2013 Investment Climate Statement
Bureau of Economic and Business Affairs
February 2013
Report

Vietnam has been very successful in attracting foreign direct investment, sustaining FDI levels around USD 10-11 billion a year over the last five years, up from almost nothing just a decade ago. Vietnam’s attractiveness to foreign investors resulted in large part from the country’s open government policies encouraging FDI, geographical position near global supply chains, political and economic stability, and abundant labor resources. Recently, however, international investors have voiced concerns that the investment climate has deteriorated. Problems include corruption and a weak legal infrastructure, financial instability, inadequate training and education systems, and conflicting and detrimental bureaucratic decision-making. Investors have called for immediate reforms and the development of sound economic policies in order for Vietnam to continue to attract good-quality foreign investment.

Openness to, and Restrictions Upon, Foreign Investment

Vietnam officially encourages foreign investment as part of its development strategy and the government has stated its commitment to improving the country’s business and investment climate. The Investment Law of 2005 provides the legal framework for foreign investment in Vietnam.

Vietnam became the 150th member of the World Trade Organization on January 11, 2007. Vietnam’s commitments under the WTO increase market access for exports of U.S. goods and services and establish greater transparency in regulatory and trade practices as well as a more level playing field between Vietnamese and foreign companies. Vietnam undertook commitments on goods (tariffs, quotas, and ceilings on agricultural subsidies) and services (provisions of access to Foreign Service providers and related conditions). It has also committed to implement agreements on intellectual property (TRIPS), investment measures (TRIMS), customs valuation, technical barriers to trade, sanitary and phyto-sanitary measures, import licensing provisions, anti-dumping and countervailing measures, and rules of origin. Vietnam has made progress in implementing its bilateral and international obligations; however, concerns remain in many areas such as protection of intellectual property rights (IPR) and effectiveness of the court/arbitration system.

The government of Vietnam (GVN) holds regular “business forum” meetings with the private sector, including both domestic and foreign businesses and business associations, to discuss issues of importance. Foreign investors use these meetings to draw attention to investment impediments in Vietnam. These fora, together with frequent dialogues between GVN officials and foreign investors, have allowed foreign investors to comment on many legal and procedural reforms.

Despite the GVN’s stated commitment to improving the country’s business and investment climate, Vietnam is still transitioning from a centrally planned economy to a more market-oriented and private sector-based model. As indicated by the World Bank’s Doing Business 2013 rankings below, the overall ease of doing business in Vietnam has not improved. An October 2011 survey of the business community in Vietnam showed business morale at a three-year low, although most companies reported being optimistic about Vietnam’s long-term economic prospects. Vietnam still faces development challenges that affect foreign investors, including poorly developed infrastructure, inadequate and cumbersome legal and financial systems, an unwieldy bureaucracy, non-transparent regulations, high start-up costs, arcane land acquisition and transfer regulations and procedures, a shortage of skilled personnel and pervasive corruption. Most investors make provisions for international arbitration so they do not have to rely exclusively on an under-developed and unreliable judicial system to uphold contracts. Foreign companies report delays in obtaining investment licenses, and licensing practices can vary among provinces. Investors frequently face policy changes related to taxes, tariffs, and administrative procedures, sometimes with little advance notice, making business planning difficult. Because Vietnam’s labor laws and implementation of those laws are not well developed, companies sometimes face difficulties with labor management issues. Corruption became more prevalent as evidenced by Vietnam’s dropping 11 places in the Transparency International Corruption Perceptions index.

Following are Vietnam’s rankings according to various indices:

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Index

2012 Rank

2011 Rank

Change in rank

Transparency International Corruption Perceptions Index

123/176

112/183

-11

Heritage Foundation Index of Economic Freedom

136/179

139/179

+3


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World Bank’s Ease of Doing Business

2013 Rank

2012 Rank

Change in Rank

Overall

99

99

No change

Starting a Business

108

109

+1

Dealing with Construction Permits

28

27

-1

Getting Electricity

155

157

+2

Registering Property

48

48

No change

Getting Credit

40

38

-2

Protecting Investors

169

167

-2

Paying Taxes

138

153

+15

Trading Across Borders

74

74

No change

Enforcing Contracts

44

41

-3

Resolving Insolvency

149

145

-4


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Millennium Challenge Corporation

2012 score (% ranking in peer group)

2011 score (% ranking in peer group)

MCC Government Effectiveness

0.6 (95%)

0.55 (95%)

MCC Rule of Law

0.43 (84%)

0.44 (81%)

MCC Control of Corruption

0.25 (65%)

0.20 (71%)

MCC Fiscal Policy

-4.5 (30%)

-5.3 (14%)

MCC Trade Policy

78.6 (90%)

79.6 (88%)

MCC Regulatory Quality

0.15 (60%)

0.15 (63%)

MCC Business Start Up

0.96 (86%)

0.96 (77%)

MCC Land Rights Access

0.68 (80%)

0.74 (85%)

MCC Natural Resource Management

53.6 (44%)

80.18 (97%)

MCC Access to Credit

44 (84%)

49 (91%)

MCC Inflation

18.7 (8%)

9.2 (32%)

Investment Regulation

The 2005 Investment Law, together with its implementing decrees and circulars, regulates investment in Vietnam, including investors’ rights and obligations, investment incentives, state administration of investment activities, and offshore investment. The Investment Law also provides for guarantees against the nationalization or confiscation of assets and applies to both foreign and domestic investors. The Investment Law designates prohibited and restricted sectors for investment, but there are additional laws that apply conditions to investments in sectors such as mining, post and telecommunications, property trading, banking, securities, and insurance.

