New criteria developed for the selection of FDI projects

Vietnam retains its position as an FDI spotlight in the region albeit with the severe impact of Covid-19 on the whole economy. Foreign investors still maintain their positive outlook and confidence in the Vietnam economy and investment-business environment. In 2021, Vietnam attracted 408 billion USD registered FDI, securing its rank at 18th place in the world and 2nd place in SouthEast Asia. Hence, in the first two months of 2022, FDI enterprises invested approximately 5 billion USD in Vietnam. Undoubtedly, Vietnam receives a considerable amount of foreign capital resources. 

Despite recording impressive FDI inflows, Vietnam faces several challenges in assessing and selecting FDI projects. In particular, over half of the operating FDI enterprises have reported business losses. According to the Ministry of Finance, out of 25,171 FDI firms, only 10,125 firms are making profits, accounting for 40.2%. Meanwhile, the rest (14,108 firms) are reporting losses, which is equivalent to 56% of the total existing enterprise number. In 2020, the loss value of FDI firms reached up to 151.064 billion VND while the accumulated loss value of these firms was above 623.000 billion VND. Paradoxically, the total assets of FDI enterprises with losses stood at 2.47 quadrillion VND, increasing by 22% compared to 2019. 

Besides, though Vietnam attracts a great source of FDI, the spillover effects of FDI enterprises on domestic firms are humble. In particular, technology transfer from FDI enterprises in Vietnam is much lower than in other countries in the same region, limiting Vietnam to move up the global supply chain (Ministry of Industry and Trade, 2021).

Therefore, the Ministry of Planning and Investment (MPI) is establishing a more well-articulated and thorough set of selection criteria for FDI projects. Accordingly, the following key points will be used to evaluate and consider FDI projects for approval:

1. Investment slot/ha of land,
2. Number of employees in each investment project,
3. Commitment to technology transfer of investors,
4. High technology content of the project,
5. The ability to link with the domestic business sector,
6. Environmental Protection,
7. Ensuring national defense and security.

In detail, investment slot/ha of land was identified to reduce the number of small-scale and low-capital investment projects yet using up large areas of land, resulting in a waste of resources.  In addition, the criteria on employee number per investment project will contribute to the efficient and effective deployment of the labor force, thereby levitating the pressure on the social order and security of the localities with dense labor concentration. Overall, both of these criteria have been institutionalized in the Law on Investment 2020 and Resolution No.31/2021/ND-CP. 

Further, the MPI concretized the technological criteria for enjoying investment incentives. More specifically, the investment projects should meet the requirements on: 

• the ratio of revenue from high-tech products in the total annual net revenue of the enterprise, 
• the ratio of total expenditure on R&D activities conducted in Vietnam to total annual net revenue,
• percentage of employees, with university/college qualifications or higher, performing R&D activities of the total number of employees. 

Similarly, technology transfer is also one of the four criteria for applying special investment incentives. Yet the transferred technology shall be on the list of encouraged-for-transfer technologies in accordance with the regulations and the number of Vietnamese enterprises receiving technology transfer. 

Moreover, to strengthen the link between the FDI sector and domestic enterprises, the MPI has recommended clear criteria on connectedness and spillover effects of FDI firms through: 

• the percentage of Vietnamese enterprises over the total number of enterprises participating in the assembly, component-raw material-service supply for manufacturing finished products. 
• value to product ratio in which products are created by Vietnamese enterprises participating in the value chain. 

As the average localization rate of Vietnam is modestly from 20% to 25%, this regulation will help Vietnam overcome its biggest shortcoming in FDI attraction. 

When it comes to the environment, the criteria focus on sustainable development, following which the MPI proposed to improve standards and technical regulations on products, environment, natural resources, and energy-saving, reducing emissions in alignment with regional and world standards. Meanwhile, the criteria for ensuring national defense and security have also been closely institutionalized in the Investment Law 2020 and Decree No. 31/2021/ND-CP. Particularly, activities related to national defense and security, or projects in “sensitive” areas shall be appraised and scrutinized in each certifying phase. 

Leading economic experts assessed that Vietnam is a potential destination for foreign investors thanks to its active participation in free trade agreements, especially several recent new-generation FTAs. Other than FTAs, FDI enterprises can benefit from competitive cheap labor costs, low energy costs, and attractive investment incentives of the nation. However, Vietnam is lacking a comprehensive legal framework for FDI to harvest fruitful results and create positive spillover effects. Thus, the Government should specify and regulate strict binding standards and conditions for further development and adaptation.

To obtain a comprehensive understanding of the Vietnamese legal system and enjoy investment preferential policies, foreign investors should consult top professionals in the field. Viettonkin - one of the leading consulting firms with a deep insight of the Vietnam market and legislation - can help you and your business navigate through the legal process in Vietnam. Please do not hesitate to contact our Viettonkin consultant team via email at info@viettonkin.com.vn or contact page.