New laws help harness capital inflows
VietNamNet Bridge – On November 26, 2014, the National Assembly passed the new Law on Investment and Law on Enterprises. Both changes were initiated to spur additional foreign investment interest that should commence after the signing of the Free Trade Agreement with the European Union and the Trans-Pacific Partnership (TPP).
The new laws on enterprises and investment are likely to improve the Vietnamese economy’s performance
Chairman of the Vietnam Chamber of Commerce and Industry Dr. Vu Tien Loc, in a recent conference on the subject of foreign investment in Hanoi, indicated that foreign investment was responsible for creating between 21 per cent and 30 per cent of the social development in the country as well as contributing close to 20 per cent of the gross domestic product of Vietnam. There is no question that foreign investment is of vital importance to the continued growth and prosperity of Vietnam.
Briefly, the revised Law on Investment has been implemented to increase investor confidence. For example, all laws related to indirect investment are to be determined by the Law on Securities (2006) and any future regulation implemented by the appropriate authorities. By setting indirect investment apart from the Law of Investment, the government essentially concedes that indirect investment must be governed differently from direct investment. As foreign indirect investment has obviously grown over the past decade, it represents a significant investment in the Vietnamese economy as a whole and is responsible for promoting economic growth as much as foreign direct investment. Another important revision is the definition of a “foreign investor” which has been broadened to include any individual and entity established within the regulations of foreign law. This is a broadening concept which allows for greater investor flexibility.
The new Law on Enterprises has also included meaningful revisions. For example, the definition of a state-owned enterprise has been revised to be an enterprise that is wholly-owned by the government and not an entity which capital has 50 per cent or less state investment. This has broad implications in the classification of businesses for purposes of competitive advantage. Although the new law does not fully define the procedures for firms to liquidate, suspend business or close, for example, it does formulate changes in obtaining investment certificates. But preferential industries (typically value-added) such as technology-based industries and clean and renewable energy industries will receive tax incentives and exemptions where applicable, which are clearly intended to attract foreign investment after the conclusion of FTA negotiations.
The key to the implementation of the new laws on Investment and Enterprises are to improve the general business climate in Vietnam and to attract consistent and credible foreign investment. Attracting foreign investment is a tricky proposition for any country.
First, competition for foreign investment (both direct and indirect) is fierce. At any one time, there is essentially a finite amount of foreign investment in the world. Although currently there is some alleviation of the pressure as central banks around the world continue to promote low interest rates and easy monetary policies worldwide, this is not typically the case. Eventually Vietnam will have to continue to be more competitive to maintain a high level of foreign direct and indirect investment. The new laws on Investment and Enterprises are a step in this direction.
Second, inclusion in the TPP and the new trade pact with the European Union will provide Vietnam with an unprecedented opportunity to attract foreign investment. The government of Vietnam has realised the potential of this opportunity and has implemented changes to the current laws which will make foreign investment in Vietnam more favourable. The TPP as well as the pending agreement with the European Union will provide significant benefits to Vietnam as it continues to recognise the need to formulate laws and regulations to better fit the current environment and foreign investor requirements and expectations.
Third, the foreign investment environment for Vietnam has changed significantly over the last decade. Whereas when the previous Law on Investment was introduced, aggregate foreign investment was quite low. Project size was typically low also. Foreign direct investment, in the past, was typically in the mining, textiles, and agriculture industries. Currently, Vietnam is witnessing foreign direct investment of large-scale, high technology projects as well as in other high, value-added industries. From an indirect investment standpoint, the investment by large institutional indirect investors such as ETFs has also changed the foreign indirect investor profile. Money flows in and out of the Vietnamese markets have increased incrementally over the last decade. In order to perpetuate the emergence of larger classes of direct and indirect foreign investors, changes to increase investor confidence were essential.
Fourth, a country must balance the needs and requirements of domestic businesses with the needs and requirements of foreign investors. It is imperative that any government finds this balance and formulates laws which promote both domestic investment and foreign investment in a co-operative and complementary way. Spurring domestic investment does not, therefore, mean curtailing foreign investment or vice versa. Both foreign and domestic investment must be promoted to generally provide the highest benefit to the economy as a whole.
Lastly, as the economy of Vietnam has been improving, foreign investment is vital to the perpetuation of a healthy, balanced economy. Foreign direct and indirect investment is essential to improving and maintaining the sentiment of domestic businesses and investors. As foreign investors continue to increase investments, sentiment in the economic well-being of the country increases as a result. If foreign investment lags, domestic sentiment or confidence in the economy will also lag. Typically this phenomenon either results in a dynamic, robust economy or a stagnant, slow-growth economy. As all investors are aware, positive investor sentiment is critical to promoting sustainable economic growth.
Vietnam is currently in a unique position economically. With relatively robust gross domestic product and low inflation, efforts by the Vietnamese government to spur economic growth through refining laws on investment, enterprises, and real estate should be applauded. And as inclusion in the TPP and other trade agreements occur, further favourable changes will evidently be considered to continue building the interest of foreign investors. If the government intends to further efforts for Vietnam to “upgrade” from frontier market status to emerging market status, it is imperative that action must be taken in the future to support more effective changes to the enterprise, investment, and real estate laws.
Implementation of the new laws (to become effective in mid-2015), must be swift and efficient. In some cases, although this may be a challenge, in the eyes of the foreign investor, commitment to careful and considerate implementation will help support the notion that the government continues to move towards progressive changes in these laws.
Changes in laws governing foreign investment must be constantly in a state of flux. As the world investment climate changes and other countries move more decisively to attract foreign capital, Vietnam must recognise the changing environment and act to balance the desire and need for foreign investment with the costs of foreign investment. This task will always remain difficult as it is difficult to quantify the ultimate costs and benefits of revisions in the enterprise, investment and real estate laws until well after the implementation of the revisions. The stakes are ultimately high, but, if successful, Vietnam will experience robust economic growth for the foreseeable future through efficient and effective harnessing of foreign direct an indirect investment.
By Dr. Christian Kamm President of Kamm Investment Inc