Vietnam’s great changes in legal framework on investment have significantly increased the country’s attraction to foreign capital inflows. Minh Nguyen, partner at accounting and tax advisors Mazars in Vietnam, delves into the importance of regulatory sandboxes and mentorship programmes for motivating new economic models.
04 September, 2020
Foreign direct investment (FDI) has proved to be a key role in the development of Vietnam over the past few decades. But in the current global economy and trade situation, Vietnam needs to have a significant step up to attract FDI in a more effective way, especially in reform of its investment legal platform and environment.
The country has made significant steps over the years with gradual set-up of a legal framework of Civil Code, Law on Commercial, Law on Enterprises, and Law on Securities, as well as some bilateral trade agreements including one with the United States and all the changes that this entailed. It then followed up with another brave stand - accession to the World Trade Organization.
Thanks to these, the business climate has improved much, thus rapidly changing Vietnam’s attractiveness and Western interest in pouring money into Vietnam. In 1995, the total amount of FDI licensed was only $3.5 billion, thus that type of investment has come a long way in 25 years. Now, foreign-invested projects now contribute about 20 per cent of Vietnam’s GDP.
Foreign-invested enterprises (FIEs) now account for 68 per cent of all of Vietnam’s exports. Importantly, foreign-invested projects have created many good jobs helping to raise GDP. Last year saw related licensed ventures totalling more than $38 billion in Vietnam – a 10-year high, and a 7 per cent increase on the previous year. Now in the new development period, new economic models of transportation, lodging services, fintech, energy, and digital entertainment are expected to drive the sharing economy in Vietnam if regulatory sandboxes become more readily available.
Partner | Tax & Business Advisory Services, Mazars in Vietnam
Vice Chairman, European Chamber of Commerce in Vietnam
Sandbox scheme a necessity
The Vietnamese government has been fostering development of the startup community and innovation, specifically in building the National Innovation Centre which is led by the Ministry of Planning and Investment. There has also been approval of a pilot sandbox scheme – which would enable the isolated execution of software or programmes for independent evaluation or monitoring – in deployment of new technology in the sharing economy that was initiated by the Ministry of Information and Communications. Those initiatives will surely increase the confidence of overseas investors in Vietnamese startups. A specialised capital market for startups is also being placed under consideration and discussion, and is expected to increase the ability of fundraising for such schemes in Vietnam. However, studies and observations show that startups still struggle in approaching and meeting the demands of financiers.
The Vietnamese ecosystem in this field is still in the early stages. Startups themselves lack knowledge and experience in business modelling, international business development, research and development, and even simple compliance such as tax, accounting, and invoicing.
Therefore, involvement of business angels is important so they can share risks and experience in the field of early-stage startup investments. They can provide practical business knowledge to increase competitiveness via a mentorship programme.
International investors are expected to play some role in this process, in terms of both funding and expertise. Not only looking at investment funding, Vietnamese startups also need overseas experts to join them as angel investors and mentors. Those people are individuals with diversity of knowledge and experience, normally investing in startups at an early stage and assisting them in many aspects, especially in how to go global.
However, local investment laws and regulations need to be reformed to adapt this need, and to facilitate foreign investment in innovation.
New business environment
In June, the National Assembly passed the new Law on Investment which will take effect from January 1, 2021. It is expected to create an even more transparent investment environment and facilitate new FDI into the country. The new law is indeed a big step in reform, specifically when it comes to innovation and startups.
In Vietnam for many years, international funders have been subject to investment registration procedures. Although the process has become more and more transparent, it is still a burden for small companies in terms of time consumed and cost involved.
Pursuant to the current Law on Investment 2014, such a person can invest in Vietnam in several ways, including establishing a new enterprise; making capital contributions to or purchasing shares or equity in Vietnamese companies; or investing through a business cooperation contract or a private-public partnership.
These overseas investors shall have to obtain an investment registration certificate (IRC) before carrying out next steps in business registration procedures, which involves having to submit documents evidencing financial capacity and experience, which are often troublesome for individuals and small companies.
These and other practical issues result in hesitation from foreign financiers when making an investment, as well as difficulties for startups in fully complying with the laws when calling for funding.
In this regard, the Law on Investment 2019 now removes the requirement of obtaining an IRC for foreign investors that invest in “small- and medium-sized startups” and “startup investment funds”. A general definition of “startup project” is also mentioned in this law: an investment project that implements ideas on the basis of exploiting intellectual property, technologies, and new business models and is able to grow quickly.
With this rule, businesses – especially those working on startups and innovation – expect new foreign investment flow into this area. Nevertheless, further detailed guidelines and regulations on implementation of the new law are expected to be introduced as soon as possible.
On 31 March 2021, the Government released Decree 44/2021/ND-CP ("Decree 44") providing guidance on the conditions for being deductible expense of the donation and sponsorship in cash or in kind for prevention of COVID-19 pandemic.