Vietnam Key Economic Zones & Investment GuidelineUncover the opportunities and challenges

of investment in a rapidly growing market

Comprehensive Overview Study: Part 2 of 2

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Source: General Statistics Office of Vietnam, Investment and Construction

Accumulative Amount and Numbers of FDI by KEZs

Total registered investments and numbers of projects in the four KEZs. (By 31st of December 2018)

Figure 7

3 Investment in KEZs

Since China has moved towards more high-end manufacturing and become more expensive for basic manufacturing

and assembling, investors are shifting their sourcing locations to other low-cost countries, especially to South-East

Asia. In 2018, the US started trade tensions, aiming to improve the employment rate in the US and protect the US’s

economy. As of mid-October 2019, goods of 550 billion USD from China to the US have been affected by the US’s

exclusive tariffs, while imports of 185 billion USD from the US to China are under China’s retaliatory levies. As a result,

the trade war accelerates the companies’ relocation out of China to avoid its impact. Vietnam stands out among the

emerging replacement markets for investors. However, the rapid growth from a low economic base of Vietnam brings

both unique opportunities and challenges. This chapter will review the opportunities and the challenges of investing

in this country.

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Vietnam is the third-largest consumer market in South-East Asia behind Indonesia and the Philippines. Over the past

years, the country has become one of the fastest-growing economies globally. Offering low-costs and supportive

regulations, Vietnam has been labeled as an attractive destination for investments in multiple reports. During the

US-China trade war, companies that seek alternative suppliers and manufacturers to replace China will find Vietnam

as one of the most suitable locations, especially in the Northern KEZ as part of a “China plus one”-strategy.

3.1 Reasons to invest in Vietnam

Upon the government’s effort to create a more open business environment, along with the US-China trade war’s

spill-over impact, Vietnam saw a great growth in FDI in 2017, growing 127% from the 2016 figures, equivalent to a

value of 35.88 billion USD, and maintained at 35.46 billion USD in 2018.

Accumulated to the 31st December 2018, Vietnam has registered a total of 27,454 FDI projects, equivalent to 340

849.9 million USD. The KEZs contribute 78.5% of the total investments in Vietnam, with the Southern KEZ being the

biggest contributor of 45%, the North follows by 26.7%. The Central and Mekong Delta accounting for the least

investments, accounting for only 5.1% and 1.7%, respectively.

Foreign Direct Investments

Number of projects Registered Investment (million USD) Percentage of total FDI in Vietnam

00 3,000 6,000 9,000 12,000 15,000 18,000

00 3,0000 6,0000 9,0000 12,0000 15,0000 18,0000

1.7%

5.1%

45.0%

26.7%

1,072

17,821

8,444

91,062

5,696

15,295

153,271

Source: The World Bank (IBRD-IDA), Doing Business – Measuring Business Regulations

Ease of Doing Business in Vietnam

Global ranking of Doing Business of Vietnam from 2012 - 2018

Figure 8

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Located in the middle of ASEAN and closest proximity to China, Vietnam is a strategic destination for investment.

The Northern Key Economic Zone is best positioned as “China plus one” manufacturing due to its proximity to the

Chinese border.

Further, Vietnam is connected to the world through shipping routes from the main harbors in the Northern KEZ (Hai

Phong, Quang Ninh), Southern KEZs (Vung Tau, Sai Gon), Central KEZ (Quy Nhon, Da Nang, Chan May, Dung Quat)

which gives easy access to the world’s major routes.

Location

Vietnam ranked 69th in 2018 among 190 assessed economies in terms of ease of doing business with, improving

from the 82nd position in 2016 and the 91st in 2015. It is the result of numerous amendments to the regulations of the

business environment in Vietnam, making the investments more transparent as well.

Since 2017, Vietnam has implemented several major changes, such as simplifying pre-registration and registration

formalities, introducing online procedures by publishing the notice of incorporation online, simplifying tax

compliance processes for business license tax and value-added tax, reducing employer’s contribution to the labor

fund from 1% to 0.5%, and making decisions rendered in commercial cases publicly available.