The Investment Law provides for five main forms of foreign direct investment: (1) 100 percent foreign-owned or domestic-owned companies; (2) joint ventures (JV) between domestic and foreign investors; (3) business contracts such as business cooperation contracts (BCC), build-and-operate agreements (BOT and BTO), and build and transfer contracts (BT); (4) capital contribution for management of a company; and (5) merger and acquisitions (M&A). Foreign investors can, with restrictions, invest indirectly by buying securities or investing through financial intermediaries.

Vietnam has gradually opened some sectors for foreign investment through M&A. While foreign investors are allowed to buy shares in some domestic companies without limitation, examples where this has occurred are rare. The ratio of total foreign ownership permitted in a project depends on a number of factors, including Vietnam’s international commitments, the economic sector in question and the type of investor, among others. There are strict foreign ownership limitations for certain listed companies and service sectors. For example, foreign ownership cannot exceed 49 percent for listed companies and 30 percent for listed companies in the financial sector. A foreign bank is allowed to apply to establish a 100 percent foreign owned affiliate in Vietnam but may only own up to 20 percent of a local commercial bank. Individual foreign investors are usually limited to 15 percent ownership, though a single foreign investor may increase ownership to 20 percent through a strategic alliance with a local partner and with approval from the Prime Minister’s Office.

Investment Sectors

The Investment Law distinguishes four types of sectors: (1) prohibited sectors; (2) encouraged sectors; (3) conditional sectors applicable to both foreign and domestic investors; and (4) conditional sectors applicable only to foreign investors.

The list of sectors in which foreign investment is prohibited includes cases where the investment would be deemed to be “detrimental to national defense, security and public interest, health, or historical and cultural values.”

The list of sectors in which investment is encouraged includes high-technology, agriculture, labor-intensive industries (employing 5000 or more employees), infrastructure development, and projects located in remote and mountainous areas.

The list of sectors in which investment is conditional for both foreign and domestic investors includes those having an impact on national defense, security, social order and safety; culture, information, press and publishing; financial and banking; public health; entertainment services; real estate; survey, prospecting, exploration and exploitation of natural resources; ecology and the environment; and education and training.

The sectors where certain conditions are applicable to foreign investors include telecommunications, postal networks, ports and airports, and other sectors as per Vietnam’s commitments under international and bilateral arrangements.

Foreign investors have the right to sell, market, and distribute what they manufacture locally, and to import goods needed for their investment projects and inputs directly related to their production, provided this right is included in their investment license.

Foreign participation in distribution services, including commission agents, wholesale and retail services, and franchising, opened to fully foreign-owned businesses in 2009. Vietnam has excluded certain products from its WTO distribution services commitments, including rice, sugar, tobacco, crude and processed oil, pharmaceuticals, explosives, news and magazines, precious metals, and gemstones. Distribution of alcohol, cement and concrete, fertilizers, iron and steel, paper, tires, and audiovisual equipment opened to foreign investors in 2010. Investment in retail outlets is subject to a strict “economic needs test.”

Investment Licensing

Local authorities in Vietnam’s 58 provinces and 5 municipalities generally have the authority to issue investment licenses. Provincial authorities and the management boards of industrial zones are the issuing entities for most types of investment licensing, with the exception of build-and-operate projects (BOT, BO, BTO), which are still licensed by the central government. Domestic investors with projects of less than VND 15 billion (approximately $714,000) do not need to acquire investment licenses.

The procedure to obtain investment certification is complex, requiring investors to get approval from several ministries and/or agencies, depending on ownership (foreign or domestic), size and sector of the investment. Projects deemed to be of “national importance” must be approved by the National Assembly. Key infrastructure projects must be approved by the Prime Minister’s Office (see below). Investments in conditional sectors such as broadcasting, mining, telecommunications, banking and finance, ports and airports and education are subject to a more complex licensing process.

Licensing is required to establish a new investment as well as to make significant changes to an ongoing enterprise, such as to increase investment capital, restructure the company by changing the form of investment or investment ratios between foreign and domestic partners or add additional business activities.

Decentralization of licensing authority to provincial authorities has in some cases streamlined the licensing process and reduced processing times. It has also, however, given rise to considerable regional differences in procedures and interpretations of relevant investment laws and regulations.

Investment projects that must be approved by the Prime Minister include:

  • All projects, regardless of capital source and size, in airports and seaports; mining, oil and gas; broadcasting and television; casinos; tobacco; higher education; sea transportation; post and delivery services; telecommunication and internet networks; printing and publishing; independent scientific research establishments; and establishment of industrial, export processing, high-tech and economic zones.
  • All projects having capital in excess of VND 1.5 trillion (approximately $71 million), regardless of foreign ownership, in electricity; mineral processing and metallurgy; railways, roads and domestic waterways; and alcoholic beverages.
  • All foreign-invested projects in sea transport, post and telecommunication, publishing, and independent science research units.

Vietnamese authorities evaluate investment license applications using a number of criteria, including the legal status and financial capabilities of the foreign and Vietnamese investors; the project’s compatibility with Vietnam’s “Master Plan” for economic and social development; the benefits accruing to the GVN or to the Communist Party of Vietnam; projected revenue; technology and expertise; efficient use of resources; environmental protection; plans for land use and land clearance compensation; project incentives including tax rates and land, water, and sea surface rental fees.

