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Vietnam Today

A better class of investment

Released at: 10:44, 09/01/2019

A better class of investment

Photos: Viet Tuan

Vietnam is certain to see better-quality foreign investment under the CPTPP.

by Hong Nhung

Commitments on investment and services among member countries in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) are among the most important factors in Vietnam attracting more FDI and foreign portfolio investment (FPI) in the years to come. While source countries will remain largely the same, there will be better-quality inflows of foreign capital after the agreement takes effect in Vietnam on January 14.

Influencing investment

Figures from the Ministry of Planning and Investment (MPI) reveal that, as at October 20, CPTPP members had more than $120 billion worth of FDI in Vietnam, accounting for 35.7 per cent of the country’s total. Two of the biggest moves this year are from investors in CPTPP members: the $4.14 billion smart city project of a joint venture between Japan’s Sumitomo Corp. and Vietnam’s BRG Group, and the Laguna project belonging to Singapore’s Banyan Tree, which increased its capital by $1.12 billion. Other projects of note include the $150 million Hanbaram Wind Power Plant and $80 million Ramatex Nam Dinh Textile and Apparel Factory from Singaporean investors, and the $80 million Ykk Ha Nam factory from Japan. Japan, Singapore, and Malaysia - all members - have been leading investment partners of Vietnam in the three decades since it first began attracting FDI.

The CPTPP gives priority to cross-border investment, meaning Vietnam will be in a more favorable position to attract FDI from other members, especially those that are yet to strike free trade agreements (FTAs) with the country, like Canada and Mexico, according to Mr. Pham Hong Hai, CEO of HSBC Vietnam. “Vietnamese businesses will also find it easier to invest in other CPTPP members,” he said. “The most important thing for Vietnam to act upon is adjusting its legal framework to align with the CPTPP’s terms.” 

Ms. Le Thai Ha, Senior Lecturer in Economics at RMIT University Vietnam, said that, theoretically speaking, the favorable business environment brought about by the CPTPP will attract more foreign-invested enterprises (FIEs) to Vietnam, helping the country bring in more FDI, especially from CPTPP member countries whose investments in Vietnam are relatively limited, such as Australia, Canada, and New Zealand. Vietnam has been Canada’s largest trading partner in ASEAN over recent years but FDI inflows from the country are substantially less than those from South Korea, Japan, and Singapore. The slowing global economy, however, makes predicting movements in FDI anything but certain. 

In addition to 90 per cent of trade barriers being removed under the deal, Mr. Fred Burke, Managing Partner at Baker & McKenzie Vietnam, said the CPTPP will also boost FDI in a number of other ways. Investor-state dispute settlements will create an environment of greater confidence in legal protections against expropriation, administrative or otherwise. The labor and environmental chapters, as adopted into Vietnamese law, will make Vietnam a more attractive place to source manufactured goods and services because they will be produced and supplied in accordance with international standards and be freer from any allegation of abuses.

Thanks to new provisions in the CPTPP, such as supporting an integrated Asia-Pacific marketplace, investment protection and guarantees, new opportunities in services, and the protection of intellectual property, foreign capital into Vietnam is certain to grow, according to Mr. Shin Dong Min, CEO of Shinhan Bank Vietnam. “This means that we will see great benefits from the FDI sector,” he said. “With greater opportunities for market access, service providers in member countries can provide cross-border services to other countries.” 

FIEs to benefit

An estimate from the Peterson Institute for International Economics (PIIE) last year revealed that, once fully ratified and implemented, the CPTPP could boost trade for members by 6 per cent and add 1 per cent to real incomes by 2030. It found that developing country members such as Vietnam, Peru and Malaysia stand to benefit the most in terms of accelerated growth, with exports expanding by more than 8.5 per cent compared to the baseline. A multi-national trade pact like the CPTPP will benefit Vietnam’s growth model, which is based on investment and exports, and will promote trade cooperation associated with investment.

Without the US, however, Vietnam’s benefits may be less than what would have come from the TPP, Mr. Burke noted, but the CPTPP will nonetheless be helpful for FIEs in numerous ways. Enterprises need regulatory coherence to plan and develop their businesses and the CPTPP has an entire chapter devoted to the subject. Reductions in duty rates and non-tariff barriers as well as the opening of ancillary service sectors will all help make Vietnam an even more competitive and robust part of several key global supply chains. These changes will create more opportunities for domestic enterprises too, he said, as they continue to attain the standards necessary to penetrate into global markets.