Besides the improvements in business registrations, taxes, and enforcing contracts; obtaining construction permits

and electricity access have also improved in the recent years. It takes 166 days on average to acquire a construction

permit and costs about 0.7% of the warehouse value. Getting electricity to operate in Vietnam requires a 4-step

process and takes about 31 days on average to complete. For investors, the future prospects of ease of doing

business in Vietnam looks very promising.

Ease of Doing Business

120

100

80

60

40

20

0

2012

98

2013

99

2014

93

2015

91

2016

82

2017

68

2018

69

Source: Worldometers, Countries in the World by Populations (2019)

Population by Country

Records of populations in some countries in 2018 (Thousand People)

Figure 9

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Since the Economic Reform in 1986, Vietnam has opened up its economy to the world, and step by step established

relations of commonwealth countries, including economic, political and cultural relations.

Becoming a member of and signing free trade agreements are the signs of a more liberal economy of Vietnam. Some

of the key milestones are:

Vietnam have also started negotiations for other free trade agreements with European Free Trade Association

(EFTA), Israel, and the Regional Comprehensive Economic Partnership as a member of the ASEAN. The country has

shown its ambition to promote economic growth and continue trading with other countries and regions.

Trade Agreements

Vietnam’s population ranks 15 globally with 96.5 million people. The population is larger than many European

countries and similar and comparable to the Philippines (figure 9). Looking forward, the Vietnam population is

projected to trend around 97.0 Million in 2020.

After the Economic Reform in 1989, the Gross National Income (GNI) per capita of Vietnam grew from 210 USD per

year, to 2,400 USD in 2018, making an average increase of 8.46% per annum. Exhibiting Vietnams transformation

from one of the poorest economies in the world to a lower-middle-income economy. The growth partly due to the

growing consumer market, driven by the middle and affluent class in the country. A class that has been increasing

rapidly and expects to reach 44 million by 2020, according to a recent report from PwC on The Future of ASEAN. The

growing population and domestic consumer market, especially by the middle class, are factors that attracts

investors to this market.

Growing Population

The membership in ASEAN, ASEAN Free Trade Agreement (AFTA) in 1995;

The US – Vietnam Bilateral Trade Agreement (BTA) in 2001;

Member of the World Trade Organization (WTO) in 2007;

Vietnam – Japan Economic Partnership Agreement (VJEPA) in 2009;

Vietnam – Korea Free Trade Agreement (VKFTA) in 2015;

Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) in 2018;

EU – Vietnam Free Trade Agreement (EVFTA) in 2019.

150,000

120,000

90,000

60,000

30,000

0

Japan

126,860

The Phili

ppines

108,117

Vietn

am

96,46283,517

Germany

83,430

Turkey

69,626

Thailand

67,530

United K

ingdom

65,130

France

60,550

Italy

46,737

Italy

Source: The World Bank, Cost of business start-up procedures (% of GNI per capita) - Vietnam, East Asia & Pacific

Cost of Business Start-up Procedures (% of GNI per capita)

Comparison of cost of business start-up procedures in Vietnam and East Asia & Pacific

Figure 10

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Over the past years, the Vietnamese government has shown its commitment of creating a more welcoming

environment for foreign investors. Different incentives are offered to foreign investors in specific geographical areas

or sectors of special interest such as renewable energy, high-tech, and healthcare. Some of the tax benefits include:

Openness to Foreign Investment

Unlike many other countries, Vietnam does not require a minimum capital for companies to set-up a business. And

with the improved business registration process, the entry costs in Vietnam have become relatively low. According

to the World Bank’s data, Vietnam’s cost of setting up a business, which is the cost to register a business normalized

by presenting it as a percentage of gross national income (GNI) per capita, was about 5.9% in 2018. The figure has

been reduced by 37.8 percentage points since 2003 and is much lower than the average of East Asia & Pacific, which

was 16.1% in 2018.

Relatively Low Entry Cost

Although the minimum wage in Vietnam has increased over the years, the labor costs are still lower than similar

economies in Asia, and compared to China, the manufacturing hub of the world, Vietnam’s minimum wage is only

about half.

Labor Costs

Lower corporate income tax rate or exemption from the tax;

Exemption from import duty, for example on raw materials;

Reduction of or exemption from land rental or land use tax.

