A socialist state, the country’s government has been gradually moving away from a centrally-planned economy since 1986 in a programme known as Doi Moi. In January 2007, Vietnam joined the World Trade Organisation and was an official negotiating partner in the Trans-Pacific Partnership (TPP) trade agreement in 2010. Anyone who has visited Vietnam will understand that agriculture plays a significant role in its economy, however the share that agriculture has of the country’s economic output has been shrinking. In 2000 a quarter of the country’s output was agriculture-based, a share which fell to 22% in 2012. Industry is taking up the slack, increasing from 36% of gross domestic product (GDP) to 41% during the same period.

Overall, Vietnam’s GDP grew by 5% in 2012, which was the slowest rate of growth for the country since 1999. The country’s export-oriented economy was hard hit by the global recession but exports did bounce back in 2012, increasing by more than 18% year-on-year.

Speaking in Vietnam’s capital city, Hanoi, in March 2013, European Commissioner for Trade, Karel De Gucht, said the policy of Doi Moi had moved Vietnam from “rigidity and control to openness and flexibility – allowing room first for domestic private enterprise, then for foreign investors and gradually for a greater role of market forces in the economy”. The greater openness had led to an average growth rate of 6.5% between 2007 and 2011 and significant declines in poverty and the rise of Vietnam up the ranks of global economies, he added. For example, Vietnam now is second only to Singapore in attracting foreign direct investment (FDI) in the ASEAN region, relative to GDP.

FDI in Vietnam has risen steadily during the past decade and in the past year has soared by 65.5%. Vietnam’s General Statistics Office (GSO) announced in October that FDI inflows had reached $19.2 billion, surpassing the government’s target of $13-$14 billion. The largest share of investment (from a total of 52 countries) came from Korean investors, who contributed $3.6 billion in the past year. Singapore with $2.7 billion was next, followed by China, Japan and Russia, which collectively contributed $4.4 billion. “As some businesses struggle to be economically viable in China – where costs have risen and the Renminbi has strengthened – they are turning to Vietnam,” says Andrew Dyer, Head of Transaction Banking Sales, Asia Pacific at ANZ Group. “Production in Vietnam is fairly low cost and there is a young workforce. In addition the logistics are good and the infrastructure and supply chain is superior to neighbouring countries.”

However, Dyer says money is not freely moveable across borders so there are no notional pooling or sweeping products. “It is similar to China about ten years ago; some contract manufacturers will operate very lean companies in Vietnam, keeping their invoicing and other treasury activities offshore,” he adds.

During the past year the pace of foreign-funded projects also increased, according to the GSO with more than 1,000 approvals for new ventures and a continued contribution of $6.2 billion to ongoing projects. Manufacturing and processing proposals received the greatest share of interest from foreign investors and represent 77% of contributed capital.

Two large infrastructure projects during 2013 attracted significant FDI inflow: a thermal power plant that attracted nearly $2 billion in total investment in a joint venture between the Government’s General Department of Energy and Singapore’s Sembcorp and a $1.2 billion integrated circuit project funded through FDI contributions from Korean company Samsung. The power plant is considered essential to ensuring a power supply to support Vietnam’s economic development.

On a smaller scale, multinationals Nestlé and Starbucks hope to cash in on the Vietnamese coffee drinking tradition. Vietnam is the world’s second biggest producer of coffee beans behind Brazil, with more than 90% of production exported. At the start of 2013 US-based Starbucks opened its first outlet in the country. Nestlé has also targeted the coffee market in Vietnam, having invested in coffee factories in the country.

“Generally Vietnam is a challenging business environment, but many FDI firms are doing very well, a number of Vietnamese firms are doing well, although many Vietnamese state-owned enterprises and SMEs are facing real difficulties,” says Herbert Cochran, Executive Director of the American Chamber of Commerce (AmCham) Vietnam in Ho Chi Minh City. “The business environment is pretty good for FDI firms, which account for about 40% of domestic industrial production and two-thirds of all non-oil exports from Vietnam. However, it seems to be quite difficult for SOEs and also for Vietnamese private companies, 66% of whom have reported losses in 2012 and 2013, according to news reports.”