FDI from cptpp member countries

Source: Foreign Investment Agency, October 2018

Export manufacturing will, obviously, benefit the most, followed by service industries that directly or indirectly support manufacturing. “This is because the CPTPP will help accelerate the shift of certain global supply chains to Vietnam,” Mr. Burke said. “But in the end, service providers and investors in domestic enterprises should also reap rewards as reforms enhance competitiveness.” 

“The Vietnamese Government has expressed a cooperative attitude towards high-level trade and investment liberalization with the ratification of the CPTPP,” Mr. Hidemasa Kozawa, General Director of Sumitomo Corp. Vietnam, told VET. “The elimination of non-tariff barriers and the government’s commitment to transparency and a high-level of liberalization will definitely support FDI. The CPTPP, in our view, will benefit Vietnam, in particular stimulating its economic growth, attracting additional sources of FDI, including service industry FDI, and creating jobs.”

From a policy perspective, the pact will push domestic reforms and implementing the CPTPP will open the door to more transparency. “International banks like HSBC will benefit from Vietnam’s commitments to open the market together with creating a transparent mechanism for accessing the market for foreign investors while ensuring the benefits of these investors,” Mr. Hai said.

As Ms. Ha from RMIT pointed out, Vietnam has already signed bilateral or multilateral trade agreements with many of the CPTPP members. For these countries, the CPTPP will unlikely generate considerable trade effects or export activities for Vietnamese firms and business activities for FIEs in Vietnam. However, it will provide a good platform for greater engagement between businesses in Vietnam and those in other CPTPP member countries with which Vietnam is yet to have an FTA, such as Canada, Mexico, and Peru.

Hurdles to surmount

Vietnam ranked 77th in the Global Competitiveness Report 2018, which is quite low compared to other regional countries and can be attributed to its high business transaction costs, low-quality human resources, and weak innovation ecosystem. “The major challenges for Vietnam in attracting more foreign investment is the low quality of its growth, the poor competitiveness of its economy, the low production capacity of its domestic enterprises, and the shortage of skilled workers,” Ms. Ha noted. In the long term, Vietnam’s cheap labor strategy could hamper the national economy and the quality of the workforce. Based on the Asian Productivity Organization (APO)’s Productivity Database 2017, labor productivity in Vietnam is among the lowest in Asia, surpassing only Bangladesh, Nepal, Cambodia, and Myanmar. “We therefore need to improve the quality of our workers, with a special focus on enhancing student employability, to allow for higher productivity in the next few years,” she said.

She also identified a worrying trend: not all foreign companies in Vietnam provide training to improve worker skills and instead simply attract workers from their rivals. In this context, Vietnam should prioritize high value-added FDI projects and enterprises that are committed to training to promote worker productivity.

The CPTPP’s Chapter 9 on cross-border investment is substantially aligned with Vietnam’s Laws on Investment and Enterprises. However, Mr. Hai said, the pact has higher requirements in terms of investment, such as transparency in the legal system and penalties for violations of intellectual property rights and worker rights and for bribery.

On the export side, the trading arrangement Vietnam is about to enter will make life complicated for supply chain planners, who will be dealing with complex and possibly inconsistent country of origin rules, according to Mr. Burke. On the import side, Vietnam will have to open its domestic market to competition from foreign players. To date, he said, this kind of competition has produced more competitive industries and faster domestic development, but it won’t be easy for everyone to keep up and some industries that have been overly protected may face serious difficulties if they don’t prepare in time.

As a result, “in order to best leverage the CPTPP in further enhancing FDI into Vietnam, Vietnam needs to select the most suitable projects and have better policies to encourage connections between domestic businesses and foreign investors, especially SMEs,” Mr. Hai said. “By doing so, Vietnam can improve its position in the global value chain and build stronger domestic businesses to influence the local market and effectively compete internationally. Vietnamese companies themselves need to invest in technological innovation to compete with CPTPP members at home.”

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