Updated: Mar 30
1. Which sectors have been the biggest recipients of FDI in 2020? How does this compare to 2019?
In 2020, USD 28.5 billion in foreign direct investment (“FDI”) capital was invested into Vietnam, a decline of 25% compared with 2019. With respect to the sectors of investment, the leading position is still held by manufacturing and processing, accounting for 47.7% of FDI registered capital, equivalent to USD 13.6 billion.
Despite the effects of the economic recession in the market in 2020, the real estate sector still recognizes growth of nearly USD 4.2 billion from FDI, rising from USD 3.8 billion in 2019.
However, with over 14% of contribution, this sector just ranks in third place in 2020. Receiving USD 5.1 billion, equivalent to 18% of FDI capital, the second biggest FDI sector of 2020 is held by investments in electricity production and distribution. In early 2020, a project of Liquefied Natural Gas (LNG) Power Plant was approved for the Bac Lieu Thermal Power Center with investment capital received from a Singaporean investor of up to USD 4 billion.
Another major FDI recipient sector in 2020 is retail and wholesale. Compared to the previous year, this sector remains top ranked for FDI attraction spots in Vietnam, even though it has experienced such unexpected events during this year such as the outbreak of the COVID-19 pandemic, social distancing and increased online purchasing.
2. With growing global trade tensions with China coupled with the on-going COVID-19 pandemic, companies seemed to be interested in diversifying their supply chains, with Vietnam quickly becoming a principal beneficiary. It is worth noting that the EU is already Vietnam’s second largest (by value) destination for goods. What further momentum will the EVFTA provide?
Due to severe impacts from the COVID-19 pandemic, the European Union (“EU”) markets have met certain challenges promoting trade with Vietnam after the EVFTA took effect since 1 August 2020. Given that annual trade value between Vietnam and EU in 2020 showed EU went from second place to the third largest export market of Vietnam with about 12% of contribution, after the US and China, there are some outstanding points on the bright side though.
When looking at the three months of EVFTA implementation, it can be seen that Vietnamese exports to EU reached US $11 billion, an increase of 5%. In particular, in the third month alone, after the EVFTA took effect, Vietnam's exports to the EU increased by 15%. In the opposite direction, imports from the EU to Vietnam reached USD 13.2 billion, increased by 4.3% in 11 months of 2020, while after only 3 months of EVFTA taking effect, growth rate is at 11%. The elimination of tariff barriers is just one of the material aspects in the EVFTA that can help boost trade growth between the countries. A notable spot is that Vietnam and the EU share favourable economic structures with each other, in which the parties are not direct competitors, but rather complementary. If Vietnamese business, especially small and medium ones, can adapt properly, such as in terms of their suppliers of input materials, they can satisfy conditions in rules of origins (”ROO”) to take advantage of tariff elimination in the EVFTA. Such a dominant sector as footwear exports is one good example. As soon as the effectiveness of the EVFTA, over 37% of tariffs of Vietnamese footwear have dropped to zero, while the remainder will enjoy a preference of 12.5% in the roadmaps of three to seven years. A trend has been Chinese producers shifting their businesses to Vietnam bases to adapt with new regulations. This path, other than the rise of domestic material sources as a replacement, will result in big competitive advantages of Vietnam to its biggest competitor, China, in this field.
In the long term, apart from tariff preferences, the EVFTA also brings potential investment opportunities resulting from the promotion of investor protection and high position in the supply chain where Vietnam is constantly making improvement. Some remarkable FDI projects have been approved and implemented recently that focus on high-technology manufacturing and infrastructure. Vietnam is taking steps to be involved in more primary and important parts of the global and regional supply chain. Not only with a new approach to the ROO, an investor-protection mechanism is also one key point that makes Vietnam attractive for FDI. EU and Vietnam have signed a relevant investment-protection agreement side-by-side with EVFTA, i.e., the EVIPA to promote enforcement. From the Vietnam side, this agreement has made and will make the Government be indeed concerned about adjusting and adapting its domestic legal and investment framework to ensure transparency and fairness for foreign investors, including those from the EU, and their investment assets into the country too.
3. The Regional Comprehensive Economic Partnership (“RCEP”) makes up a market of over 2.3 billion consumers. In what ways, will the RCEP help to attract FDI in Vietnam in particular?
Vietnamese businesses will participate in the value chain and regional production network, while also benefiting from reduced transaction costs and a more friendly business environment through existing rules and general application in different ASEAN FTAs.