Several US-based multinationals, particularly in the consumer goods arena, have taken the lead in investing in Vietnam, he adds, with such companies investing between $200m to $500m each. For many of these companies Vietnam is their fastest growing market globally. “Moreover, US foreign direct investment in higher value-added modern manufacturing is increasing, led by Intel’s investment of $1 billion in an assembly and test facility in Saigon Hi-Tech Park and scores of other smaller investments.” The American Chamber of Commerce in Vietnam has a ‘manufacturing committee’ with about 20 companies involved in modern manufacturing. These companies are successful, and more are coming, says Cochran. One company that opened operations in Vietnam five years ago now employs almost 1,000 people, exports about $50m worth of goods per year and is looking for new land to expand because it expects to triple its business in the next three to five years.

Cochran says American Chamber of Commerce cooperation with and support of Vietnam’s government and business has led to a substantial increase in bilateral trade during the past ten years: from only $1.5 billion in 2001 when a bilateral trade agreement went into effect in December of that year to $9.7 billion in 2006 when Vietnam achieved WTO Accession and Permanent Normal Trade Relations with the US (December 2006). More than $28.7 billion worth of trade is projected in 2013. If present trends continue, bilateral trade could reach $50 billion by 2020, says Cochran.

“Generally Vietnam is a challenging business environment, but many FDI firms are doing very well, a number of Vietnamese firms are doing well, although many Vietnamese state-owned enterprises and SMEs are facing real difficulties.”

Herbert Cochran, Executive Director, American Chamber of Commerce (AmCham), Vietnam

Speaking at the Autumn Economic Forum of the United Nations Development Programme in September 2013, Bakhodir Burkhanov, the Programme’s Deputy Country Director for Vietnam, said the country had maintained macroeconomic stability during 2013. But he warned that the slow progress on structural reforms in the banking, public investment and state owned enterprise (SOE) sectors had been an impediment to economic growth. He added: “Investor confidence remains subdued, with growth of labour productivity slowing from 5% annually between 2000 and 2007 to 3.5% between 2008 and 2011. Vietnam has dropped ten places to 75^th in the 2012-13 edition of the Global Competitiveness Report by the World Economic Forum, and slipped from 116 in 2010 to 123 in 2012 in Transparency International’s Corruption Perception Index. Poverty reduction and human development progress have also slowed down.” To tackle these problems he suggested a greater focus be placed on examining the social impact of reform options and on the institutional framework to support reform initiatives.

A study by AmCham into American companies’ perceptions of doing business in ASEAN countries found the main sources of dissatisfaction in doing business in Vietnam were caused by corruption (70%) and infrastructure (65%). On the plus side, 59% of companies appreciated the availability of low-cost labour and availability of trained personnel (43%) – see Table 1.

Vietnam has been undertaking a restructure of SOEs and Prime Minister Nguyen Tan Dung has said he plans to push the country’s SOEs into closer competition with the private sector. He hopes this will make them more competitive and the overall goal is to retain only a smaller number of key SOEs in certain industries.

Corruption also is being tackled and in November 2013 a former general director of the state-owned Agribank Financial Leasing Company was sentenced to death for his part in a $25m embezzlement of state property. Another man, a former chairman of a construction company, was also sentenced to death in the case.

Another factor in tackling corruption may come in the form of the TPP. Steven Winkelman, Chairman of the Vietnam Business Forum, told an audience in Vietnam in December 2013 that the TPP could help the government in its drive towards a market economy and reform of the SOE sector. The TPP is being negotiated between Australia, Brunei Darussalam, Chile, Malaysia, New Zealand, Peru, Singapore, Vietnam and the US. Combined, these countries encompass 800 million people, around one-third of world trade, and nearly 40% of the global economy. Studies have shown that Vietnam has the most to gain of any country currently negotiating the agreement, with export and GDP growth potentially greater than for other partner countries. It is believed the partnership will enable the private sector greater access into key markets, will stimulate competition, will attract additional foreign investment and will help build key supply chain infrastructure, thus creating significant opportunities for Vietnamese businesses, and jobs and higher incomes for Vietnamese workers. TPP will help Vietnam’s strategic drive to industrialise, modernise and globalise.