The 2005 Commercial Law and the implementing guidelines contained in Decree 72, issued in July 2006, allow foreign firms to establish branches or representative offices. Branches may engage in trading activities, while the representative offices are allowed to liaise with customers, negotiate and enter into contracts on behalf of their parent company, and conduct market research, but not to engage in commercial or profit making activity.

Participation of Foreign Investors in the GVN “Privatization” Program

Foreign investors are allowed to buy shares in state-owned enterprises (SOEs) being “equitized” (converted to joint stock companies, though rarely fully privatized) by the GVN. Shares are typically offered through an auction, although the process is not always clear or transparent. Foreign ownership in certain specified sectors may not exceed the limits for that sector, generally 49 percent.

Other Investment Related Legislation

Vietnam’s Bankruptcy Law of 2004 provides that parties other than creditors are able to participate in bankruptcy procedures and gives courts legal authority to deal with insolvent businesses.

The Law on Competition of 2004 aims to create an equitable and non-discriminatory competitive environment, and protect and encourage fair competition. The Law acknowledges the importance of the rights of organizations and individuals to compete freely, and addresses anti-competitive agreements, state monopolies, economic concentration, and unfair competition.

Taxation

In December, the GVN proposed to lower corporate income tax rates from the current 25 percent to 20 percent for small- and medium-sized enterprises and 23 percent for all other enterprises. If approved, the tax cut would take effect January 1, 2014. Corporate income tax for extractive industries varies from 32 to 50 percent depending on the project, and can be as low as 10 percent if an investment is made in selected priority sectors or in remote areas. Incentives are the same for both foreign-invested and domestic enterprises.

Vietnam does not tax profits remitted by foreign-invested companies. However, companies are required to fulfill their local tax and financial obligations before remitting profits overseas and are not permitted to accumulate losses, and the government has shown a strong interest in investigating alleged transfer pricing. A new personal income tax regime placing Vietnamese and foreigners on the same tax rate schedule took effect in January 2009. The new law regulates all types of personal income, including income previously subject to other laws such as income from individual businesses and property sales. The lowest tax rate is 5 percent while the highest is 35 percent.

Vietnam and the United States began discussions toward a bilateral agreement on the avoidance of double taxation in December 2010 and will hold their fourth round of negotiations in early 2013. There is currently no intergovernmental agreement on implementation of the Foreign Assets Tax Compliance Act (FATCA).

Conversion and Transfer Policies

The GVN has committed to permitting foreign businesses to remit profits in hard currency, revenues from joint ventures, income derived from services, technology transfers, and legally owned capital and intellectual property, after paying all related tax liabilities and fees. In practice, there have been exceptions to this provision and some U.S. companies reported inability to remit hard currency outside Vietnam.

According to the 2005 Ordinance on Foreign Exchange Control, all currency transactions between residents and non-residents of Vietnam shall be conducted freely. With some restrictions, residents are allowed to open foreign currency accounts. Exporters are required to remit all foreign currency earnings into a foreign currency account with an authorized credit institution in Vietnam. Retaining foreign currency earnings overseas requires approval of the State Bank of Vietnam (SBV).

Foreign investors are expected to be “self-sufficient” for their foreign exchange requirements. The laws stipulate that the GVN will assist in balancing foreign currency supplies for foreign investors in transportation infrastructure, energy, and waste management when banks are unable to satisfy their foreign currency requirements. One particular concern for foreign lenders to power projects is foreign exchange convertibility. Since 2011 the GVN generally only provides a guarantee of foreign exchange to BOT projects in the power sector of up to 30 percent of revenue after deducting expenses incurred in VND.

The SBV publishes daily average interbank exchange rates against the U.S. dollar, and then allows USD/VND transactions to move in a band around this daily rate. The SBV has maintained a trading band of +/-1 percent since February 2011. The foreign currency exchange rate was stable throughout 2012. No dollar shortages were reported during the year.

Expropriation and Compensation

The U.S. Mission is aware of and monitoring four cases of expropriation of foreign investment without just compensation by the GVN. During 2010, several foreign investors reported that the provincial or national government pressured them to increase the pace of project development or to raise additional project capital, or risk the loss of their investment license. During 2011, one investor filed claims for international arbitration against a provincial government for cancellation of his investment certificate for project delays after the government allegedly licensed mining on the property the investor was developing as a resort.

Under the U.S.-Vietnam Bilateral Trade Agreement (BTA), in any future case of expropriation or nationalization of U.S. investor assets, Vietnam will be obligated to apply international standards of treatment, which includes taking such an action for a public purpose, in a non-discriminatory manner, in accordance with due process of law, and with payment of prompt, adequate, and effective compensation.

Dispute Settlement

The hierarchy of Vietnamese courts include: (1) Supreme Court; (2) Provincial Courts; and (3) District Courts. The courts operate in five divisions: criminal, civil, administrative, economic, and labor. Parallel to the court systems is the People’s Procuracy, which is responsible for supervising the operation of judicial authorities. The People’s Procuracy can protest a judgment or ask for a review of a case. In addition, Vietnam has a system of independent arbitration centers, established under the Commercial Arbitration Ordinance (2003), which can grant enforceable arbitral awards.

Foreign and domestic arbitral awards are legally enforceable in Vietnam, although in practice it can be hard to ensure enforcement. Vietnam is a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, meaning that foreign arbitral awards rendered by a recognized international arbitration institution should be respected by Vietnamese courts without a review of the case’s merit.

