Chapter 4.

Environment for
International Investment

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Required materials
• UNCTAD, World Investment Report, 1998 pp.89-130, 2010
• Phung Xuan Nha, 2001, International Investment, (Đầu tư quốc tế).
Ch.5
• Kavaljit Singh, 2007, Why international investment matters?
• Vietnam’s Investment Law, 2005.

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Goal and Content
1. Goal: To identify factors determining International investment
2. Objective: to be able to:
• grasp the factors influencing International investment movement
• analyze advantages and disadvantages of host/home countries in
attracting/encouraging FDI inflow/outflow
• define the attractions and limitations of Vietnam’s FDI environment
3. Content:
• Home-country Environment (Push factors)
• Host-country Environment (Pull factors)
• International Environment

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Environment for International Investment

Capital
mobility Host country’s
investment
environment
(Pull factors)
Home country’s
business
environment Home
(Push factors) Remittance

International
environment

Source: Phù ng Xuâ n Nhạ, 2001, International Investment, p.. 72

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1. Host-country’s Investment Environment
(Pull factors)
Political Stability

Social and Cultural Factors Policy and Legislation

Level of Economic- Geographical

Social Development Location and Natural
Conditions

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Political stability
The critical condition assures
• Investors’ ownership of their assets
• Government’s investment orientation and FDI incentive
maintaining.
The indirect condition assures:
• Economic and social stability in the host country
• Foreign affairs policy

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Policy and legislation
Foreign investors are concerned with
• Sufficient of laws, policies governing business and living in the host
country
• Transparency, systematics, consistency and efficiently implement of
policy and laws
• In accordance with international rules
• Equality treatment between local and foreign investors
Other concern:
• Corruption
• Administrative procedure

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Geographical location and natural
conditions
 Geographical location:
 Indigenous market
 Closed to natural resources
 Connectivity to international market
 Near airport and seaport
 Natural condition:
 Climate
 Natural resource
 Population
 Landscape

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Macroeconomic development
 Level of macroeconomic management
 Efficiency in manipulating the economy
 Possibility to the domestic market entry
 Administrative procedure
 Quality and quantity of services
 Competitiveness of local companies

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Social and cultural factors
Ways of thinking
Languages
Religion, social ethic
Custom, taste
Education

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Case study:
Why Vietnam is an attractive destination for
foreign investors ?

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WHY VIETNAM???
Ranking of Vietnam’s Business Environment in 2020

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Ranking of
Vietnam’s
Business
Environment
in 2020

16
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Ranking of
Vietnam’s
Business
Environment
in 2020
(cont.)

17
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Ranking of
Vietnam’s
Business
Environment
in 2020
(cont.)

18
Investment policies and regulators
Since the inauguration of Doi Moi in 1986, Vietnam has been pro-active in its pursuit of
regional and global economic integration attracting FDI is among the crucial
measures.
• The promulgation of the Foreign Investment Law in 1987 and four revisions in 1990,
1992, 1996, and 2000  The improvements were comprehensive, ranging from
registration procedures and the decentralization of investment licensing to land
access, trade policy, foreign exchange control, and tax policies
• increase the rights of foreign investors,
• to make the investment environment more favorable, and narrow the policy gap
between foreign and domestic investors.

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Investment policies and regulators (cont.)
• The Investment Law of 2005: legal framework for enterprises of
all ownership types
• established a more level investment environment for all investors:
simplifying the registration procedures for foreign investment.
• abolishes the requirements for FDI enterprises to procure inputs from
domestic sources, to fulfill certain export ratio, and to ensure certain
localization rate
• More equal treatment: FDI enterprises were adjusted by almost the same
regulations on business registration, operations, both provincial and
municipal government authorities, selection of unconditional investment
areas, and autonomy in business decisions.