Vietnam East Asia & Pacific

60%

50%

40%

30%

20%

10%

0%

2003

51.2%

31.9%30.6%

27.6%

24.3%

20.0%

16.8%

13.3%12.1%

10.7%8.8%

7.7%5.3% 4.9% 4.6%

6.5% 5.9%

55.4%

45.3%

39.8%

33.6%

30.8%

25.9% 25.9%

23.7%

26.7% 26.0%24.5%

20.2%

17.6% 17.3% 16.1%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: Trading Economics, Minimum Wages in Countries

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Minimum Wages throughout Asia

Comparison of minimum wages of Vietnam and other countries in Asia in 2018 and 2019

Figure 11

Besides the opportunities presented earlier in this report, there are some barriers for investors to consider as well.

Although the FDI and economic growth rate have maintained at a high level of about 6% per annum, some aspects of

the business environment have not been developed as well.

3.2 Top challenges of investment in Vietnam

Vietnam ranked 69th among 190 countries in the report of Ease of Doing Business in 2018 by the World Bank. Among

the assessed criteria, Vietnam ranked 104th in starting a business. The neighbor country and the manufacturing hub

of the world, China, ranked 28th. In Vietnam, there are 8 procedures to register a business, taking 17 days on average

and costing about 5.9% of the income per capita. Companies should have an address and a signed lease ready

before the registration of the company. In contrast, starting a business in China only requires 4 procedures, taking 8.6

days in average and costs 0.4% of income per capita. In addition to that there are also some limitations and

prohibitions in Vietnam on foreign investments such as certain types of drugs, chemicals, minerals, biological

businesses, and firecrackers.

Starting a Company

All paperwork in Vietnam must be in Vietnamese to be legal, and documents in foreign languages should have

notarized Vietnamese translations. Notarization and certification can be issued by the courts in the home country,

then authenticated by a Vietnamese embassy. Licenses will be issued in Vietnamese.

Language Barriers

Vietnam Dong (VND) is the currency of Vietnam, whose exchange rate is closely tied to the USD, to support a stable exchange rate with strong trading partners. The foreign exchange regulations have been liberalized over the years to facilitate the remittance of funds in to Vietnam. However, the regulations of outflows are still quite restricted, making transferring money abroad challenging. The economy is cash-dependent, with more than 90% of the domestic payments done with cash. Cashless systems in Vietnam often lack stability and reliability. Different from most countries, cash-on-delivery for e-commerce sales is the most common payment method in Vietnam. The level of

trust in the local banks are quite low due to their corruption and bureaucracy, and many Vietnamese businesses

choose to use wire transfers to send funds. Looking forward, the Vietnamese government aims to make Vietnam

cashless by 2020 by improving the systems, increasing fees on cash transactions, and reducing fees on electronic

payments. In reality, the plan seeks to reduce the number of cash transactions to less than 10% of total market

transactions in all supermarkets, shopping malls and distributors by 2020; 70% of transactions related to utility

services and telecoms; and 50% of total urban households.

Payments and Banking Systems

2018 2019

62.6

94.5

171.8 180.0 182.0

238.5262.3 254.6

278.6

338.3 346.7

170.0

350

300

250

200

150

100

50

0Bangladesh Vietnam Cambodia Malaysia Indonesia China

Corruption Perceptions Index (CPI), Transparency International

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In 2017, the Vietnamese government implemented an online tax declaration system, simplifying the procedures for

calculating VAT and CIT. Although there have been some undertaken reforms to improve the complicated tax system,

Vietnam is still ranked 131 among 190 countries evaluated on ease of paying taxes. There are about 10 corporate tax

payments to submit in a year, including VAT and social insurance, taking 498 hours on average to complete. The total

tax amount takes roughly 37.8% of the profit.

Taxes

Even though the country becomes more globalized and open to foreign investors, bureaucracy and lack of

transparency in regulations are still common in Vietnam. The current regulatory regimes and overlapping

jurisdictions of some government ministries can result in the inconsistency in the government’s policies. In addition,

poorly disclosed corporate standards and lack of financial transparency also add burdens to businesses. In the

report of the Provincial Competitiveness Index by VCCI and USAID in 2018, the transparency index of Vietnam scored

6.2 on a scale of 1-10. In the report, only 67% of the surveyed companies report that they do receive their requested

information from the officials, whereas 68% agree that personal relationships are necessary to obtain the

documents.