Under the investment chapter of the BTA, Vietnam gives U.S. investors the right to choose a variety of third-party dispute settlement mechanisms in the event of an investment dispute with the GVN. Vietnam has not yet acceded to the Convention on the Settlement of Investment Disputes between States and Nationals of other States (ICSID), but has asked the United States to provide advice in this area as part of the U.S. technical assistance program designed to assist Vietnam to implement the BTA. The Ministry of Planning and Investment (MPI) has submitted a proposal to the GVN to join the ICSID, which is still under consideration.

Vietnam’s legal system, including its dispute and claims settlement mechanisms, remains underdeveloped and ineffective in settling disputes. Negotiation between the concerned parties is the most common means of dispute resolution.

Under the 2005 Civil Code, all contracts are “civil contracts” subject to uniform rules over all contractual relations, including those with foreign businesses. In foreign civil contracts, parties are allowed to choose foreign laws as reference for their contractual agreement, provided that the application of the law does not violate the basic principles of Vietnamese law. In addition, commercial contracts between businesses are also regulated by the 2005 Commercial Law.

According to the World Bank, it takes an average of five years to resolve a bankruptcy in Vietnam.

Performance Requirements and Incentives

As part of its WTO accession, Vietnam committed to remove performance requirements that are inconsistent with the TRIMS agreement. The Investment Law specifically prohibits the following requirements: giving priority to the purchase or use of domestic goods or services; compulsory purchase of goods or services from a specific domestic manufacturer or services provider; export of goods or services at a fixed percentage; restricting the quantity, value or type of goods or services that may be exported or which may be sourced domestically; fixing import goods at the same quantity and value as goods exported; requirements to achieve certain local content ratios in manufacturing goods; stipulated levels or values on R&D activities; supplying goods or services in a particular location whether in Vietnam or abroad; or mandating the establishment of head offices in a particular location.

The GVN promotes foreign investment in certain priority sectors or geographical regions, such as mountainous and remote areas of the country with difficult economic and social conditions. The GVN encourages investment in production of new materials, new energy sources, metallurgy and chemical industries, manufacturing of high-tech products, bio-technology, information technology, mechanical engineering, agricultural, fishery and forestry production, salt production, generation of new plant varieties and animal species, ecology and environmental protection, research and development, knowledge-based services, processing and manufacturing, labor-intensive projects (using 5,000 or more full-time laborers), infrastructure projects, education, training, and health and sports development.

A September 2011 Prime Ministerial Directive further defined the GVN’s foreign investment priorities, encouraging projects that use modern and environmentally-friendly technology, and promote efficient use of natural, mineral, and land resources. The GVN discourages investments that may increase Vietnam’s trade deficit.

Foreign investors are exempt from import duties on goods imported for their own use and which cannot be procured locally, including all equipment, machinery, vehicles, components and spare parts for machinery and equipment, raw materials, inputs for manufacturing and construction materials that cannot be produced domestically. Remote and mountainous provinces are allowed to provide additional tax breaks and other incentives to prospective investors.

Vietnam has instituted incentives designed to attract investment from Vietnamese expatriates and their families. In 2008, the GVN recognized dual citizenship for Vietnamese expatriates, who are allowed to choose their status as either domestic or foreign investors. Real estate laws permit limited categories of these investors to buy land use rights to build homes.

U.S. citizens of Vietnamese descent may be treated as Vietnamese nationals unless they have formally renounced their Vietnamese citizenship. U.S. investors of Vietnamese origin should consult the U.S. Embassy in Hanoi or the U.S. Consulate General in Ho Chi Minh City for more information.

Foreign businesses view new regulations governing foreign workers in Vietnam as a further obstacle to conducting business activities. Decree 46, which took effect August 1, 2011, increases work permit requirements and requires employers to identify a local Vietnamese apprentice or provide evidence of a formal training plan to replace foreign workers before Vietnam will extend a foreigner’s work permit.

Right to Private Ownership and Establishment

The right to non-land private property was stipulated in Vietnam’s Constitution in 1992, recognizing “the right of ownership with regard to lawful income, savings, housing, chattel, means of production funds and other possessions in enterprises or other economic organizations” (Article 58).

Real estate rights in Vietnam are divided into land ownership, which is collective, and land-use and building rights, which can be held privately. All land in Vietnam is owned collectively and managed by the State and, as such, neither foreigners nor Vietnamese nationals can own it. In addition to land, collective property includes “forests, rivers and lakes, water supplies, wealth lying underground or coming from the sea, the continental shelf and the air, the funds and property invested by the State in enterprises and works in all branches and fields - the economy, culture, society, science, technology, external relations, national defense, security - and all other property determined by law as belonging to the State.”

The Land Law of 2003 extended “land-use rights” to foreign investors, allowing title holders to conduct real estate transactions, including mortgages. Foreign investors can lease land for (renewable) periods of 50 years, and up to 70 years in some poor areas of the country. Certain foreigners can own apartments, durable construction, durable trees and planted forests for production purposes in Vietnam, but not the associated land.

Protection of Property Rights

The basis of the legal system related to property rights includes the 2005 Civil Code, the 2005 Intellectual Property Law as amended in 2009, and implementing regulations and decrees. Vietnam has joined the Paris Convention on Industrial Property and the Berne Convention on Copyright and has worked to meet its commitments under these international treaties.

