Relationship between EVFTA and foreign direct investment in Viet Nam

EU foreign direct investment in Viet Nam

Currently, the EU is one of the important sources of foreign direct investment (FDI) in Viet Nam. In the past 25 years, as of late December 2014, investors from 23 out of the 28 EU member states have committed a total investment of US$ 19.1 billion in more than 1,600 projects in Viet Nam (according to the Foreign Investment Agency, Ministry of Planning and Investment). Regarding investment fields, EU investors are present in almost all important economic sectors of our country, namely in 18 out of 21 sectors in the national economy. The processing and manufacturing industries take lead with 549 investment projects with a total prescribed capital of US$ 6.04 billion (representing 31.89% of EU total investment in Viet Nam). In second place is the production and distribution of electricity, gas, water, and air-conditioners (19 investment projects with a total registered capital of US$ 3.52). In the third place is information and communication (with 169 investment projects with a total registered capital of US$ 2.19 billion). On investment area, the EU has had FDI projects in 52 out of 63 provinces and cities nationwide (including offshore oil and gas projects). Ha Noi is the pace-setter attracting FDI inflows from EU countries with 361 projects worth US$ 3.08 billion (accounting for 16.2% of total investment capital of EU countries in Viet Nam). Ho Chi Minh City ranks second with 570 projects and a total investment of US$ 2.8 billion (representing 14.8% of the total investment capital of EU countries in Viet Nam). Ba Ria - Vung Tau, Quang Ninh and Dong Nai also attract high investment from EU countries with total investment capital respectively US$ 2.45 billion; US$ 2.2 billion and US$ 1.8 billion. Regarding investment forms, most of EU investment are in the form of 100% foreign capital, with 1,115 projects with a total investment reaching US$ 7.71 billion (representing 40.7% of the total investment capital of EU countries in Viet Nam). Next is joint ventures (377 projects with a total investment of US$ 4.78 billion accounting for 25.2% of the total investment capital of EU countries in Viet Nam). Contracts and business partnership boast 29 projects with a total registered capital of US$ 3.1 billion. There are only four BOT, BT and BTO projects with an investment capital of US$ 3.08 billion. The rest are joint stock companies and the parent companies (according to the Ministry of Planning and Investment).

Relationship between EVFTA with foreign direct investment in Viet Nam

First, the free trade agreement (FTA) with the EU is a new generation agreement which will have the detailed provisions on freedom of investment. Along with the existing incentives in the strategy to attract investment from the state, the agreement will certainly promote investment activities in Viet Nam. Besides, the agreement also has provisions for supporting fields such as intellectual property, environment, and government procurement, transparency in investment or in the declaration of expenditure. These provisions largely resolve the previous concerns about the business environment in Viet Nam.

Second, direct investment from the EU as well as from other countries into Viet Nam will increase thanks to liberalization commitments. In the period of 2011-2013, Viet Nam still enjoy Generalized System of Preferences (GSP), with the average tax reduction of 3.5 percentage points with the proportion of GSP-eligible good accounting for approximately 25% of total Viet Nam's export turnover to the EU. However, if the FTA with Europe is signed, tariffs of exports to the EU as well as import of materials from the EU will fall much further, may be down to 0% for many commodities. Thus, when investing in Viet Nam, both Europe and other countries will benefit from the Agreement.

Third, Europe is a region with developed economies, technical standards and quality in every stage of production and each product. Signing FTA with Europe, Viet Nam should honor commitments to those standards. With assistance in technology, science, engineering and innovative products from Europe, the infrastructure and the products made in Viet Nam will be improved. This is more attractive to foreign investors in Viet Nam.

Opportunities to attract FDI as the result of the EVFTA signing

Opportunities come from within Viet Nam

First, Viet Nam has a favorable geographical position as it is situated in the heart of Southeast Asia. Joining ASEAN Economic Community (AEC) at the end of 2015, Viet Nam is pressured to become the export center of the region. Viet Nam will become the ideal bridge for foreign manufacturers to invest in Viet Nam to enter other ASEAN markets.

Second, labor in Viet Nam is low cost; the population structure is undergoing "demographic bonus", with abundant labor force. According to the General Statistics Office, the labor force aged 15 and older was estimated, as of 01 January 2015, 54.48 million, up by 782,000 persons compared to the same period of 2014, of which 51.3% were male, and 48.7% were female. The labor force in the working age was estimated to reach 47.75 million by 01 January 2015, increasing by 333,700 people as compared with the same period of 2014, men accounted for 53.7% and women accounted for 46.3%. Labor cost in Viet Nam is 50% lower than that of China and only 40% of those of the Philippines and Thailand.

