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Shifting preferences

Released at: 04:07, 17/06/2014

Shifting preferences

Vietnam must now compete against its traditional regional destinations for FDI along with newly-emerging countries.

by Huyen Thanh

In the 2013-2014 Global Competitiveness Index (GCI) released by the World Economic Forum (WEF), Vietnam moved up five positions and was ranked 70th out of 148 surveyed economies globally. Meanwhile, it was ranked 99th out of 185 economies in the World Bank’s Doing Business 2013 report, down nine positions compared with 2012. Both are based on the decisions of foreign investors on investment destinations. Three new Southeast Asian countries - Laos, the Philippines, and Myanmar - appeared on the list of possible investment destinations, which were not previously viewed as competitors of Vietnam for foreign investment. According to the 2013 Provincial Competitiveness Index (PCI) in Vietnam, released by the Vietnam Chamber of Commerce and Industry, 54 per cent of surveyed foreign investors considered other countries as a potential destination before investing in Vietnam, compared to 32 per cent in both 2011 and 2012. Vietnam is no longer the “darling” of the international investment community, as it was in the 2007-2010 period, and must now compete for foreign direct investment (FDI) against traditional regional destinations such as China, Thailand and Indonesia, together with several new entrants.

The foreign-invested enterprise (FIE) sector saw Vietnam as having a low risk of expropriation (64 per cent) compared to its regional competitors, greater policy stability (60 per cent), believes they were more influence over policies that affect their business (59 per cent), and subject to better tax rates (52 per cent). Regarding expropriation, investors were far more confident about their investment in Vietnam than in its competitors. Some 74.6 per cent said that Vietnam has less expropriation risk than China and, surprisingly, 71.4 per cent ranked Vietnam ahead of Thailand, perhaps reflecting concerns regarding its political instability. The exception was Taiwan, where only 38.5 per cent of FIEs ranked Vietnam as having stronger property rights.

On policy stability, FIEs believe that Vietnam has greater stability and predictability than China, Thailand, Cambodia and Laos, but less than Indonesia, Malaysia and Taiwan. According to Dr Edmund Malesky, the PCI’s lead researcher, these findings are critical, as foreign investors value the ability to predict changes to laws, which allow them to make long-term strategic plans. In particular, FIEs in high-tech goods and services value policy stability even more, as it takes longer to be profitable and the investment risk is larger. Vietnam outperformed its competitors in low-end production but still ranked behind primary destinations in more sophisticated investment.

In terms of policy influence, the instance of FIEs having a voice in the process of drafting and implementing laws and regulations that affect their business is higher in Vietnam than in any of its competitors, such as China (60.6 per cent preferred Vietnam), Thailand (61.8 per cent), and the Philippines (77.3 per cent), and in particular neighbours Cambodia (73.3 per cent) and Laos (57.9 per cent).

Vietnam’s satisfactory performance on relative tax burdens may come as a surprise to some, but the perception of FIEs lines up with the actual tax rates of Vietnam’s competitors. Vietnam’s average value added tax (VAT) of 10 per cent and corporate income tax (CIT) of 23 per cent in 2013 and 25 per cent in 2012 are in keeping with thos of its competitors. China, Indonesia and Malaysia all have average corporate tax rates of 25 per cent. The Philippines has a slightly higher CIT of 30 per cent and VAT of 12 per cent. Thailand, with 18 per cent (previously 23 per cent) and Taiwan with 17 per cent have lower CIT rates, as do Singapore and Hong Kong.

Vietnam also has some weaknesses relative to its rivals in terms of corruption, infrastructure, regulations and public services. Foreign investors consistently rate Vietnam as being significantly less attractive when it comes to corruption, regulatory burdens, quality of public services (education and health care), and the quality and reliability of infrastructure. In terms of infrastructure, investors placed Vietnam in roughly the same position as Cambodia and Laos. Vietnam appears to rank worse than its neighbours when it comes to corruption and regulatory burdens. These findings are broadly consistent with Vietnam’s performance in the Global Competitiveness Index 2013/2014 rankings, where it ranked 98 out of 148 countries in “Institutional Pillars” and coming in at 116th in corruption and 106th in regulatory burden.

The Provincial Competitiveness Index 2013 covers a highly representative selection of 1,609 FIEs from 49 different countries, whose operations are located in 13 provinces in Vietnam.

On all of these issues Taiwan and Malaysia appear as standout alternatives to Vietnam, according to Dr Malesky. Both of these economies are far more likely to attract the high technology and value-added investors that Vietnamese policy makers desire. Of investors considering other countries, 69 per cent selected Vietnam over the competition, while 31 per cent invested here as part of a multi-country investment strategy.

In 2013, though the economy continued to face difficulties, the performance of FIEs was slightly better than in 2012. Revenue remained steady and profitability increased moderately. Sixty-four per cent of FIEs reported profits in 2013, up four percentage points from 2012, while only 24 per cent reported losses. Of those reporting profits, 10.7 per cent said that their margins were more than 5 per cent. FIEs, though, are somewhat pessimistic about their growth plans. Thirty-three per cent hired additional workers in 2013, down from 50 per cent in 2010. Only 28 per cent were optimistic about their business plans in 2013.

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