In 2009, Vietnam revised the Intellectual Property (IP) Law and IP-related provisions in the Criminal Code with respect to criminal penalties for certain acts of IPR infringement or piracy. These revisions reinforce previous criminal provisions set out in an Inter-ministerial Circular. However, enforcement agencies still lack clarity in how to impose criminal penalties on IPR violators and continue to wait for further implementing guidelines from relevant ministries. The GVN also issued a decree on penalties on infringement of IPR, which increased the maximum fines to VND 500 million (approximately $23,800), plus seizure of any gains deriving from the infringing act.

Although Vietnam has made progress in establishing a legal framework for IPR protection, various forms of infringement and piracy of intellectual property continues to be widespread. Enforcement of administrative orders and court decisions on IP issues remains inconsistent and weak. In addition, the system of administrative enforcement is complex and rights holders have raised concerns regarding inconsistent coordination among enforcement agencies.

Most often, authorities use administrative actions such as warnings and fines to enforce IPR protection because they are less demanding on limited enforcement time and resources. The United States, and other interested countries, has conducted training for enforcement agencies, prosecutors and judges. Some businesses and rights holders have started to assert their rights under the law more forcefully. One positive sign is the growth of Collective Management Organizations, particularly for the music and publishing industries, but the impact of these organizations and their ability to collect royalties on behalf of their members remains weak. In recent years, the government pledged and then partially implemented a plan to rid government offices of pirated software. Vietnamese enforcement bodies have investigated, and in some cases raided and fined, businesses suspected of using pirated software. However, Vietnam still has one of the highest rates of piracy in the world, and enforcement remains uneven, particularly for software, music, and movies. Rights holders continue to seek additional enforcement actions against websites containing infringing digital content. To date, however, very little enforcement action has been taken to punish or prevent digital and internet piracy.

Substantial compensation for IPR violations is only available under the civil remedies section of the IP Law. However, Vietnam’s courts are untested in this regard, and concerns remain as to whether rights holders have adequate access to effective civil remedies under the IP Law. Vietnam has yet to establish specialized IP courts, and knowledge on IP issues within the judiciary remains low. Criminal offenses are prosecuted under the Criminal Code, and criminal proceedings are regulated under the Criminal Procedure Code. In practice, however, criminal prosecutions are rarely used to prosecute IPR violations.

Transparency of the Regulatory System

The Law on the Promulgation of Legal Normative Documents requires all legal documents and agreements to be published online for comments for 60 days, and published in the Official Gazette before implementation. However, government entities regularly issue rules and implementing regulations without public notification or with little advance warning or opportunity for comment by affected parties, arguing that these binding documents are not “legal documents.”

The Office of Government of Vietnam, with assistance from USAID, has launched a new National Database of Administrative Procedures (AP) to improve and simplify the administrative procedures required to establish and conduct business in Vietnam.

Since June 2010 investors have been able to register new businesses online through a government website, following the Prime Minister’s Decree 43/2010. There have been some implementation problems, and the business community hopes to continue to improve registration procedures.

Efficient Capital Markets and Portfolio Investment

Vietnam’s financial system remains weak and poorly regulated. A lack of financial transparency and non-compliance with internationally accepted standards among Vietnamese firms are among the many challenges facing the GVN’s plan to expand the domestic stock and securities markets as a venue for firms to raise capital domestically.

The banking sector is underdeveloped and is now the subject of a national restructuring initiative to address high non-performing loans (NPL), and other structural problems. By the end of March 2012 only 20 percent of Vietnamese residents had a bank account. Most domestic banks are under-capitalized and reportedly hold a large number of NPLs. Under Vietnamese accounting standards the official NPL rate was reported at 8.82 percent as of September 30, 2012. State-directed lending by state-owned commercial banks and related-party lending under non-commercial criteria remain a source of concern among foreign investors and other financial analysts.

Vietnam’s banking market is highly concentrated at the top and fragmented at the bottom. The four largest banks (Vietcombank, Vietinbank, the Bank for Agriculture and Rural Development, and the Vietnam Bank for Investment and Development) are state-owned or majority state-owned, accounting for approximately 58 percent of domestic lending, 46 percent of the total assets, and 37 percent of equity capital in the banking sector as of December 2011. Among these, the Bank for Agriculture and Rural Development is the largest with total assets of VND 560 trillion (about $26.7 billion). Vietnam’s 38 joint stock commercial banks are all smaller than the state-owned commercial banks but gradually gaining market share.

Vietnamese banks are required to maintain minimum chartered capital of VND 3 trillion (about $143 million).

The GVN has initiated banking reforms intended to improve the efficiency of the banking system, especially via the equitization (or privatization) of state-owned commercial banks. Vietcombank and Vietinbank conducted initial public offerings (IPO) in December 2007 and December 2008, respectively, and both were listed on Vietnam’s stock market in 2009. The Vietnam Bank for Investment and Development was equitized on December 28, 2011. The state remains the controlling shareholder in these banks.

In 2008, the State Bank of Vietnam for the first time granted licenses to the following wholly foreign-owned banks: HSBC, Standard Chartered Bank, ANZ, Hong Leong and Shinhan Vina. The current ceiling for foreign ownership in a local joint stock bank is set at 30 percent of the total charter capital for the total foreign ownership and 15 percent for one foreign shareholder, or 20 percent with approval from the Prime Minister’s Office.

