outside financiers into Vietnam within one year.

Investment has continued to follow general trends for many years. Accordingly, capital flows most strongly in the field of manufacturing and processing, real estate, wholesale, and retail. However, it is regrettable that potential fields that Vietnam is in need of and encouragement of investment – such as high-tech agriculture – have not attracted much foreign capital as of yet.

Capital flow adjustment policy

When comparing the figures of $22.8 billion of direct investment and $15.5 billion through the M&A channel, it can be seen that the direct investment capital still plays a leading role. However, the increase of such funding via M&A also raises the question of whether it is necessary to design policies to adjust the capital flow or let the market and investors decide by themselves.

As of now, there has not been any official assessment comparing advantages and disadvantages between these two forms. Therefore, it is impossible to accurately assess the specific benefits that each form brings to overseas investment in Vietnam.

In fact, there should be in-depth study on the issue to supplement policy orientation to attract such investment. For example, is it necessary to determine a predetermined ratio of each phase (for example, every five years) attracted to a percentage of the direct channels and a percentage by the M&A channel? There are also industries and fields that need and do not need to encourage investment under the M&A channel. For example, in beer production, Vietnam has a market and has the capacity to succeed, so Vietnam should not encourage funding in this particular area.

In order to comprehensively assess the results of foreign investment attraction in 2019 through the M&A channel, the state management agency needs to consider in detail outstanding large deals in the past year, to see clearly the negatives and positives from which to draw lessons on state management in foreign investment in upcoming period.

Regarding the rapid increase on investment capital from China and Hong Kong, there have been studies showing that it may be due to the influence of the US-China trade tensions and the current instability situation in Hong Kong. In addition, the project screening and orientation for attracting international partners to Vietnam has not been clearly defined and agreed in the whole system of management of attracting foreign investment.

Many experts specialising in studying such funding in Vietnam still have certain concerns on the quality of the projects relocated to Vietnam, and who the investors actually are. So now may be the time to install a filter for foreign investors so that the country can choose those that are really capable and come with initiatives that are environmentally friendly, because the red carpet period is over with all investors.

A new filter is needed to select and protect the prestige of investors – those who always comply with international laws on investment of the host country. At the same time, such a procedure protects the development of foreign investment in Vietnam in the coming period.

Suffering the effects

It can be generally considered that overseas investment attraction in Vietnam continues to be successful with consecutive increases in inflow compared to previous years. The credit rating of Vietnam’s business environment continues to be highly appreciated by reputable international rating organisations. International funding has made positive contributions to Vietnam’s socio-economic development in past years, including adding important capital sources, promoting exports, contributing to the state budget, attracting high technology, creating jobs, and contributing to enhancing the role and position of Vietnam in the process of international economic integration.

However, along with these successes, the most important thing is the management of such investment. For example, the Our City urban area project in the northern port city of Haiphong was found to have held a large-scale gambling organisation involving hundreds of non-nationals. This case shows the lessons that must be learned in all localities across the country in the management of immigration. Besides that, it is necessary to review projects on all sectors, including long-delayed ventures, enterprises with tax debts, using Vietnamese and foreign labourers, and more. It is also necessary to pay particular attention on 100 per cent foreign-invested enterprises.

The relocating trends in 2019 of foreign investment flows are temporary and short-term, and will become long-term trends depending on two main factors: the context and situation of international trade and investment; and the initiative in attracting foreign investment for Vietnam in the short or long term.

The international context will greatly affect investment attraction of every country but not all countries have to suffer adverse effects. Previously, Vietnam was not only surrounded by sanctions but also experienced a regional financial crisis, but the country knows how to proactively overcome these challenges. Thus, up to the present time and in the face of external turmoil, the opening or closure of any venture is our own initiative and right.

Ensuring there is a proper filter, Vietnam will determine the trend of foreign investment inflows in the coming period, bringing the highest efficiency and space for true investors in the country.

In August 2019, the Party Central Committee issued Resolution No.50-NQ/TW on directions to perfect institutions and improve effectiveness of foreign investment co-operation by 2030. This is a particularly important resolution that needs to be seriously implemented from the central to local levels. It will promote activities of attracting and using foreign investment in Vietnam in the coming period in the right direction, bringing higher socio-economic efficiency and sustainability in all aspects of economy and society, security, defence, culture, and foreign affairs. Most importantly, it will surely get the consensus and appreciation of international partners, especially that of true investors.