Third, financial incentives on land, amended income tax in the new Investment Law for some foreign enterprises in Viet Nam are also very attractive for FDI. Currently the corporate income tax for FDI businesses are only 22% and in 2016, it is set at 20%.

Fourth, Viet Nam will be one of the largest consumption markets and most attractive in the world in the future. Viet Nam concluded negotiation on the Trans-Pacific Partnership Agreement (TPP) and the members of the TPP account for 70% of global consumers. Besides, Viet Nam has signed a series of FTAs with South Korea, and Eurasian Economic Union. When theses agreement come into effect, products in Viet Nam will be free to access large export markets in the world without tariff barriers, and quotas.

Opportunities come from European investors

First, an increasing number of EU companies choose Viet Nam as an ideal investment destination in the manufacturing sector. Companies in Viet Nam often lack technology and capital, which are available in European companies with strong international potential. On the other hand, labor costs are relatively high in Europe and therefore they cannot compete in a global context. The cost structure of companies in Viet Nam is quite attractive, Viet Nam’s advantages are quite diverse, and labor quality as well as the protection of intellectual property rights are better than other countries in the region.

Second, EVFTA will also promote the EU's FDI inflows into the high quality services sector that Viet Nam's economy desperately needs, such as finance-banking-insurance, energy, telecommunications, sea ports and maritime transport.

Third, while some domestic banks are struggling with internal problems, such as restructuring and bad debt, among others, foreign banks are backed by the powerful financial conglomerates around the world are seeking to enter and expand market share in Viet Nam. Foreign banks will have more advantages over domestic banks, if the FTA with the EU is officially put into effect with a commitment to open and incentives, surely this would be an attractive sector for strong investment from European investors.

Opportunities come from other countries outside Europe

First, the FTA with the EU will not only increase the number of EU companies to invest in Viet Nam but also bring investments from other countries outside Europe. EVFTA creates an open investment environment, adopts more favorable provisions in the field of investment and tariffs. Countries without FTAs with the EU tend to invest in Viet Nam to benefit from this agreement.

Second, the European single market is a large and attractive but demanding market in terms trade regulations (such as rules of origin and technical rules). EVFTA will create a gateway facilitating easy access to this market for all manufacturing enterprises with production in Viet Nam, including domestic and foreign enterprises.

Third, EVFTA help enterprises in Viet Nam to import technology and high quality raw materials from the EU with lower cost. This contributes to increase labor productivity, improve quality and reduce costs for products manufactured in Viet Nam. This is the motivation for FDI enterprises to invest in Viet Nam to enjoy this offer from Europe.

Fourth, when signing EVFTA, Viet Nam also has a clear mandate to attract foreign investment in strategic industries such as supporting industries. With its commitments to trade in goods and provisions on rules of origin and technical standards, EVFTA will encourage EU investors to make intensive investment into Viet Nam market (not just sub-contracts of production but also in support industries) to enjoy preferential tax rates of FTA.

Fifth, EVFTA opens market for quality services from Europe, such as insurance, banking, telecommunications, and logistics. In combination with open competition and low-cost labor, it will make services extensively develop and offer low prices. This is regarded as a driving force for production, creating supply chain of capital and products. The improved production support services will also be an advantage for attracting FDI from non-EVFTA countries.

Challenges to FDI attraction when signing EVFTA

First, competitiveness, according to report of the World Economic Forum (WEF) in 2014, the Global Competitiveness Index of Viet Nam ranked 68th out of 144 countries, business sophistication ranked 106th, technology readiness ranked 99th, financial market development ranked 90th, education ranked 96th and especially institutions still ranked 92th. These cause many disadvantages for Viet Nam in attracting FDI, especially from close partners like the EU.

Second, the business environment was unattractive. According to the Report on business environment in 2015 of the World Bank, the business environment Viet Nam was ranked 78th out of 189 economies. However, many indicators are still very low, such as paying taxes (173th, with 32 times of payments per year or 872 hours per year); electricity access (135th, taking 6 procedures and 115 days to get electricity supply); starting a business (125th, with 10 different procedures and 34 days); protecting minority investors (117th); resolving insolvency (104th). Some sectors, and local authorities are not aware of the urgency to improve investment and business environment and competitiveness. Compared to the business environment of countries in the region, such as Singapore (1st), Malaysia, Indonesia (18th), and Thailand (26th), business environment Viet Nam is still not really attractive.

Third, the issue of labor and management. Due to a low starting point, and given its agricultural-based economic structure, the percentage of participation in labor market is still low at about 30%. The quality and labor structure remain inadequate compared with the requirements of development and integration. About 45% of workers in the agricultural sector receive no training. The low quality of human resources is one of the "bottlenecks" hindering the development of Viet Nam. The World Bank (WB) stated that Viet Nam are lacking qualified and high-skilled technical labor. If the scale of labor quality is set at 10, the quality of Viet Nam’s human resource stands at 3.79, rating 11th out of the 12 Asian countries in the World Bank's ranking, while Korea reaches 6.91; India reaches 5.76; Malaysia, and Indonesia stands at 5.59. Therefore, labor productivity of Viet Nam is among the lowest group in the Asia-Pacific (almost 15 times lower than Singapore, 11 times lower than Japan and 10 times lower than South Korea).