The Vietnamese stock market includes two stock exchanges: Ho Chi Minh City Stock Exchange (HOSE) and Hanoi Stock Exchange (HNX). As of December 26, 2012, 308 stocks were listed in the HOSE with total market capitalization of approximately $10.78 billion, and 395 companies were listed in the HNX with total market capitalization of approximately $4 billion. The majority of listed firms are former SOEs that have undergone partial privatization (“equitization”). A new trading floor for unlisted public companies (UPCOM) was launched at the Hanoi Securities Center in June 2009. At the end of 2011, 132 companies were listed on UPCOM. In September 2009, a separate trading floor for government bonds was established.

Competition from State-Owned Enterprises (SOEs)

SOEs’ share of factor inputs has steadily declined over the last decade. In 2000, SOEs reportedly accounted for nearly 68 percent of capital, 55 percent of fixed assets (such as land), 45 percent of bank credit, and 59 percent of the jobs in the enterprise sector. These percentages have steadily decreased over the past decade. By 2009, SOEs’ share of capital had fallen to 39 percent, fixed assets to 45 percent, bank credit to 27 percent, and employment in the enterprise sector to 19 percent. The steep decline in SOEs’ share of employment from 59 percent to 19 percent was due to many labor-intensive SOEs being equitized and domestic private and foreign enterprises expanding their labor force. SOEs are still dominant in all strategic sectors, such as oil and gas, telecommunications, electricity, mining, and insurance.

In 2005, the GVN established the State Capital Investment Corporation (SCIC) to represent GVN state ownership in SOEs, with the responsibility to manage, restructure, and trade state interests in SOEs through the process of equitization and privatization. By 2015, the SCIC plans to privatize or equitize more than 1000 state-owned enterprises, but as of 2012 progress had ground to a halt. The SCIC is also charged with accelerating SOE reform and improving management in companies in its portfolio.

The 2005 Law on Enterprises requires all SOEs to change their corporate structures to operate, as of July 1, 2010, under the same legal and regulatory framework as all other business entities. However, significant additional SOE reform is needed in order to put the private sector on a level competitive field with SOEs.

In 2010, Vietnam’s state-owned shipbuilder Vinashin went bankrupt due to mismanagement and substantial investment outside its core business sectors. The incident raised both domestic and international concern about the efficiency and continued viability of an economic model driven by a dominant state sector.

Vietnam allows foreign investors to participate in the equitization process (per Decree 59 issued in 2011), subject to the provisions of other laws that may restrict foreign investors’ participation in the process, such as ceilings on capital ownership. SOEs have only recently been authorized to sell shares to strategic investors before the IPO. The floor price for shares sold to strategic investors, however, cannot be lower than the price determined by their ministerial line authority.

In July 2012, Vietnam officially started the SOE restructuring plan, focusing on restructuring the state business groups with the purpose of improving the efficiency and strengthening the decisive role of state sector in the economy. However, a clearer action plan is still needed so that the restructuring can be fully started and sufficiently implemented.

Corporate Social Responsibility

Many multinational companies implement Corporate Social Responsibility (CSR) programs in Vietnam. Although awareness of CSR programs appears to be increasing among domestic companies, only the largest Vietnamese companies implement CSR programs.

Political Violence

The U.S. Mission knows of no incidents of violence against investors in Vietnam.

Corruption

Vietnam’s 2005 Anti-Corruption Law requires GVN officials to declare their assets and sets strict penalties for those caught engaging in corrupt practices. Implementation and enforcement, however, continues to remain problematic. The GVN signed the United Nation Convention on Anti-Corruption in July 2009.

The Government has tasked various agencies to deal with corruption, including the Steering Committee for Anti-Corruption (led by the Prime Minister), Government Inspectorate, and line ministries and agencies. However, few corruption cases have been detected, investigated and prosecuted.

The 2012 Transparency International Corruption Perceptions Index ranked Vietnam 123 out of 176 countries. Corruption in Vietnam is due in large part to a lack of transparency, accountability, and media freedom, as well as low pay for government officials and inadequate systems for holding officials accountable for their actions. Competition among GVN agencies for control over business and investments has created a confused overlapping of jurisdictions and bureaucratic procedures and approvals that in turn create opportunities for corruption.

Vietnam’s 2011 Provincial Competitiveness Index (the latest available), supported by USAID’s VNCI Project in partnership with the Vietnam Chamber of Commerce and Industry, surveyed 1970 foreign-invested enterprises and 6922 local enterprises regarding the number of firms that had paid informal charges to public officials. According to the Provincial Competitiveness Index (PCI) survey, progress has been made in reducing petty corruption in the form of small payments to public officials at local administrative agencies. While petty corruption has been reduced according to that survey, it appears that corruption by top officials (such as kickbacks on procurement contracts or sweetheart land deals) has increased over time. Fifty-six percent of operations that bid for government projects claimed that paying “commissions” was a common business practice, compared to 41 percent from the previous year.

Bilateral Investment Agreements

Vietnam has 58 bilateral investment agreements with the following countries and territories: Algeria, Argentina, Armenia, Australia, Austria, Belarus, Belgium and Luxembourg, Bulgaria, Burma, Chile, China, Cuba, Czech Republic, Cambodia, Denmark, Egypt, Finland, France, Germany, Hungary, Iceland, India, Indonesia, Italy, Iran, Japan, Kazakhstan, Kuwait, Laos, Latvia, Lithuania, Malaysia, Mongolia, Mozambique, Netherlands, North Korea, Oman, Philippines, Poland, Qatar, Romania, Russia, Singapore, South Korea, Spain, Sri Lanka, Sweden, Switzerland, Taiwan, Tajikistan, Thailand, Ukraine, United Kingdom, Uruguay, Uzbekistan, United Arab Emirates, and Venezuela.

