Final Research (3)

One year after the Sixth Congress of the Vietnamese Communist Party adopted the Doi Moi policy in 1986, the Law on Foreign Investment was approved. Thanks to the incentives it offered and the economic potential of the country, the number of foreign direct investment (FDI) projects in Viet Nam has been significantly increasing

Chapter 1 Introduction 1.1 Rationale

One year after the Sixth Congress of the Vietnamese Communist Party adopted the Doi Moi

policy in 1986, the Law on Foreign Investment was approved Thanks to the incentives itoffered and the economic potential of the country, the number of foreign direct investment(FDI) projects in Viet Nam has been significantly increasing The Joint Venture (JV) hasemerged as the most preferred form of foreign investment by foreign investors This isdemonstrated by the high number of JV projects and the total investment capital amongother forms of FDI From 1988 to 1995, the total JV projects are 1,031 and the accumulatedinvestment capital occupies 70% total capital of FDI However, during the first six months of

1996, the number of joint venture projects has been decreasing (VIR, 19-25 August 1996).There are signs that foreign investors are consciously shifting to other forms of FDI in VietNam

Although there have already been several studies on JVs in Viet Nam, they have mainlyfocused on the implementation phase such as managerial problems, conflicts betweenpartners or human resources issues in JVs As a matter of fact, the pre-investment stage isequally important in which most decisions for investment have been made It deserves,therefore, more scrutiny in order to better grasp the current situation of FDI in Viet Nam

1.2 Problem Statement of the Study

The decreasing trend of the joint venture form in the current inflow of FDI has become aserious concern of the Vietnamese government It needs to be thoroughly analyzed and

relevant solutions should be developed in order to ensure a sustainable success of the doi moi policy.

1.3 Objectives of the Study

The objectives of the research study are:

1 To identify the factors which make investment attractive and unattractive to foreigninvestors in Viet Nam in choosing joint venture form

2 To determine the difficulties or problems for foreign investors in forming JVs in VietNam

3 To provide recommendations for the Vietnamese authorities, the Vietnamesepartners and the foreign investors with a view to improve the investmentenvironment in attracting foreign investors choosing JV form

1.4.2 Data Collection Methods

The information needs were collected from:

a Secondary data: a desk research on the FDI was carried out This exploratory study was

mainly based on the secondary data which were available in various newspapers,magazines, official documents

b Primary data were obtained from in-depth interviews with business experts/consultants of CESAIS (Centre For Economic Studies and Applications), government officials in Ho Chi

Minh City, officials of the former SCCI and FDI promoters in Viet Nam, particularly thosefrom Korea, Taiwan, Hong Kong, Singapore

Beside personal interviews, a mail survey was also conducted with the assistance and

support of the CESAIS members A total number of 200 questionnaires were delivered to

foreign investors and Vietnamese partners who were sampled from the comprehensive “List

of FDI by the End of April, 1996”, in Viet Nam Info, compiled by the VCCI The questionnaire

was developed to serve the objectives stated in section 1.3

To ensure a high response-rate, we constantly used follow-up telephone calls to remind therespondents about the questionnaire An additional questionnaire was sent out in case therespondents did not receive one in the first mailing

Despite all the efforts, we were able to collect only 40 questionnaires, representing aresponse rate of 20% Among these 40 returned questionnaires, 3 were considered invalidbecause of various reasons: due to missing page of the questionnaire, blank questionnairefor any reasons Consequently, we finally had 37 usable questionnaires for analysis Thelist of respondent companies is shown in Appendix C

1.4.3 Data Processing

Data from the mail survey were inputted via Microsoft Excel 5.0 with initial screening.Secondary screening was done when converting the Excel file to SPSS format All thecalculations and tabulations were done via SPSS and Excel for Windows

For data analysis, the mean score of each factors from the SPSS results will be mainly used

to illustrate the discussions of findings

1.5 Scope and Limitations of the Study

The study only covered FDI in Viet Nam, and focused especially on the joint venture form Itmainly considered the reasons or factors which make foreign investors choose or do notchoose joint venture among forms of FDI

The survey was only conducted in Ho Chi Minh City It, therefore, does not reflect thesituation of the whole country

