VietNamNet Bridge – The Foreign Investment Agency (FIA), when releasing its report on foreign direct investment (FDI) in Vietnam in the first four months of 2014, called the public’s attention to the fact that a lot of tiny foreign invested enterprises (FIEs) have turned up in Vietnam.

The report showed that $4.9 billion worth of FDI was registered in the first four months of 2014, just 59 percent that of the same period of the last year.

The figure included the $3.2 billion worth of capital for 390 newly registered projects and $1.6 billion worth of capital for 140 expanded projects.

Disappointing and worrying figures

FIA noted that the registered FDI capital in Vietnam was low in the first months of the year largely due to the absence of large scale projects. Only two projects have investment capital of over $1 billion. Of the other projects capitalized at less than $1 billion for each, there are also tiny ones with capital of $100,000-500,000.

The figures reportedly are “disappointing” and “worrying” in the eyes of state management agencies.

FIA’s Head Do Nhat Hoang said there are two “strange” features in the FDI picture in Vietnam: an unreasonable mechanism for FDI project licensing, and the emergence of tiny foreign invested businesses.

What can tiny businesses bring to Vietnam?

According to Professor Nguyen Mai, a prominent economist, and former Deputy Chair of the State Commission for Cooperation and Investment (now the Ministry of Planning and Investment), Vietnam needs to set a limit for foreign investors.

As Vietnamese businesses have grownup, there is no longer a need for Vietnam to try to attract foreign investors at any costs, something which often hinders the development of domestic businesses.

“It would be better to encourage domestic enterprises to do what they can instead of laying a red carpet to welcome foreign investors,” Mai said.

He warned that nonselective investment incentives would lead to an influx of investors from economies directly competing with Vietnam, where they would hamper domestic production.

Regarding the presence of tiny businesses, Mai said in a developing economy like Vietnam, the existence of licensed but non-operational businesses, bogus and tiny enterprises, is quite normal.  Tiny businesses are believed to account for a large proportion of the total 460,000 existing businesses.

It always is very difficult to control the establishment and operation of “businesses on paper” and tiny businesses, not only in Vietnam, but in many other countries as well.

Analysts have commented that globalization and close connectivity in the modern production both have automatically led to the establishment of such businesses.

The differences in the accountancy standards, taxation systems, labor costs and goods standards, plus the signing of bilateral and multilateral treaties have prompted businesses to “invent” many different kinds of businesses to optimize profits .

Tiny businesses and “businesses on paper” prove to be favored by investors because they allow for taking advantage of the legal and tax loopholes and controlling their production costs.

Therefore, the appearance of big FIEs is often accompanied by small and tiny businesses as satellites, set up to support the big ones.

K. Chi