In December 2008, Vietnam and the United States began negotiations of a Bilateral Investment Treaty (BIT), concluding the third round of talks in November 2009. Ongoing negotiations of a Trans-Pacific Partnership free trade agreement (TPP), in which the both the United States and Vietnam participate, address investment issues.

OPIC and Other Investment Insurance Programs

The Overseas Private Investment Corporation (OPIC) has a standing bilateral agreement with Vietnam that provides the protections and guarantees necessary for OPIC to operate in Vietnam. Vietnam joined the Multilateral Investment Guarantee Agency (MIGA) in 1995.

On November 9, 2010, the Prime Minister issued Decision 71 to regulate pilot projects under the Public-Private Partnership (PPP) model for infrastructure development. Sectors to have PPP investments include transportation infrastructure, airports, seaports, clean water supply, power plants, hospitals, waste treatment, and other infrastructure projects identified by the Prime Minister. The value of the government’s contribution in a PPP project will not exceed 30 percent of total investment capital.

The estimated annual U.S. dollar value of local currency used by the U.S. Mission in Vietnam is about $55 million. This currency is purchased at the commercial bank rate, which is closely linked to the official government rate. The SBV devalued the VND by five percent in November 2009, by three percent in February 2010, by another two percent in August 2010, and by nine percent in February 2011.

Labor

One of Vietnam’s main investment advantages is its labor force, which is large (over 52.1 million people), literate (GVN reports a literacy rate of 94 percent), inexpensive, and young (nearly 69 percent of the population is under 40). The labor pool is expected to increase by 1.5 percent annually between 2010 and 2015.

The GVN sets minimum wages depending on the ownership structure and location of the company. As of January 1, 2013, the minimum wage for workers in private businesses ranges from VND 2.35 million ($112) to VND 1.65 million ($80) monthly, depending on geographic zone. Businesses in urban districts of Hanoi, Ho Chi Minh City, and neighboring areas are subject to the higher minimum wage. These rates apply to both local and foreign invested enterprises. For government officials a comparable minimum wage increase will go into effect May 1, 2013.

Foreign investors can hire and recruit staff directly, but only after exhausting a 15-day period using a state-run employment and recruitment bureau. In practice, many employers omit this step and hire their personnel directly without going through the bureau. All personnel must be registered with the GVN. The GVN has recently tightened enforcement of foreigner work permit requirements. In August 2011 a new implementing regulation took effect that requires employers to identify a local apprentice or provide evidence of a formal training plan to replace foreign workers before extending a foreigner’s work permit. The legislation also requires employers to advertise job openings in national and local newspapers at least 30 days prior to recruiting foreign employees.

The 2012 revised Labor Code introduced an extensive process of mediation and arbitration to deal with labor disputes and stipulates that strikes can only be held if they relate to collective labor disputes about benefits. The code still requires that at least 50 percent of workers in the workplace must vote for the strikes. The new labor code introduced several other critical revisions, including increasing maternity leave from 4 months to 6 months, restricting labor outsourcing services, and reducing the validity of foreign worker permits from three to two years.

Vietnam witnessed approximately 532 strikes in 2012, according to data from the Vietnam General Confederation of Labor (VGCL), close to only half the number of the strikes in 2011, when 981 strikes occurred. Approximately 80 percent of strikes took place in foreign invested enterprises (FIEs) and the remaining 20 percent in domestic private companies. Over two-thirds of FIE strikes occurred in Taiwanese or South Korean owned businesses. The majority of strikes (89 percent) took place in Ho Chi Minh City and surrounding provinces, where most FIEs are located, particularly in the garment, footwear, and furniture sectors. The GVN rarely takes action against “illegal” strikers.

The Trade Union code was also revised in 2012. In principle employers are not obliged to establish trade unions at their workplace but if a trade union is established the employer must provide a workspace and amenities to conduct trade union activities. All labor unions must be affiliated with the VGCL; a state-run organization under the Communist Party-affiliated Fatherland Front that labor experts note has weak capacity at the provincial and enterprise level. Employers have to contribute 2 percent of their payroll to support trade union budgets regardless of whether trade unions exist at their workplace or not.

Vietnam has been a member of the International Labor Organization (ILO) since 1992, and has ratified five core labor conventions (Conventions 100 and 111 on discrimination, Conventions 138 and 182 on child labor, and Convention 29 on forced labor). Vietnam has not ratified Convention 105 dealing with forced labor as a means of political coercion and discrimination or Conventions 87 and 98 on freedom of association and collective bargaining, but is considering doing so. Under the 1998 Declaration on Fundamental Principles and Rights to Work, however, all ILO members, including Vietnam, have pledged to respect and promote core ILO labor standards, including those regarding association, the right to organize and collective bargaining. A number of technical assistance projects in the field of labor sponsored by foreign donors, including the United States, are currently underway in Vietnam.

Foreign Trade Zones/Free Ports

Vietnam has about 270 industrial zones (IZs) and export processing zones (EPZs), most of which are located in Vietnam’s key economic zones. Projects in IPs and EPZs often enjoy investment incentives by sectors and geographical areas. Enterprises pay no duties when importing raw materials if the end products are exported. Vietnam committed to eliminating prohibited export subsidies on its accession to the WTO.