With a scheme of ROO under RCEP, harmonizing ROO to utilize input materials are advantages for Vietnamese enterprises to optimize their input material sources into producing exports to RCEP member countries’ markets. For example, the Chairman of the Vietnam Textile and Apparel Association (VITAS), has said that the ROO under RCEP are relatively simpler than many other FTAs and will bring many opportunities to the Vietnamese textile and garment industry. Specifically, to enter the Japanese market, in the past, textile enterprises had to prove that the raw materials originated from ASEAN or Japan, which caused certain difficulties as most of the raw and auxiliary materials of the Vietnamese textile and garment products were imported from China. Thanks to RCEP, Vietnamese garments with raw materials from China also enjoy preferential tariffs when exported to the Japanese market.
Although RCEP is not equal to EVFTA in the level of tariffs’ elimination and inclusiveness (e.g., in the EVFTA there is a chapter committing to regulating the commercial activities of state-owned or controlled enterprises and monopoly firms whose commercial sizes are large enough to substantially increase competition), RCEP enables small and medium-sized enterprises (including micro-enterprises) (“SMEs”) to better deal with arising issues from globalization and trade liberalization. SMEs make up more than 90% of business establishments across all RCEP participating countries. Specifically, SMEs are of an important sector to promote the growth of Vietnam’s economy these days, with the contribution of around 40% of GDP and about 98% of all enterprises in the country. It is believed that the simplified ROO, along with the reduction of customs procedures, will create more leverage for the Vietnamese SMEs to thrive in their manufacturing and exporting business, particularly in joining the regional and global supply chains.
4. Does the EVFTA and the RCEP affect the sectors that traditionally are recipients of FDI or does it also aim to facilitate FDI into growing sectors in Vietnam? And in what ways?
The EVFTA and RCEP, both modern trade agreements, will reduce tariffs and facilitate FDI into improving supply chains in Vietnam. RCEP helps Vietnam to access a market of 2.3 billion people and US$26.2 trillion in global output, while the EU is Vietnam’s second largest export market after the United States, representing 17% of its exports.
With simplification of trade procedures, the EVFTA and the RCEP will encourage FDI in trade, commerce, and services sectors including trade in goods, trade in services, economic and technical cooperation, e-commerce, SMEs, and other matters.
Vietnamese manufacturing enterprises will benefit from joining the regional production and value chain network, while also receiving the benefit from the reduction of transaction costs and business-friendly environment with these two trade agreements. Specifically, growing sectors such as IT, footwear, automobiles, and telecommunications sectors can increase exports. Furthermore, Vietnam’s exports in agriculture and fisheries will also increase.
5. Since 1st January 2021, the Law on Investment 2020 (LOI2020) is in force. How does it differ from LOI2014? What does it mean for FDI Investors? What else should FDI investors be aware of when looking at Vietnam for investments in 2021.
· The difference between LOI 2020 & LOI 2014:
For the first time in Vietnam, the LOI 2020 introduces a market access “negative list”, which means foreign entities are afforded national treatment with regard to investment except in those sectors explicitly set out in the List of Restricted Sectors. This is a more permissive approach than previous iterations of Vietnam’s investment regulations, which followed a “positive list” approach, blocking market access except in listed sectors.
Under the LOI 2020, investment in certain sectors may be entirely prohibited or subject to certain restrictions or conditions. Further, the LOI 2020 introduces a List of Conditional Investments and Businesses of the LOI 2020 details 227 sectors with some changes from the LOI 2014. For example, sectors added to the conditional sectors list include water sanitization and architectural services; meanwhile, certain sectors, including franchising and logistics, were removed from the list. Debt collection is newly added to the List of Restricted Sectors.
Under the LOI 2014, enterprises 51% or more foreign-owned were treated as "foreign investors" for the purposes of investment activities. Thus, an enterprise with more than 50% owned by a foreign entity could still receive benefits afforded to domestic enterprises. However, the LOI 2020 changes this, lowering the "foreign investor" threshold to 50%.
The LOI 2020 tightens rules regarding the use of Vietnamese nominees for foreign investors to access restricted sectors. An investment project undertaken “on the basis of a “sham” civil transaction”– and can be terminated by the Vietnamese Government. This corresponds with Article 124.1 of the Civil Code No. 92/2015/QH13 dated 25 November 2015.