Fourth, information system of labor market Viet Nam is still weak and limited, as is divided between the regions; the capacity to collect and provide information has fallen short of the needs of the partners in the labor market, especially employers and workers. In addition, it lacks reliable and consistent market projection models, staff and experts working in statistics, analysis and forecasts.

Fifth, obstacles in attracting investment in certain key areas: 1. The agricultural sector, this is the sector Viet Nam has a comparative advantage, however, FDI in agriculture is very limited. This is because of the intrinsic nature of the agricultural sector and constraints in Viet Nam's policy on agriculture. What many investors are concerned is low profit because processing industry has not yet developed while the payback period is prolonged. In addition, disaster risks, floods, droughts and market risk and underdeveloped insurance services are also problems hindering investment in the sector. 2. The supporting industry, currently the number of businesses operating in the support industrial sector remains limited, mainly small and medium-sized enterprises. Their product quality is low and unstable. Due to insufficient resources in technology and capital, most of the products do not meet the technical requirements of consumers. That makes FDI enterprises still cautious with Vietnamese suppliers. Moreover, the proportion of local content in the industry of Viet Nam is very low. Some spearhead sectors of Viet Nam, such as textiles, footwear and electronics must import raw materials from abroad. Therefore, enterprises always have to depend on imported raw materials, This prevents proactivity in production and business. Added value of Vietnamese enterprises is too low as compared with those of countries with developed supporting industries.

Forecasts and recommendations

Forecasts

First, EVFTA is a comprehensive free trade agreement. Considering both the scope and level of commitments, EVFTA goes further than WTO, with commitments not only in traditional sectors, such as trade in goods, trade in services but also in the fields of investment, intellectual property, public procurement, and competition policy. Therefore, signing EVFTA, Viet Nam should aim to promote exports, attract investment to take full advantage of the liberalization process in the region, while grasping the trend of liberalization rigorously taking place in the world.

Second, EVFTA will be an important "push" for Viet Nam's exports, especially those products that Viet Nam has advantages, such as textiles, furniture and agricultural products. With 500 million consumers and over US$ 17,000 billion in GDP, the EU is a dream. Signing of FTA with the EU, import duties on EU reduce, Viet Nam's exports will have an opportunity to enter the EU market and increase its market share. EVFTA framework allows eliminate tariffs on more than 90 tariff lines. According to EuroCham in Viet Nam, EVFTA once signed may help Viet Nam’s gross domestic product increased by 10%-15%; Viet Nam's exports to the EU increased by 30%-40% and imports from Viet Nam into the EU increased by 20%-25%.

Third, when EVFTA comes into force, with expected high standards of transparency and facilitation, the business environment in Viet Nam would certainly be improved to be more open and freer, thus promoting business activities and direct investment from Europe and other countries in Viet Nam. Along with the size and potential of European investment, Viet Nam has the opportunity to become the transfer hub, linking European trade and investment in the ASEAN region. This will actively support the process of economic restructuring and transformation of growth model of Viet Nam.

Fourth, joining FTA with the EU would help Viet Nam implement the policy of diversification of economic and trade relations, especially export markets and avoid excessive dependence on a specific area. According to the Ministry of Industry and Trade, in 2014, 70% of Viet Nam's import value came from East Asia and 50% of exports were to this market. Particularly, Viet Nam's exports to China accounted for 26% of total export value, while imports from this market is higher, accounting for 29% of total import value. EVFTA, similar to the TPP, will help Viet Nam have a more balanced import and export market structure.

Fifth, EVFTA will establish a stable incentive mechanism for exports of Viet Nam without depending on Generalized System of Preferences (GSP) of the EU. Currently, the EU periodically reviews and may withdraw the GSP preferences under the EU's own criteria that Viet Nam can not intervene. EVFTA will also help accelerate EU’s recognition of Viet Nam's full market economy, so that Viet Nam’s exports will not be subject to discrimination in anti-dumping and anti-subsidy cases filed by the EU.

Sixth, EVFTA will facilitate EU’s high quality investment flows into Viet Nam. With the scale and potential of the EU, Viet Nam has an opportunity to attract large EU investment and to become a transfer hub, connecting trade and investment in ASEAN region. This impact will be resonated when the ASEAN Economic Community is formed.

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The article was published on Communist Review No. 877 (November 2015)