Improvements in investment and business policy and the participation in bilateral and multilateral free trade agreements have helped Vietnam become a potentially attractive destination for domestic and foreign investors, says lawyer Pham Duy Khuong, managing director of ASL LAW, who spoke about the recent movements and their influence with VIR’s Hoang Oanh.
How do you evaluate the current investment environment in Vietnam, what moves by the government and ministries have made important contributions to attracting foreign investors?
Vietnam is one of the few countries in Asia to record positive GDP growth in 2020, and the government’s efforts to control and limit the spread of COVID-19 have rendered the nation a safe destination for foreign investors.
The participation in bi- and multilateral agreements, such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, the EU-Vietnam Free Trade Agreement, and most recently the UK-Vietnam Free Trade Agreement, have shown Vietnam’s efforts to improve investment policy, raising expectations of imminent new investments from Europe, along with a shift in investment flows and production bases of many multinational enterprises located in China.
Mergers and acquisitions (M&As) are considered an effective tool to help foreign investors access and invest in the Vietnamese market at a cheaper cost and take advantage of the available advantages to avoid difficulties when adapting to new business culture and environment.
The government has recently improved the legal framework, with the Ministry of Planning and Investment (MPI) also taking decisive actions to amend and introduce very specific policies. For example, the past concept of “conditional business lines” for foreign investors was a very general concept, but now, the ministry offers a list of such lines that is much smaller than before, facilitating to welcome foreign investors.
Although the investment environment has improved, many foreign investors seem to be hesitant to invest in Vietnam. What could stand in their way?
Some investment sectors only accept domestic investors, and there is a list of sectors restricted for foreign investments. Although the amended Law on Enterprises removed some sectors from this list, there are still some with limitations in finance and banking. Units performing M&As in this field are required to operate in the finance and banking industry, which forces many investors to acquire banks, which does not come without certain difficulties.
In addition, some unclear provisions of the Law on Competition have become a barrier to implementing M&A deals in Vietnam. In particular, the Vietnam Competition Authority (VCA) under the Ministry of Industry and Trade must be notified of a transaction if the combined market share in the relevant market falls between 30-50 per cent. Transactions that result in a combined market share of more than 50 per cent will be prohibited, except in certain cases.
However, the definition of what a relevant market is remains unclarified. Although a relevant market is defined in the Law on Competition with two conditions, in practice, it is difficult to determine these, while decisions of the authorities are still very subjective, causing investors to bear many potential risks in M&A deals.
When the amended laws on investment and enterprises took effect in January, what benefits came with them and would these be enough to overcome the above barriers?
The provisions of the amended Law on Enterprises are now relatively open. I think the main problem of these new provisions will be the enforcement aspect. The issues of M&A encouragement, attraction of foreign investors to Vietnam, the elimination of conditional business lines, and institutional and policy clarification are very specific, but some issues will arise during their enforcement. For example, the licensing of a business registration takes only five to seven days, but many foreign investors share that this process usually prolongs to several months.
On the other hand, the requirements for documents and procedures in the dossier are too cumbersome compared to other countries in the region, such as Singapore, where one only needs to submit a copy of the dossier via email. Vietnam requires notarisation, consular legalisation, notarisation of translated documents, which all takes about a month to complete. Such problems that arise in practice have not much to do with the law, but will still make investing in Vietnam difficult and cumbersome.
What sectors will attract foreign investors in the coming time?
The retail will probably retain its potential, and edutech and fintech will also continue to attract the attention of foreign investors as the pandemic has caused sudden growth in non-cash and online payments, as well as new consumer habits.
Other hot sectors include pharmaceuticals, healthcare, and real estate. There are now many investors waiting for opportunities to buy back real estate projects with great potential despite facing financial difficulties.
What is your assessment of the current investment trends of Vietnamese enterprises?
We often forget that many Vietnamese investors are now looking for M&A projects abroad. Vietnamese investors tend to choose enterprises with European or American factories to inherit certificates of origin and certain incentives, based on provisions relating to bilateral agreements, especially regarding origin and taxation. In addition, a number of Vietnamese businesses have also franchised in the US, Australia, and South Korea, proving that this customer segment has the potential to expand.
What factors should Vietnamese businesses consider when investing abroad?
Firstly, they must consider the legal framework of the country in which they intend to invest in, as well as tax incentives, human resources, and local support policies. In addition, Vietnamese investors should also conduct legal appraisal of the project. If they conduct M&As, they must pay more attention to employee factors, existing non-contractual issues with employees, intellectual property assets (trademark, patent and copyright), credit debt, and tax issues behind the deal. If Vietnamese investors pay full attention to those factors, finding the right projects in a safe investment environment will be more likely. In particular, under COVID 19 investors should understand about the policies of immigration and visa of the countries where they are going to invest.
With the legal improvements as well as the emergence of new trends, what do you expect the investment environment in Vietnam to look like in the future?
According to statistics from market research firm Euromonitor International based in London, Vietnam can retain its position in the top 20 countries with the highest M&A index in 2021. Along with the successful development of a vaccine, travelling between countries may be easier in the next half year, and I expect investment flows to shift towards Vietnam through new establishments, share repurchases, and M&A activities.
In addition, I also expect the M&A playground to see more Vietnamese businesses. In the past, 90 per cent of all small and medium transactions (under $6-7 million) in Vietnam were carried out by Vietnamese enterprises, while larger projects have only been tackled by foreign firms. Hopefully, we will see bigger deals coming from Vietnamese enterprises this year, which would not only create great resonance but also show that the financial capacity of Vietnamese investors is not inferior to foreign ones.