The LOI 2020 states that investments shall be suspended or terminated if such activities are “harmful, or are in danger of harming national defense or security”. Notably, the terms “national defense” and “security" are not defined, leaving the Government board interpretive freedom in applying this provision.
The LOI 2020 introduces new incentives for investment in certain sectors, including:
(i) High-tech sectors, including software development, clean energy technologies, and information and communications technology-related products;
(iii) Public transportation;
(vi) Pharmaceuticals and other health industries; and
(vii) Investment projects for creative startups.
Further, the LOI 2020 provides for investment incentives in “[a]reas with difficult socio-economic conditions” and industrial zones. Such incentives may include tax incentives, access to credit, support for research and development, and other measures.
The LOI 2020 also includes a range of provisions dictating the terms for Vietnamese outbound investment and includes additional rules and guidance regarding investment approvals, including procedures for issuance, adjustment and termination of outward Investment Registration Certificates.
· What does it mean for FDI Investors? What else should FDI investors be aware of when looking at Vietnam for investments in 2021?
Following the Politburo’s Resolution 50/NQ-TW dated 20 August 2019 on foreign investment policy towards 2030, a special effort to help make Vietnam more selective in attracting foreign investments, the LOI 2020 has tightened the requirements for all investors to ensure national defense and security prior to their investment and maintained throughout the whole investment term.
Foreign investors or FDI must obtain in-principle approval from the provincial People’s Committee, if their investment projects are to be implemented on the islands, the frontier, seaside and other areas which may affect the country’s national security and defense.
Furthermore, foreign investors investing in Vietnam by contributing capital, acquiring shares or capital contribution to a target company must satisfy the conditions on ensuring national security and defense provided under the LOI 2020. Investors must also meet the conditions set out by land laws regarding land use rights.
If the target company has a land-use right certificate for a parcel of land on an island, frontier or seaside area, foreign investors must obtain an approval from the licensing authority (commonly known as an M&A approval) prior to the investment, regardless of the foreign ownership ratio in the target company post-acquisition.
Ultimately, as a general policy on investment under the LOI 2020, any local or foreign investor whose investment prejudices the nation’s security and defense will be cancelled, suspended or terminated. The Prime Minister may decide on the suspension, wholly or partially, of an investment project at the Ministry of Planning and Investment’s request, if the project is deemed harmful to national security and defense.
6. How does the EVIPA help protect member state investors with their FDI into Vietnam? In what ways and what other dispute mechanisms assist member state investors?
According to the EVIPA, the EU and Vietnam have agreed to set up a permanent court, referred to as the “Tribunal” to handle issues related to each member state’s investments in Vietnam, such as protection against the Vietnamese Government’s expropriation without compensation. This will not only protect investors and their investments but also protect a member state’s right to oversee the implementation of public policies. In addition, the court system will be an independent dispute resolution system since local courts will not be allowed to intervene or question the decision of the Tribunals.
The Tribunal members and the court hearing process are also designed to ensure that fair treatment can be implemented. The Tribunal shall consist of nine members, with the EU and Vietnam each nominating three members, and the remaining three members appointed from a third country.
With the court hearing process, all cases will be heard by a three-member team from the Tribunal, with the EU, Vietnam, and a third country represented equally. The three members will be selected by the President of the Tribunal with the chair of the team being the member the third country, not the EU or Vietnam.
Another dispute mechanism is consultation and mediation. Either Hanoi, Brussels, or the capital of a relevant EU member state can be the venue for consultation or mediation. The medium of consultation can be conducted through video conference or in another location, as agreed upon by the involved parties. Likewise, a mediator can be appointed for mediation as agreed upon by the disputing parties.
For further information, please contact:
Partner, VCI Legal
+84 2838 272 029
Kent Wong is a partner at VCI Legal, a leading national law firm in Vietnam. Kent heads the Banking & Finance/Capital Markets team, where he represents major financial institutions as well as foreign clients with business interests in Vietnam and Korea.
Kent advises on a broad range of banking and corporate matters and has acted in a variety of international finance transactions including secured bank lending, project finance, acquisition financing and restructuring.
In addition, Kent has considerable experience in cross-border M&A and private equity transactions, and has advised on numerous joint ventures, private acquisitions and divestitures. Kent was awarded the title of "IBA Fellow in International Legal Practice" by the International Bar Association in 2009. He is recognised as a leading practitioner byChambers Asia-Pacific, asialaw, The Legal 500 and IFLR1000.
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