Friday, May 18, 2001
Vietnam: Wooing FDI and succeeding Kanthi Tripathi
IN THEIR recently-held Ninth Communist Party Congress which discussed the ten-year strategy for socio-economic development, Vietnamese leaders stressed the need to do away with policy and legal differentiation between domestic and foreign investors in order to attract further foreign investment in the country. While investors were looking forward particularly to these reforms, FDI flows have been doing well of late, compared to the slump in recent years and against the backdrop of general slowdown in FDI flows into South-East Asia since the financial crisis of 1997. Foreign investments in Vietnam in 2000 crossed $2 billion with the Nam Con Son gas project's finalisation, the largest foreign-invested project with a $1.5-billion capital. ONGC Videsh of India is one of the partners in this project along with PetroVietnam, British Petroleum, and Norway's Statoil. It is also reported that the Vietnamese government considered other major investment projects towards end 2000, such as a mobile phone project, a foreign-owned hospital, and a university with a substantial foreign stake. This year has already seen a marked increase in FDI projects approved and investment inflows. Official estimate are that new projects worth $2.5 billion will be finalised, and inflows would reach $2 billion. Vietnam's Foreign Investment Law of 1987, with its fourth revision in May 2000, has resulted in about 3,500 FDI projects with an approved capital of $44 billion. Of these, around 2,600 are current with a combined capital of $36 billion of which about half has been disbursed. Foreign investment contributes to over 12 per cent of the Vietnam's GDP (compared to four per cent eight years ago), and to a third of its industrial production. Companies with foreign investment have generally had double-digit growth, with stakes in thriving sectors such as telecommunications, oil and gas, agriculture, heavy and light engineering, textiles, forestry, and tourism. Ho Chi Minh City, which got over $10 billion in FDI as of last year, attracts the largest quantum of foreign investments. Hanoi comes next, followed by Dong Nai and Binh Duong. Vietnam has had notable successes in its rice, coffee, seafood, rubber textiles and tea exports, with its major markets in Japan, Singapore, Korea, China and Taiwan, and exports to the US growing. In 1991, FDI businesses exported $52 million, just 2.5 per cent of total exports. Vietnam, with nearly three-fourths of its foreign investment from East and South-East Asia, is now also wooing the West. It believes that too much dependence on regional investors also explains the FDI decline between 1997-99, since Asian investors had to face the economic crisis. Singapore has investments in Vietnam worth $7 billion, in nearly 250 projects. The other major investors are also regional -- Taiwan, Japan, South Korea and China, with the next rung occupied by France, Russia, the US and the UK. Taiwan has been noticeably active in entering the Vietnamese market over the last year, and now has investments worth over $5billion. The Japanese have $4 billion worth of projects in industrial zones' infrastructure, telecommunications, oil and gas, agriculture, hotels, computer components, automobiles, cement, etc. While American investments are much lower, some major projects -- a paper pulp plant and a beer brewery -- are reported to be under consideration. Vietnam believes that the long-term potential of Western Europe and North America is encouraging, given its new enterprise law that lifts the entry barriers to domestic private investment, the amendments made last year to the Foreign Investment Law, the opening of the new stock exchange, and the signing of the US-Vietnam trade agreement in July 2000. Several amendments sought by investors were made to the Foreign Investment Law: Reducing investor risks relating to land clearance and compensation, relaxing currency balance regulations, giving greater autonomy to foreign investors to change their investment forms, re-organise enterprises, and transfer capital, lowering tariffs and taxes, etc. In addition, Vietnam has been accelerating reforms to prepare for the WTO membership, and is also committed to reduce tariffs below 5 per cent for imports from other Asean countries under the Asean Free Trade Area (AFTA). Vietnam launched its Securities Trading Centre in July 2000 in Ho Chi Minh City. Although only a few companies are listed on the exchange, there is considerable interest in it. Investors are observing how this nascent market develops a network of participants and intermediaries. Vietnam is, therefore, faced with the challenge of attracting companies to list their shares and building a solid domestic investor base. Vietnam is working seriously on its equitisation programme for converting state-owned enterprises into joint stock companies, so that they can then be listed. Foreign investors are said to be interested in acquiring shares in these enterprises, though the majority share will continue to be held by government agencies. Western perceptions about Vietnam are said to be more positive after it signed the trade agreement with the US. The accord is seen as constituting fresh, broad-based market reforms since Vietnam reopened to foreign investment in 1987. Under this agreement, Vietnam has made commitments on tariffs and non-tariff barriers for industrial and agricultural goods, on services, intellectual property, investment, transparency, etc. Once the agreement comes into force, as is expected to happen later this year, Vietnam would, in return, get Normal Trade Relations status from the US. Once Vietnam completes its WTO accession negotiations with the US, it would become eligible for a permanent normal trade relations status. When this agreement comes into effect, Vietnamese goods will enjoy improved access to the American market with import tariffs dropping substantially. Then exports, textiles and coffee, for instance, to the US are likely to grow considerably, as also foreign investments in export-oriented industries to meet the new demand created. It has been suggested that even without immediate additional domestic investment, these exports could witness a sudden increase through a diversion of products in view of the higher US margins, with investment following. At an investment road-show it organised in Singapore, Vietnam promised investors transparent economic policies, market reforms, and an economy that will grow 7.5 per cent annually over the next five years. They were also reportedly told that Vietnam would cut costs for investors by lowering telecommunication charges, amend the income-tax law and allow FDI enterprises to list equity. Other reports hint that Vietnam may also allow companies with large investment portfolios to establish capital management firms, and agree to foreign shareholding companies and partnerships being formed through mergers and takeovers. Industry and services account for almost three-fourths of the Vietnamese economy. The country has a high literacy rate and competitive labour costs. Its population also includes an economically-strong Chinese Diaspora ready to make money by investing in the growing domestic and export-oriented market. India's relations with Vietnam have been reinforced over the last year through a number of high-level exchanges culminating in the Prime Minister, Mr Atal Bihari Vajpayee's recent visit to Vietnam. That India is a Dialogue Partner of the Asean, and the recently finalised cooperation agenda of the Mekong-Ganga Programme are further moot points. There is considerable interest among the Vietnamese in India's industrial capabilities and strengths in human resource development. The success of the IT sector also seems prospective. For Indian businessmen interested in overseas investments, Vietnam makes long-term sense, given its promising growth indices and strong export potential. Vietnam's preferential access to the other Asean countries under AFTA will also open up these markets to those who invest in the country. Compared to the other Asean countries where there are well-established companies to compete with, Vietnam is a promising destination for new investors. (The author is in the Indian Foreign Service.)
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