For decades, Vietnam’s GDP has been growing by an average of 6% per year, positioning the country among the fastest developing economies in the world. This allowed Vietnam to leave its prior status as one of the poorest countries on Earth and move into the desired stage of middle-income country. What is the secret behind the success story of Vietnam? This article offers the reader an overview of the key drivers that contributed to Vietnam’s incredible achievements.
The fact that a high percentage of the population lives in the countryside (68% VS 44% in China) keeps production and labor costs low. Moreover, from a geographical perspective, Vietnam surely benefits from being the closest neighboring country of China, the world’s largest manufacturer. Indeed, as wages of low-skill employees are rising in China, Vietnam becomes the natural substitute country for companies seeking lower-cost production sites while simultaneously securing proximity to China’s advanced logistical infrastructure.
The relatively young population of Vietnam is also contributing to maintain this positive momentum. In contrast to China, where the median age is 36 years, Vietnam shows an impressive average age of 31 years.
The government’s initiative to further develop the country as an attractive investment hub also turned out to be successful, with foreign companies feeling more confident to set up operations in Vietnam. Reforms have resulted in partial privatization of state-owned enterprises, liberalization of the trade regime, and increased recognition of private property rights.
In essence, a gradual integration into the global trade and investment scene allowed Vietnam to transform itself over the years into a more market-oriented economy.
That said, the bureaucratic nature of Vietnam’s economy, constantly changing laws, corruption at different levels of the government, and an immature financial sector might be sources of initial hardship for entrepreneurs and corporations. These factors surely make a trusted local business partner a valuable asset to count on when entering the Vietnamese market.
Import & Export
Since Vietnam became a member of the World Trade Organization (WTO) in 2007, the country has benefited from fewer restrictions and lower tariffs in export markets. In 2016, exports rose by 8.6% to USD 176 billion. The export increase was mainly caused by the rise of demand for mobile phone units and parts as well as other electronics, computers and IT components.
Vietnam’s impressive growth of exports is largely driven by Foreign Direct Investments. Indeed, the FDI sector accounted for 71% of Vietnam’s total exports and nearly 100% of the exported phones, electronics and components. Moreover, a considerable part of the imported capital goods is composed of machinery, equipment, parts, and electronics that are assembled, then later on exported to other countries.
Improved and facilitated access to cheaper raw materials and intermediate inputs, due to a drop of import tariffs as a result of their WTO membership, allowed Vietnamese manufacturers to open their doors to the rest of the world.
In February 2016, Vietnam, together with 11 other nations sharing borders with the Pacific Ocean, signed the Trans-Pacific Partnership (TPP), a treaty aimed at promoting economic growth, enhancing living standards, sustaining the creation and retention of jobs, enhancing labor protection, and promoting transparency within member nations. The future of the partnership is still uncertain as of January 2017. American President Donald Trump signed a presidential memorandum to withdraw the United States from the TPP. However, analysts maintain that Vietnam will surely be one of the major beneficiaries of TPP implementation.
Incorporation of an Invested Company in Vietnam
According to the local Investment Law and Enterprise Law, there are 3 key steps to undertake to establish a foreign invested company in Vietnam.
Step 1: Application for an Investment Registration Certificate (“IRC”)
As a first step to successfully register a foreign invested company in Vietnam, the applicant necessarily has to obtain an IRC. To receive this certificate, the foreign investor has to submit to the licensing authority an application dossier explaining the proposed investment project/business activities to be carried out in Vietnam.
The approval for the IRC is discretionary, and statutorily provided after 15 days from the date of submission of the application. However, in practice, the licensing process may take longer. In particular, should the authorities have concerns regarding the proposed business activity, a few rounds of information exchange might be necessary.
Step 2: Request for an Enterprise Registration Certificate (“ERC”)
Upon the issuance of the IRC, the foreign investor will be requested to apply for an ERC. It normally takes around 5 days to get this ERC.
Step 3: Request for a Trading Licence (“TL”) in case of incorporating a trading company
Once the foreign investor has acquired both IRC and ERC, the applicant has to apply for a TL, which is issued by the Provincial People’s Committee (“PPC”). Trading activities have to be intended as import, export, wholesale, retail, agency activity. Accordingly, for import and export, the estimated time for obtaining the license is 30 days, while for wholesale, retail and agency the estimated time is 45-60 days, as the PPC needs to obtain the approval of the Ministry of Trading and Industry prior to issuing the license.
Establishment of a representative office in Vietnam
There is also another alternative to enter the Vietnamese market, namely establishing a local representative office (“RO”).
An RO, by definition, cannot engage in profit-making activities, sign or enter into any contracts, or be engaged in trading activities. A company may establish an RO in a foreign country to conduct marketing and/or non-transactional operations. For a Vietnamese RO, the chief of the office is not required to reside in Vietnam.
The procedure for the establishment of this form of operation is very simple. It may take 20 days to get the Certificate of Operation of Representative Office, which is the only license needed by foreign investors who want to settle a representative office in Vietnam.