Analysis: Hurdles litter path, but Vietnam investment to rise

HANOI Wed Sep 29, 2010 7:12am EDT

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HANOI (Reuters) - Few investors disagree that Vietnam has huge potential. But until the country's opaque regulatory environment becomes more predictable, only the bravest firms will commit to making substantial direct investments there.

When Vietnam's communist government first opened up to foreign investment back in the 1990s, multinationals couldn't wait to break ground on factories and hire some of Asia's cheapest workers.

Foreign direct investment has since grown exponentially with the number leaping after Vietnam joined the World Trade Organization in 2007. Now, with the global economy recovering and Vietnam's regional comparative advantages rising, a new line of potential investors is forming at its gate.

Analysts say manufacturers are taking a good look at Vietnam partly because the Chinese yuan appears set for a long run of strengthening, and retailers are hoping to profit from a growing middle class in the country of 86 million.

Yet despite the country's draw, Vietnam is struggling to live up to its full potential, hindered by slow progress on a list of perennial barriers to investment and recent policymaking gaffes that have caused costly headaches for foreign businesses and scared off at least one multi-million dollar deal.

"I always say to the foreign investment authorities there are plenty of countries in Southeast Asia with a bright future behind them," said Fred Burke with the law firm Baker & McKenzie.

"They have to be careful not to take anything for granted. They're constantly tinkering with things and trying to work it out but there's a step backwards every time there's a step forwards."

Foreign direct investment inflows rose slowly from $2.4 billion in 2000 to about $4 billion in 2006, then doubled in 2007. The following year inflows leapt to $11.5 billion before the global economic crisis clipped the figure back to $10 billion last year, government figures showed.

AWAITING CLARITY

Vietnam is on track in 2010 for investment as high as last year. In the first 8 months, FDI disbursements hit $7.25 billion.

"It's not all blue skies," said Alain Cany, head of the European Chamber of Commerce in Vietnam. "We see very slow progress on many issues for investors ... and the government is moving really slowly to improve this business environment."

At least three recent measures appear to run counter to Hanoi's commitments to improve the business environment in the country of 86 million, business groups and consultants say. Two may violate Vietnam's World Trade Organization accession agreements.

The Finance Ministry decided in August to implement a rule on October 1 that would compel companies to register price changes for products including cement, steel, infant milk, coal and animal feed, and could subject them to price controls.

State media reported ambassadors from the United States, EU, Australia, Canada and New Zealand said in a letter to the government in June the price control rule would "affect Vietnam's commitments as a WTO member" and could hinder foreign investment. A finance ministry official denied there was a WTO violation.

The chilling effect is harder to deny. Two sources said a foreign company that was considering a major investment in a cement project in central Vietnam recently shelved the plan after getting cold feet because of the price control measure.

With just days to go before it takes effect, those who are already committed are holding their breath.

"We are still waiting for clarity for how it will be implemented," said Enda Ryan, General Director baby formula maker Mead Johnson in Ho Chi Minh City.

Separately, in mid-July the trade ministry enacted new import licensing procedures that sparked complaints about delays to shipments. The European Chamber of Commerce in Vietnam said the rules would increase costs, potentially deter investment and may be in breach of Vietnam's WTO obligations on import licensing.

The implementation of a third new rule, requiring raw animal products like fish and meat to be registered before importation, was delayed two months to September 1 after foreign governments raised concerns. Uncertainty still hangs over its implementation.

GETTING BETTER

These new policies come atop a long list of perennial problems for businesses -- weak infrastructure, macroeconomic instability, legal uncertainty, poor intellectual property rights protection, mazes of red tape and corruption.

And yet, interest is steadily growing in Vietnam as its relative competitiveness improves.

"The mood has changed considerably from a year ago," said Orsolya Szotyory-Grove with the law firm Russin & Vecchi.

The country leapt 16 notches to number 59 on the 2010-2011 World Economic Forum Global Competitiveness Index.

A United Nations survey ranked Vietnam eighth worldwide and third in Asia on a 2010-2012 list of the top host economies for FDI in terms of the number of mentions transnational corporations gave them as an FDI priority.

A new survey by UK Trade & Investment and the Economist Intelligence Unit said Vietnam was the top investment destination after the BRICs for the third year running.

Haagen Dazs, a unit of General Mills, started selling ice cream here at the end of August, and PepsiCo last month committed to invest $250 million in Vietnam. Others are said to be looking in areas including retail and telecoms.

But it won't all pan out. One Asian consultant estimated that less than 10 percent of firms looking here would actually invest.

Jacob Ramsay, who follows the country for the consultancy Control Risks, calls Vietnam a "boutique investment environment".

"Only companies that have had some previous exposure to similar sorts of difficulties are really looking," he said. "Or companies that have huge resources and plenty of time."

(Additional reporting by Ngo Thi Ngoc Chau in Hanoi and Sui-Lee Wee in Hong Kong; Editing by Andrew Marshall)

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