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Investment policies and regulators (cont.)
• Vietnam has attempted to facilitate trade expansion and attract FDI by
laying the legal foundations for activities
• Entry into overseas markets and engagement in foreign trade, previously
restricted to state-owned enterprises (SOEs), has been gradually relaxed for the
private sector since 1989.
• In 1998, all enterprises in Vietnam – public and private – were allowed to trade
most goods registered in business licenses without export/import licenses.
• Since 2001, this right has become available for all legal entities (including
enterprises with foreign capital).
• Vietnam progressively has phased out quantitative restrictions on imports, while
relaxing foreign exchange controls

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 FTAs
RCEP: Regional Comprehensive Economic
Partnership

CPTPP: Comprehensive and Progressive

Agreement for Trans-Pacific Partnership

VEUFTA: Vietnam-Eurasian Economic Union

Free Trade Agreement

VJEPA: Vietnam-Japan Economic Partnership

Agreement

ASEAN: ASEAN Trade in Goods Agreement

INVESTMENT COST COMPARISON
INVESTMENT COST COMPARISON
Standard Salary (USD)

Source: JETRO
CIT & VAT COMPARISON
Corporate Income Tax Value Added Tax
(CIT) (VAT)
Cambodia 20% 10%
Indonesia 22% 10%
Laos 24% 10%
Malaysia 24% Sales tax 10%
Myanmar 25%
Philippines 30% 12%
Singapore 17% 7%
Thailand 20% 7%
Vietnam 20% 10%
 INDUSTRIAL PARKS, ECONOMIC ZONES

• 324 Industrial parks (220

existing Industrial Parks; 43
FDI Industrial Parks)
* VSIP has 8 IZ in Vietnam,
attracted 7 bil. USD of FDI
from 22 nations
• 17 Coastal Economic zones
• 03 High Tech Park (06 High
Tech Parks by 2030)
• 03 Special Administrative
Economic zones (Van Don,
Cam Ranh, Phu Quoc)
Comparison of
Vietnam’s
Sample IIAs
Vietnam’s International Investment
Framework
Inward FDI in Vietnam
FDI Stock and flow (US dollars at current prices in millions)
18000 200000

16000 180000

160000
14000

140000
12000

120000
10000
100000
8000
80000

6000
60000

4000
40000

2000 20000

0 0
19861987198819891990199119921993199419951996199719981999200020012002200320042005200620072008200920102011201220132014201520162017201820192020

Stock Flow
FDI structure
The World Bank Group’s report on a new approach in attracting FDI based on Vietnam’s
strategic assets, rather than simply its resources, market-growth and low costs
Vietnam needs a new approach
to attract investment based on its
Vietnam has done an skills, innovation, business and
excellent job in attracting natural environment
these investors, with low
Market- labour and energy costs and
generous incentives
seeking Strategic
asset-
These investors will come seeking
anyway, without the need for
promotion or incentives, Efficiency-
if the country has attractive
resources and a large
seeking
market

Natural
resource-
seeking
ORIENTATION OF FDI ATTRACTION
• Projects with high added value, using modern technology,
environmentally friendly
• Large-scale projects with highly competitive products, adding to the
global value chain
• Industrial projects shifting from outsourcing to production
• Infrastructure development projects (PPP), training of high-quality
human resource, R&D, modern services projects
• Projects of Information technology and biotechnology supporting
agriculture and modern agriculture
ORIENTATION OF FDI ATTRACTION
To avoid the “middle income trap” and achieve high-income status, it is clear
that Vietnam needs a next-generation FDI strategy.
The XI Party Congress adopted the Socio-Economic Development Strategy
2011-2020, with a view to reforming the country’s growth model and ensuring
sustainable and green economic development and achievement of target
economic growth rates.
The new direction and priorities for FDI are:
• Promoting FDI in accordance with the master plan of industries, focusing on high-tech,
environment-friendly and less energy-consuming sectors.
• Developing FDI in a sustainable manner with an emphasis on quality and socio-economic
impact, ensuring national defense and security, strengthening linkages to domestic
enterprises
ORIENTATION OF FDI ATTRACTION
• Specifically, this implies that Vietnam needs to focus on attracting FDI in
businesses which:
• Generate higher wages (through creating higher-value output per worker)
• Lead to increased local skills development, technology transfer and R&D
• Stimulate more efficient use of resources (not just energy, but also land, water,
raw materials, etc.)
• Create opportunities for local entrepreneurs and investors to work with
international companies as part of global value chains, and do not
displace local investors and SMEs
• Increase the competitiveness of all businesses in Vietnam (e.g., by
improving supply chains, logistics, etc.)
2. Home-country’s Business Environment
(Push factors)
Changes in Macroeconomic Policy

Overseas investment Capability of Economy, science

promoting policies. & technology level, and social
welfare policy.

