Vietnam’s way ahead in foreign investment and economic growth

Tomaso Andreatta, co-chairman, Vietnam Business Forum

Today we are witnessing the great success of Vietnam in welcoming an ever-accelerating flow of foreign investment into the country. Thanks to this, Vietnam has caught up with other large ASEAN partners as a major exporter to the whole world and GDP has grown through foreign investments, technology and know-how, the salaries paid to the Vietnamese employees, taxes, and all the local products and services acquired by foreign-invested enterprises. In part to support their companies investing in Vietnam, Japan, South Korea, and other countries have extended ODA to build infrastructure beyond the usual level.

The quality of FDI is continuously increasing, and now the first products to be exported from Vietnam are electronics, just as, a few years ago, garments, shoes and furniture overtook oil and food as the key exports. This has been made possible by a unique combination of the culture of the Vietnamese people, who are especially willing to learn and improve, are motivated and ambitious, and the government, which has ensured economic and social stability and friendship with all countries of the world over the three decades that passed since the approval of the first FDI law.

It is time to look at the future and how to keep those who invested here, while attracting even more quality investors to Vietnam to 2030 and beyond.

Even today, most companies coming to Vietnam are attracted by low labour and energy costs and tax incentives. However, salaries have been increasing much faster than productivity, reflecting the pure speed of the creation of new foreign-invested firms.

If this trend continues, it will not be long before the companies that are employing large numbers of people in garments, shoes, and assembly will move to other countries. Keeping these labour-intensive industries is fundamental as Vietnam continues to have a large, young, and low-skilled population to boost employment levels and as a basis for the future upgrading of the factories belonging to technology firms.

The solution to this is to improve the knowledge and skills of the workers so that they become more productive and, if more automation needs to be used to save the factory, they will know how to use and maintain it. While each firm should do some high-level training of its workers, it is important for independent vocational training companies to multiply and to be allowed a high freedom of curricula and organisation, so that they can quickly adapt to the changing needs of the market.

All successful countries have a good education system, and Vietnam could continue to improve its own. In part, by opening the curricula and organisation, allowing for the easy arrival of international schools, universities, and experienced teachers, and in part by multiplying the joint degrees and finding ways of attracting back those who have gone to study abroad. In this field, Vietnam is still lagging behind China, Thailand, and the Philippines. For example, with an entire population that speaks good English, Filipinos get jobs everywhere in the world and attract many service companies that boost quality employment.

For energy, it is unsure how long Vietnam can continue to go against the laws of physics of not covering electricity use and investment with tariffs. While the poorest part of the population can still be helped, the majority of the new middle class and all companies have to pay the correct price, not only for the sustainability of the industry but also because a higher cost of energy is the only way people will start to implement energy efficiency measures. Today efficiency can only be imposed by law, since it gives no economic advantages except to some MNCs who have to apply their publicly stated clean energy policy.

An important issue concerning local companies, domestic and FDI alike, is the burden of bureaucracy and especially of tax and customs. The most common complaint of our members is about corporate income tax (CIT) inspections that appear to be conducted in a way to maximise the immediate revenue to the state rather than to make them pay the taxes they really owe, and the size of the discrepancy gives rise to opportunity for corruption.

Only larger companies can afford the long negotiations necessary to arrive to a result that is agreeable to both parties, SMEs just do not have enough energy or the skills to do so.

As with customs, taking cash out of payments is a first but effective step together with moving all documents onto computers, which ensures that communication between both sides is transparent. The other main solutions are clearer regulations, as VBF is cooperating with the relevant authorities to achieve, and an effective system of escalation to a higher authority, closer to the ministry and with a single interpretation for all similar cases. Finally, a solution must be found for those companies that invested here on the basis of a license that offered certain tax incentives which are not recognised in the tax law.