Many foreign investors note that it is easier to implement projects in industrial zones because they do not have to be involved in site clearance and infrastructure construction. Foreign investment in the industrial zones is primarily in the light industry sector, such as food processing and textiles.

Customs warehouse keepers can provide transportation services and act as distributors for the goods deposited. Additional services relating to customs declaration, appraisal, insurance, reprocessing, or packaging require the approval of the provincial customs office. In practice the level of service needs improvement. The time involved for clearance and delivery can be lengthy and unpredictable.

Most goods pending import and domestic goods pending export can be deposited in bonded warehouses under the supervision of the provincial customs office. Exceptions include goods prohibited from import or export, Vietnamese-made goods with fraudulent trademarks or labels, goods of unknown origin, and goods dangerous or harmful to the public or environment. The inbound warehouse leasing contract must be registered with the customs bond unit at least 24 hours prior to the arrival of goods at the port. Documents required are a notarized copy of authorization of the holder to receive the goods, a notarized copy of the warehouse lease contract, the bill of lading, a certificate of origin, a packing list, and customs declaration forms. Owners of the goods pay import or export tax when the goods are removed from the bonded warehouse.

Foreign Direct Investment Statistics

Foreign Direct Investment 2005-2012
(All monetary amounts in billions of U.S. dollars)
Source: GVN’s Foreign Investment Agency

2012
Number of new projects authorized: 1,100
Authorized Investment (including new and extended projects): $13
Implemented Investment: $10.5

2011
Number of new projects authorized: 1,091
Authorized Investment (including new and extended projects): $11.6
Implemented Investment: $11

2010
Number of new projects authorized: 969
Authorized Investment (including new and extended projects): $18.6
Implemented Investment: $11

2009
Number of projects authorized: 1,155
Authorized Investment: $22.6
Implemented Investment: $10

2008
Number of projects authorized: 1171
Authorized Investment: $64.01
Implemented Investment: $11.5

2007
Number of projects authorized: 1544
Authorized Investment: $21.3
Implemented Investment: $8.03

2006
Number of projects authorized: 833
Authorized investment: $12
Implemented investment: $4.1

2005
Number of projects authorized: 970
Authorized investment: $6.8
Implemented investment: $3.3

Note: GVN authorities routinely revise or revoke investment licenses that have not been utilized, and some investment licenses contain automatic expiration clauses that take effect if a project or phase of a project is not implemented by a certain date. Statistics on the number of licensed projects and the value of licensed projects are then adjusted accordingly.

FDI by Major Sector 1988-2012
(All monetary amounts in billions of U.S. dollars)
Source: GVN’s Foreign Investment Agency

Sector: Industry and manufacturing
Number of Projects Authorized: 8,132
Authorized investment: $106

Sector: Real estate
Number of Projects Authorized: 389
Authorized investment: $50

Sector: Hotels and tourism
Number of Projects Authorized: 332
Authorized investment: $10.6

Sector: Construction
Number of Projects Authorized: 926
Authorized investment: $10.3

Sector: Communications
Number of Projects Authorized: 815
Authorized investment: $6.1

Sector: Extractive
Number of Projects Authorized: 77
Authorized investment: $3.1

Sector: Agriculture, forestry and fishery
Number of Projects Authorized: 503
Authorized investment: $3.4

Sector: Transportation and Warehouse
Number of Projects Authorized: 348
Authorized investment: $3.5

Sector: Finance and banking
Number of Projects Authorized: 76
Authorized investment: $1.3

Sector: Education
Number of Projects Authorized: 160
Authorized investment: $0.4

FDI by Top Ten Investors in 2012
(All amounts in billions of U.S. dollars)

If a scroll bar appears below the following table, swipe the table to move left/right of the dashed line.

Country

Number of new and extended projects

Authorized investment (millions USD)

1

Japan

378

5,137.9

2

Singapore

138

1,727.5

3

South Korea

332

1,178.1

4

Samoa

8

907.8

5

British Virgin Islands

42

788.3

6

Hong Kong

59

657.6

7

Taiwan

104

453.0

8

Cyprus

3

378.1

9

China

85

344.9

10

Malaysia

44

224.3

Source: GVN’s Foreign Investment Agency

Vietnam’s Overseas Investment

Note: Statistics on Vietnam’s investment overseas are unreliable and inconsistent.

Vietnam committed a total of $15 billion of investment in 736 projects in 67 countries and territories around the world by the end of September 2012. Laos is the top investment destination with $3.7 billion worth of investment, followed by Cambodia with $2.6 billion, and Venezuela with $1.8 billion. Other countries attracting large-scale investment from Vietnam include Russia, Malaysia, and the United States, ranging from $305 million to $1.71 billion.

In the first nine months of 2012, Vietnam authorized 66 new outward investment projects and adjustment of investment capital in 9 investment projects, with total investment capital of approximately $1.31 billion. Large-scale projects in the energy and communication sectors were targeted most by Vietnamese investors.

Total overseas investment by Vietnam
(All monetary amounts in billions of U.S. dollars)

2012
Number of projects (new and continuing): 75
Authorized capital: $1.31

2011
Number of projects: 108
Authorized capital: $2.12

2010
Number of projects: 107
Authorized capital: $2.97

2009
Number of projects: 81
Authorized capital: $1.7

2008
Number of projects: 112
Authorized capital: $3.1

2007
Number of projects: 80
Authorized capital: $1.0

2006
Number of projects: 36
Authorized capital: $0.15 billion

2005
Number of projects: 36
Authorized capital: $0.54 billion

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