Bureaucracy and Transparency

Even though Vietnam has regulations in place to protect intellectual property rights, the enforcement is notoriously

weak, and IP abuse remains a problem in Vietnam. According to a recent report by the Software Alliance (BSA), the

rate of unlicensed software use in Vietnam is 74%, which puts the country on the watch list of BSA. The government

have made necessary procedures to address the problem and introduced new legislation to protect IP rights,

including copyright and industrial property. Foreign companies that want to register their intellectual ownership

should file an application with the National Office of Industrial Property of Vietnam (NOIP) via an authorized agent.

Even with the authority of the NOIP, foreign businesses with high IP content to protect are recommended to do

thorough check-ups on the IP before exporting to or setting up in Vietnam.

Intellectual Property

Over the past few years, the Vietnamese government has made numerous attempts to reduce the corruption, by

having introduced anti-corruption laws, developed anti-corruption strategies, and strengthened its institutions.

Despite these improvements, the corruption is still a widespread problem throughout the country and becomes one

of the top barriers of doing business here. According to Transparency International’s Corruption Perceptions Index

(CPI), Vietnam scored 33 of 100 in 2018, decreased by 2 points compared to 2017, and ranked the 117th in

transparency among 180 evaluated countries. In the same report, Vietnam appears to score below the average of

Asia Pacific (43/100) and lag behind other countries in Asia such as Thailand, the Philippines, Indonesia, China, and

Malaysia in terms of control of corruption and most governance indicators. Regardless of the government’s effort to

stop or minimize the corruption, lack of implementation and enforcement is the top reason for the slow

improvements in Vietnam. In addition, the political and civil freedoms are limited within Vietnam, making it difficult

to hold the government accountable for its actions and decisions.

Corruption

Corruption Perceptions Index (CPI) in Asia Pacific

Scores and rankings of Vietnam and other countries in Asia Pacific by corruption perceptions index (CPI) in 2018

Figure 12

100

75

50

25

0

Cambodia

20

(161st/180)

(132nd/180)(117th/180) (99th/180) (99th/180)

(89th/180) (87th/180)(61st/180)

(3rd/180)

Mya

nmar

29

Vietn

am

33 36 36

Thailand

Philippin

es

38 39

Indonesi

a

China

47

Mala

ysia

85

Singapore

9

Like many other cultures, the business culture in Vietnam centers around the social connection and relationships

among business partners. It is important to get referrals and recommendations to build trust before connecting with

new people. However, an important aspect of Vietnamese business culture is “keeping face”, which refers to

maintaining the image of cohesion, respect and dignity among your peers. Seniority is also an important aspect,

especially when dealing with the government or any state-owned organization. When meeting people, greetings

should be given to everyone in a group, starting with the oldest person to the youngest. The same applies for gifting,

preparing better gifts for senior partners, showing more respect. Most decisions in Vietnamese businesses are made

by committees, with no individual having absolute power, making the group connection, rather than an individual

connection more important.

Payments and Banking Systems

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4 Conclusion

Over the past decades, China has developed into the most important sourcing hub and one of the biggest consumer

markets in the global supply chain. Many companies have established their main supply bases in China to benefit

from low production costs, experienced manufacturers, great logistics and delivery, an abundant skilled workforce,

and a vast local market.

However, the operating costs in China have increased over the past years due to the increasing labor costs and

high-quality manufacturing, making path for other emerging markets. As one of these markets, Vietnam stands out

to be one of the most favored locations for investors, offering great opportunities. However, Vietnam has its own

challenges and requires investors to conduct diligent preparation before entering the market.

Since the Economic Reforms in 1986, the Vietnamese government have implemented some reforms, making it more

open to other economies. For example, introducing the KEZs, which have contributed to the economic growth of the

country, shaping Vietnam’s overall development. The four KEZs throughout the country, are aiming to utilize the

resources of each geographic region. These zones can also be used by investors to benchmark different locations

and get an overview of the Vietnamese economy.

