Overcoming Foreign Investors’ Challenges

As of the end of February this year, the FDI capital inflow into Vietnam continues to show positive signs, reaching nearly $4.29 billion, up 38.6% compared to the same period last year. However, Vietnam still needs to enhance efforts to remove obstacles regarding labor, energy, legal, and logistics issues to improve the business environment for international investors.

The barriers of FDI investors

According to a recent survey by the American Chamber of Commerce (AmCham) in China, 60% of US companies are increasingly concerned about bilateral tensions, and over 40% have responded that they are seeking to increase investment to strengthen their supply chain resilience. Over 50% indicated that Southeast Asia remains their top destination for investment diversion from China.

On the other hand, a survey from EuroCham (the European Chamber of Commerce) also shows that European companies operating in China will continue to consider their supply chain strategies with ASEAN, as it is chosen as the top destination for investment diversion strategies.

In Vietnam specifically, according to the Foreign Investment Agency, Ministry of Planning and Investment, in the first two months of 2024, foreign investors have invested in 38 provinces and cities across the country. Singapore leads with total investment capital of over $2.08 billion, accounting for 48.5% of the total registered capital, more than 2.1 times compared to the same period in 2023; Hong Kong (China) ranks second with nearly $525.7 million, accounting for 12.2% of the total registered capital, nearly 5.1 times compared to the same period; followed by Japan, China.

FDI capital flows into 16 out of 21 national economic sectors. Among them, the manufacturing industry leads with total investment capital reaching nearly $2.54 billion, accounting for 59.1% of the total registered capital and increasing by 16.8% compared to the same period; the real estate business comes second with total investment capital of nearly $1.41 billion, accounting for 32.7% of the total registered capital, more than 3.5 times compared to the same period.

Despite the prospects from attracting FDI, according to Tim Evans, CEO of HSBC Vietnam, Vietnam also needs to identify obstacles and bottlenecks in attracting foreign investment and find ways to overcome them.

Firstly, it’s about the quality and access to the labor force. Vietnam needs to continuously improve productivity as it lags behind larger countries in the region in labor productivity, with relatively low output per hour worked. Data from the Asian Productivity Organization (APO) shows that in 2020, the value of Vietnam’s labor productivity per hour reached only $6.4, compared to $14.8 in Thailand and $68.5 in Singapore.

Secondly, Vietnam’s logistics efficiency index falls behind China, Malaysia, and Thailand with many deficiencies in logistics capacity, delivery time, and traceability.

“The logistics infrastructure in Vietnam does not meet international standards, and road transport accounts for up to 74% of total transport vehicles. Meanwhile, demand tends to favor sea transport and seaports to support exports,” Tim Evans added.

Thirdly, it’s about the legal environment. A survey by HSBC Global Connection shows that legal changes are one of the two biggest challenges for foreign businesses operating in Vietnam. Specifically, 30% of companies struggle to adapt to rapidly changing policies and regulations.

Moreover, power shortages and local power outages in the North in May and June 2023 have had negative effects on Vietnam’s business environment. If this situation does not improve and repeats in 2024, foreign investors may not choose Vietnam or even leave Vietnam.

In addition to removing bottlenecks in FDI attraction, according to Tim Evans, Vietnam needs a strategy to attract more FDI, starting with understanding and grasping the competition between Vietnam and other countries in ASEAN.

For example, Singapore and Malaysia are two Southeast Asian markets leading in the semiconductor ecosystem. Singapore is a center for semiconductor wafer fabrication and chip manufacturing equipment, while Malaysia is a center for packaging and testing.

The CEO of HSBC Vietnam remarked, “Vietnam is also gradually entering both the electric vehicle and semiconductor markets. Therefore, Vietnam needs to focus on increasing concentration on high-value-added goods while continuing to maintain its momentum in attracting large electronic manufacturers to enter the market. Vietnam has the advantage of competitive prices, stable and consistent government support, effective FTAs, and the working attitude of Vietnamese people.”

Removing barriers to attract investment

In response to feedback from foreign enterprises, Vietnam has continuously introduced measures to improve the investment environment:

Investment in logistics

Across Vietnam, there are currently over 75 logistics centers. The logistics industry in Vietnam continues to make significant strides, with an average annual growth rate of 14-16% and a scale of $40-42 billion per year. Some modern logistics centers, applying advanced technology and standardization, have been put into operation, such as the Hateco Logistics Center (in Hanoi), the HTM Logistics Center (in Hai Phong), and the AJ Total Cold Storage Logistics Center (in Long An). Additionally, many other centers are under construction, such as the ICD Vinh Phuc Logistics Center developed by a consortium of T&T Group (Vietnam) and YCH Group (Singapore), with a total investment of nearly 3.8 trillion VND, covering an area of over 83 hectares, and a designed capacity of customs clearance of about 530,000 TEUs per year.

Enhancing electricity supply

To meet the electricity demand for smart production chains, Vietnam will complete and implement the VIII Electricity Development Plan in 2024-2025. Vietnam will also apply direct power purchase agreements to encourage renewable energy producers, and approve a pilot plan to implement the direct power sale mechanism from power producers to industrial consumers (DPPA).

Improving administrative procedures and taxes

Regarding business establishment in Vietnam, whereas previously seven procedures were required, now only two procedures are needed to establish a business.

Regarding taxes and fees, the Government has decided to extend tax payment deadlines and reduce value-added tax. This will support business recovery and stimulate consumer demand.

The Government plans to review visa policies and simplify the Labor Code. This will create favorable conditions for labor permit procedures for foreigners in Vietnam, attracting talent to Vietnam.

In addition, authorities at all levels need to regularly conduct inspections and evaluations of projects to enhance investment efficiency, ensure economic and social development goals and directions; simultaneously identify existing issues, difficulties, and obstacles to promptly propose solutions, recommend competent authorities to handle obstacles, and accelerate the implementation progress of programs and projects for international investors.