In the future, domestic and foreign companies will need to work together more. This raises many issues about the structure of domestic enterprises, which are often too small and too lacking in know-how and knowledge to be in a position to sell their products to companies that have the world for their market and have to produce top-quality products at a reasonable price. In the short term, it is far easier to ask suppliers of quality products and knowledge to come here than to bring Vietnamese companies up to speed on many levels.

The Vietnamese economy would greatly benefit from making available FDI-run world-class management, training schools, service companies, banks, insurance, and technology which today do not enjoy a level playing field with local ones.

Meanwhile, local companies need to grow larger and stronger. Some domestic institutions, like the capital markets, the laws on company restructuring and M&A, and the size of local institutional investors do not yet allow the creation of companies with enough financial strength to make the investments they need to reach world markets, so they need to be reformed.

Today the government can encourage larger domestic companies to move beyond real estate and, with new dedicated management, lay the foundations for industrial business in modern and technological industries. At the same time, we need a concentration of the existing companies into larger ones that again can afford to venture into more sophisticated businesses and can afford to attract the talents and skills they need.

In addition to allowing service businesses to become fully developed in Vietnam, the opportunity has to be seized to embrace the new technologies that allow countries to jump-start older, established technologies. This causes long-term growth, attracts knowledge and gives Vietnam a “second chance.” This is especially urgent in IT and software, to join Industry 4.0 and boost the efficiency and quality of agriculture, services, and industry.

It is rather unlikely that automotive part makers will chose to come to Vietnam unless there is something new, like a total commitment to electric vehicles, which are a real product today, accelerating astonishingly quickly. An exciting spill-over is that, once electric cars are widespread enough in Vietnam, their combined batteries connected to the grid can be used to improve the electricity market.

The know-how of batteries for cars will allow building larger batteries for buildings and cities, making widespread investment in rooftop solar panels even more likely and successful. Leveraging the diffusion of smartphones creates many possible developments, from branchless banking through traffic management to e-commerce and, eventually, a cashless economy.

Among the pre-requisites of any higher technology or value-added business being brought into Vietnam are the reliable protection of IP and mechanisms of dispute resolution that are rapid and perceived to be fair to both parties, such as arbitration.

The Vietnamese market, despite its large population, does not have the depth to support a closed economy and protectionism will get retaliation, especially today. FDI companies need Vietnam as a market but, far more, as a platform for production for the ASEAN and world markets, so free trade is the sure way to open the doors to them. While Vietnam enjoys a number of FTAs with many areas of the world, their implementation is still incomplete, and the EVFTA is far from being a reality.

No new FDI will come without adequate infrastructure. Vietnam’s need for new and better infrastructure in energy and transportation far exceeds the domestic potential for financing it, and the flow of ODA, while not drying up completely, cannot change the picture. The breakthrough will come when a new way to balance risk and rapid and transparent procedures for bids and concessions will allow PPP to bring to this country all the resources it needs.

VBF is willing to work specifically to identify, explain and mitigate those risks to the government deriving from the model of PPP that is already working in all other countries. Key projects need to get full priority: Vietnam today, with all its flow of goods, still does not have a real deep-sea port and is not planning to have one that welcomes the large ships that go into Hong Kong or Singapore, nor has it completed the upgrade of the normal speed train connection between north and south and with ports.

Finally, any look at the future must include a commitment to protecting the environment. Pollution, especially of the air in the large cities and of plastic in the sea, has increased and further industrial and urban growth will strengthen the factors causing climate change.

Consumers around the world are ever-more reluctant to buy products that come from countries with an environmental emergency, and tourism will also be affected. We welcome the action proposed by the government to improve the mechanism of regional cooperation and invite Vietnam to start immediately by setting a good example here and gain leadership by tackling this issue in a decisive way.

VBF companies have already chosen Vietnam as their home and intend to expand their business as much as possible. We are the living proof of the attractiveness of Vietnam today. The government can do a lot to make the country even more attractive in a wise balance of clear direction, simple rules, and openness to the markets.