“Only 20% of the population has bank accounts, so there are quite significant problems for companies around payroll and accounts payable and receivable.”

Andrew Dyer, Head of Transaction Banking Sales, ANZ Group

Winkelman says foreign companies interested in investing in Vietnam “need to see more evidence of the Government’s willingness to reform the inefficient state-owned system, considered by many analysts as a root cause of Vietnam’s current economic challenges”. Corruption and conflict of interest issues are embedded in the fabric of the SOE sector, according to Winkelman. “Without addressing fundamental governance issues, progress will remain challenging. Investors wonder which over-extended state-owned conglomerate will be the next to fail, or which will be forced into taking bad assets onto their balance sheets. This misallocation of resources continues at a time when Vietnam needs to be making wiser decisions about capital outlays and business strategy.”

Vietnam’s economy also faces challenges because of an undercapitalised banking sector. Non-performing loans weigh heavily on banks and businesses. In September 2012, the official bad debt ratio climbed to 8.8%, although some independent analysts believe it could be higher than 15%.

The Vietnamese Government launched the Vietnamese Asset Management Company (VAMC) in July 2013 in a bid to address the troubled banking sector. US-based Fitch Ratings, however, has cast doubt on the ability of VAMC to perform its task. Fitch is concerned about the lack of capital at its disposal; at present it stands at $24m. The plan is to swap the banks’ debts for government bonds. Says Fitch: “We believe Vietnamese banks may still face capital-impairment risks even after offloading bad debt to the VAMC, based on preliminary data. This is because government-guaranteed bonds received in consideration for bad debt must be written off by a reported 20% each year, which effectively means that the bad bank only buys time for the banks to write off losses.”

Commenting on the Fitch report, the Financial Times said foreign investors were keen for decisive action from the government, not least because the banking sector’s problems have left the economy starved of new credit. “It is always possible that well-capitalised foreigners could come to the direct aid of the banks themselves but, as Fitch points out, there is limited appeal to the sector given a cap on foreign ownership of 30%,” said a report. “And any expansion of bank lending without an injection of fresh capital would only store up more trouble ahead.”

As elsewhere, Vietnam’s authorities have been reducing interest rates in a bid to stimulate economic growth. The cost and availability of financing, particularly for smaller companies and the relative impact of that on exports tends to put greater emphasis on efficient trade finance products. Access to US dollars, both onshore and offshore, is key and many different trade finance instruments are used to achieve this. Cash flow can be improved via pre- or post-shipment finance by utilising trade finance to fund the purchase or manufacture of goods, while awaiting payment from buyers. Many companies choose to finance the period between payments for the imported goods and the final sale of the goods. As more companies outsource elements of their production process to Vietnam there has been a growth in payables financing.

Another issue for multinationals to address when doing business in Vietnam is the largely cash-based economy, which, says ANZ’s Dyer presents challenges in terms of cash management. “Only 20% of the population has bank accounts, so there are quite significant problems for companies around payroll and accounts payable and receivable. There are also technology challenges regarding this because Vietnamese names are very long and the currency is also in high denominations (22,000 dong to $1). ERP systems have to be substantially modified to cope and there is significant manual input around the AP/AR processes,” he says.

The government is encouraging financial inclusion via a number of initiatives. For example, payments of more than 20 million dong ($1,000) have to be made through the banking system or a VAT receipt will not be issued. Modern payments systems are also being developed and a new cross-border system for inter-bank payments in dong is being rolled out. At the moment credit cards are not widely used outside of tourist hotels. However, there is a generational shift occurring, particularly as young people who have studied overseas return to the country and want to use internet and mobile banking services.

The main attraction for multinationals setting up in Vietnam is its potential, including low cost of labour, growing consumer market and its membership of ASEAN, which is a market with a combined GDP of $2.2 trillion. Despite the challenges, Vietnam represents an important opportunity for multinationals and the business environment is improving all the time.

• Strength: 50% or greater satisfaction rate
• Concern: 40% or greater dissatisfaction rate
• Neutral: the plurality is neutral or the factor is inapplicable
• Weak strength: plurality is satisfied but satisfaction rate is less than 50%
• Weak concern: plurality is dissatisfied but dissatisfaction rate is less than 40%