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Changes in Macro-economic policy
 Fiscal and Monetary policy:
 Interest rate, Foreign exchange
 Tax, Government expenditure
 Ex-Im policies:
 Export/import quota
 Tariff Adjustment
 Foreign Currency Management:
 Loosen/tighten capital market
 Required reserve ratio

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Economic, Science and Technology
Capability, and Social Welfare Policy.
 High domestic savings  Capital surplus  overseas investment
Technology and science development  overseas investment
Welfare policy  high tax  overseas investment
• Compensation for job-lost workers to be re-trained for new jobs.

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Overseas investment promoting policies
• Liberalizing outflows. Home countries can remove obstacles to FDI outflows
• Providing information. They can assist developing countries in collecting and
disseminating information related to investment opportunities through
cooperation with investment promotion agencies (IPAs), the provision of
technical assistance, the organization of investment missions and seminars
and the like.
• Encouraging technology transfers. Home countries can promote technology
transfer by providing assistance to strengthen a host country’s technological
base, its capacity to act as a host to FDI in technology-intensive industries and
its capacity in reaching specific technology-intensive goals.

Source: UNCTAD, World Investment Report, 2003

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Overseas investment promoting policies
(Home country measures – HCM)
• Providing incentives to outward investors. Various forms of financial and fiscal
incentives can be provided to outward investors or to support feasibility
studies and environmental assessments.
• Mitigating risk. Home countries can help to mitigate risk—say, by providing
investment insurance against losses arising from political or other non-
commercial risks that may not normally be covered through the private
insurance market.

Source: UNCTAD, World Investment Report, 2003

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HCM currently used by developed countries
• The Swiss Organization for Facilitating Investments facilitates
matchmaking between Swiss and foreign enterprises in
developing countries and economies in transition and supports
the transfer of know-how
• The Business Linkages Challenge Fund of the United Kingdom:
sharing technology on an ad hoc basis to entering long-term
contractual or business engagements

Source: UNCTAD, World Investment Report, 2003, p.157

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Drivers vs. Locational determinants of FDI
Although TNC strategies are also affected by firm- specific factors
such as physical assets, knowledge or senior management…, FDI
are affected by drivers and locational determinants.
• Drivers are factors that push companies to invest abroad.
• Locational determinants influence where they choose to invest

Source: UNCTAD, World Investment Report, 2010

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Case study: Drivers and determinants of
low-carbon foreign investment

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Drivers

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Locational determinants

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Locational determinants (cont.)

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Locational determinants (cont.)

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Locational determinants (cont.)

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3. International Environment
Actions among/between countries

Regional integration
Globalization

Rapid growth of TNCs

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Actions among/between countries
 Political dialogue:
 Avoid conflict and cold war
 Reduce war threat
 Increase economic cooperation:
 Increase Bilateral and multilateral agreements on trade and
investment
 Promote economic liberalization: reduce trade and investment barriers
 International integration
 Forming free trade and investment areas
 Mitigate investment risks

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Actions among/between
countries (cont.)

Source: UNCTAD, World Investment Report, 2003, p.89

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Regional integration
 Make use of economies of scale:
 Expand market size
 Reduce investment cost
 Exploit production specialization and cooperation:
 Raise specialization
 TNCs implement transfer pricing

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Rapid growth of TNCs
TNCs and int’l investment
TNCs and science and technology development

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Globalization
 Globalization and international production:
 Raise specialization and cooperation in global scale.
 Facilitate TNCs to exploit competitive advantage on global scale
 Distribute int’l production factors to reduce cost
 Globalization and investment liberalization:
 Cut barriers on cross-border trade and factor mobility
 Forming free investment zones
 Technology development
 Reduce cost
 Expand investment area
 Strengthen competitiveness

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Further Discussion
• Competitiveness in attracting FDI among developing countries?
• Roles of “static factors” and “dynamic factors” of developing
countries attracting FDI?
• Impacts of Global Economic Crisis on FDI?

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