Vietnam still on investors' radars

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A man works on the assembly line of a Piaggio scooter and motorcycle factory in the northern province of Vinh Phuc. Photo: Reuters

The important thing is sustainable investment, Kenneth M Atkinson, managing partner at Grant Thornton Vietnam, an auditing and business consultancy firm, tells Vietweek.

Vietweek: Vietnam has stepped up promotion of itself as a foreign direct investment (FDI) destination, but inflows are not as large as expected. Don't investors have trust in Vietnam?

Kenneth M. Atkinson: The level of FDI in terms of remitted capital has been fairly constant over the last few years at US$11-13 billion. I think investors still believe in Vietnam. However, you must realize there is competition from Indonesia, Cambodia, and Myanmar.

We are seeing a steady flow of interested investors looking at Vietnam, and many who are looking at moving investment from China or adding alternative production due to the rising cost of labor. We are also seeing strong interest and activity in private equity investments into Vietnam, and also trade buyers who prefer to buy established businesses rather than set up from scratch.

I think there is a subtle change in the form of investment as there is significant private-equity and trade deals being done where investors are buying equity in existing Vietnamese companies. At the present time this is recorded as indirect investment, whereas in reality this is actually FDI (as it is longer-term investment), so this is also distorting the actual numbers. Whilst it is hard to quantify this figure, I would estimate it to be $1-2 billion per annum.

What are Vietnam's advantages and disadvantages compared to Indonesia, which is emerging as one of the most attractive destinations in Southeast Asia for foreign investors? Is it Vietnam's main competitor?

I am not familiar with Indonesia's attractions but Indonesia is, from what we have heard from both corporate and private-equity investors, a major competitor today for FDI.

It has many of Vietnam's advantages including large population, large labor force, low labor costs and an improved banking system.

The debt crisis in Europe and global economic recession are forecast to affect FDI flows into Vietnam. However, the country has set itself a higher FDI target for this year than 2011 and 2010. Is the target feasible?

The issue is not just about the European and global economic recession. It is as much about Vietnam's attractiveness and competitiveness. Vietnam needs to be looking at measures to make the legal environment more predictable and increasing transparency.

The most common challenges faced by investors, as reported in Grant Thornton's Private Equity Survey last December, include economic policy changes, poor infrastructure, currency issues, and corruption.

These issues are of course not just issues faced by foreign investors but by local companies as well, and many of them cannot be fixed overnight. Having been here for over 20 years I have seen much of that change, which on the whole has been for the good.

It is indeed good to see the progress being made in many areas, including the bureaucracy, with the implementation of Project 30, infrastructure development, and the reduction in power cuts. Seasoned investors know all the above take time, so the important point is to show that progress is being made.

If Vietnam continues to improve in these areas, higher targets are indeed feasible.

Experts say Vietnam should focus on attracting investment from multinationals and not small- and medium-sized enterprises. Is it a reasonable move?

This approach is not sustainable in itself, and Vietnam needs balance between investment from multinational companies, international companies, and privately-held businesses. Major multinationals need a developed supply chain, and this supply chain often is made up of smaller international and privately-owned businesses.

The important thing is sustainable investment, which is realistic. There have been too many projects approved that in the cold light of day never made economic or financial sense, and of course these investment commitments have never materialized.

However, there is no doubt that major investments by multinationals can help improve the quality of investment and investor confidence generally.

Does Vietnam have enough human resources and other factors needed to attract multinationals?

Skilled managerial resources are in short supply, but this is a fact that all companies face in emerging markets, and it is a fact of life.

The major foreign investors are used to dealing with these issues and that is why there needs to be flexibility in the labor laws relating to the employment of foreigners. Both foreign-invested companies and their expatriate employees help with skill development and training.

The key issue is the trainability of people, which is very high in Vietnam because of the relatively good education system. However, there needs to be much more focus on technical skills training and vocational training within the Vietnamese system.

Because of such shortages there has been a tendency for a high degree of wage inflation and this of course is also a potential challenge as there is a danger that higher salaries will in turn reduce the attractiveness of Vietnam as a destination for FDI.

Although multinational companies can help improve the quality of investment and investor confidence, many of them do not always follow environmental protection and labor regulations. What should Vietnam do to deal with the issue?

I do not think that the problem is with multinational companies but more with regional investors. I think Vietnam should enforce strict and transparent measures to deal with the environmental problems and issues involving the abuse of or non-compliance with the Labor Code.

I would suggest that most, if not all, multinational companies have very high degrees of transparency and corporate governance, and would not knowingly violate or circumvent local laws and regulations, so I would suggest that this perception is not correct.

The high-profile cases we have seen where there has been abuse or non-compliance with local laws and regulations are I believe by companies from the region where maybe the standards of governance and transparency are not quite as high as say companies from Europe and North America.

Big companies often require many incentives, especially tax breaks, when investing in Vietnam. What should Vietnam do in such cases?

Initially Vietnam did have a policy of tax incentives, which have been gradually phased out over the last few years. Tax incentives are both a way of encouraging large-scale investment projects and helping companies absorb higher costs due to, for example, poor infrastructure or lack of locally available resources.

In order to stay competitive I believe Vietnam needs to carefully reconsider a selective policy of tax incentives for investments into sectors that the government is encouraging.

Are Vietnam's tax policies attractive enough to foreign investors?

Vietnam's tax regime is not attractive when compared to many of the regional countries trying to attract FDI. Of course, higher taxes often act as an encouragement to companies to practice transfer pricing policies whereas if tax rates are lower there is much less incentive.

A reduction of the rate of corporate income tax and personal income tax by even 5 percent would, in our opinion, help attract more foreign investment and keep Vietnam more competitive with some of its regional neighbors.

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