Due to the geographical locations, natural resources, governance, and population, the Key Economic Zones’ business

environments have shown different strengths and weaknesses in attracting investors, making the Southern KEZ

Vietnam’s preeminent investment hub, due to substantial industrial zones for diverse industries. The Northern KEZ is

best positioned as “China plus one”-strategy destination, making it a suitable alternative for low-cost operations while

maintaining the facilities close to China. The Central KEZ is a captivating market for automotive, technology, energy,

construction, and retail, while long rivers and coastlines, and enriched alluvial soil, makes the Mekong Delta KEZ ideal

for agriculture and aquaculture.

The Vietnamese government have also made amendments to the regulations and added more incentives to create a

welcoming business environment for foreign investors. In 2017, Vietnam saw a sharp growth in FDI of 127%,

equivalent to a value of 35.88 billion USD.

There are many reasons for this investment influx, primarily driven by the US-China trade war and its geographical

proximity to China. It gains easy access to other key markets in Asia through the shipping routes connected to the

main harbors in the world. For companies that are relocating their sources from China, Vietnam appears to be one of

the best options. Many Chinese suppliers also use Vietnam to establish their facilities and operations, aiming to

avoid the US’s tariffs on products imported from China.

The ease of doing business in Vietnam is also a factor that have been improved in recent years. Most improvements

have been made in regulations of business registrations, tax compliance procedures, obtaining construction permits,

and getting access to electricity. Foreign investors can also receive tax incentives and tax exemptions in certain

geographic locations and industries, such as renewable energy, healthcare, and high-tech. Even though it’s been

improved there are still some barriers and challenges of doing business in Vietnam. According to the rankings of

Ease of Doing Business in 2018, Vietnam ranked 69th of 180 countries.

However, changes in governance and culture of Vietnam are not yet compatible with the fast growth from a low

economic base. The country has a unique set of challenges for which companies should be prepared for when

starting a business here. Business registrations and tax compliances takes a long time to complete and require

multiple procedures. Legal documents in Vietnam must be in Vietnamese, and papers in foreign languages should be

translated to Vietnamese and notarized. It can all be done through courts in the home country or an embassy. The

current regulatory regimes and overlapping jurisdictions of some government ministries can result in the

inconsistency in the government’s policies. In addition, poorly disclosed corporate standards and lack of financial

transparency also add burdens to businesses. Although there are regulations of intellectual property in Vietnam, the

enforcement is notoriously weak. Companies are recommended to conduct thorough checks before setting up or

exporting high IP content products to Vietnam. With the lack of ATMs and stable cashless systems, payments in

Vietnam are primarily made with cash, even the e-commerce sales. Regulations for foreign transactions are relatively

relaxed for inflows but very challenging for transferring money out of from Vietnam. While becoming more globalized

and open to the world, Vietnam has made little improvement in controlling corruption, which widely affects various

industries and sectors and hinders socio-economic development. Limited civil and political rights, as well as

restricted media and civil organizations, have little influence to keep the government accountable for its actions.

In conclusion, Vietnam is a promising destination for investors in Asia with a welcoming environment for

incorporation and a fast-growing domestic market. However, there are challenges for companies to consider and

prepare before setting up a business here. As of today, Vietnam focuses its resources and investments primarily in

the four Key Economic Zones, including the North, Central, South, and Mekong Delta. For investors who seek to locate

their niched industries, the Southern KEZ is the best option. The KEZ consists of 8 provinces and appears to be the

biggest investment hub of Vietnam with diverse sectors and outstanding business support services. The Northern

KEZ, with seven provinces, is best fitted for companies that source electronics, manufacturing, and heavy-industry

products. The Central KEZ with five provinces started with a low economic base but has developed to be a

destination of good living quality and a manufacturing hub for food processing and non-metallic mineral products.

Different from the other KEZs, Mekong Delta bases its strength at agricultural and aquaculture production, thanks to

its natural advantages. By comparing and evaluating the strengths and weaknesses of the KEZs, as well as the

opportunities and challenges of doing business in Vietnam, this research has presented different aspects of the

Vietnamese investment landscape from the KEZs’ perspectives, including economic profiles and governance of the

KEZs, and proposed some recommendations for companies to select suitable KEZs for operations in Vietnam.

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This concludes part 2 of Asia Perspective’s Vietnam KEZ and investment overview. For more insight into Vietnam investment opportunities and challenges, see part 1 of this study.