1.6 Organization of the Study

This report is presented in 5 chapters

Chapter 1 is the introduction It includes the rationale, problem statement, objective,research methodology, scope and limitations, and organization of the study

Chapter 2 is literature review consisting of three parts: the first part will provide a generalunderstanding about joint venture; the second part is the benefits and difficulties of jointventures; the third part is the problems faced by joint ventures in developing countries.Chapter 3 presents the current situation of foreign investment in Viet Nam This includes thegovernment policy on foreign direct investment, the current status of foreign directinvestment and joint venture in Viet Nam

Chapter 4 contains the major findings and discussions that were collected throughquestionnaires and in-depth interviews with business experts/consultants and policy makers

in Ho Chi Minh City

Chapter 5 provides conclusions and recommendations to the Vietnamese government,Vietnamese partners, as well as foreign investors for consideration

Chapter 2 Literature Review

2.1 Definition of Joint Venture

There are different definitions about joint ventures For this research study, the followingseems to be most relevant:

A joint venture is a cooperative business agreement between two or more firms thatwant to achieve similar objectives This agreement usually involves the creation of anew corporate entity to satisfy the mutual needs of all parties involved (Bae, 1990)

2.2 Benefits and Difficulties of Forming Joint Ventures

Joint venture is a form of FDI It is popular over the world Joint ventures often have benefits

as well as difficulties

2.2.1 Benefits of Joint Ventures

The benefits of joint ventures are presented in the following table:

Table 2.1 Benefits of Joint Ventures

codification/public knowledge provides funds and assets to local capital markets

codification/public knowledge each partner concentrates resources on an area of greatest advantage

codification/public knowledge avoids necessity of developing international management skills

codification/public knowledge access to knowledge of local environment and markets

codification/public knowledge may reach critical mass for internationalization

codification/public knowledge more efficient competitive position

3 Political pressures:

codification/public knowledge host country pressure for local participation

codification/public knowledge local control of job creation and technology transfer

codification/public knowledge preferential treatment (remittance of royalties)

codification/public knowledge may avoid local tariffs and non-tariff barriers

4 Access to markets:

codification/public knowledge quick and efficient access to distribution

codification/public knowledge by-passed trade barriers

codification/public knowledge image/attitude to local company

5 Other reasons:

codification/public knowledge good public relations

codification/public knowledge curbs potential competition

· provides temporary relief for weak product portfolio Source: Bradley (1991)

2.2.2 Difficulties of Joint Ventures

The difficulties of joint ventures are shown in the following table:

Table 2.2 Difficulties of Joint Ventures

1 Loss of control over foreign operations

large investment of financial, technical or managerial resources favors

 codification/public knowledge

greater control than is possible in a joint venture

2 Joint ventures are difficult to co-ordinate

lack adequate procedures for protecting proprietary information

 codification/public knowledge

shared decisions affect global marketing arrangements

 codification/public knowledge

3 Loss of flexibility and confidentiality

changes in product-market mission may make joint venture a liability

2.3 Problems and Difficulties of Joint Ventures in Developing Countries

In developing countries, joint ventures often face problems related to general issues, partnerselection, negotiation, management, and problems related to host country environment

2.3.1 General Issues

Experience has learned that joint ventures are difficult to manage and frequently unstable Asurvey conducted in 1985 showed that there was a failure rate of 30% in developingcountries (Columbia Journal of World Business, 1985) A major reason for this high failurerate is the structural complexity that makes a joint ventures difficult to manage, regardless ofthe contrast between their parent environments (Shenkar and Zeira, 1992:55-75)

In particular, international joint ventures are unique and problematic in their combination oftwo major hurdles: multiple national affiliation and multiple ownership (Shenkar and Zeira,1992:55-75) Multiple national affiliation means that international joint ventures bring

together parent companies that are anchored in environments differentiated by culture,political, economic and legal systems Multiple ownership means that international jointventures are owned, and often managed, by at least two parent firms Because of thiscombination, international joint ventures are probably more problematic to manage thanother forms of foreign direct investment (Shenkar, 1990: 82-90)

In the study of strategic assessment of international partnership in ASEAN countries,Lasserre (1983) has identified the perceived sources of problems in this geography which isshown in Table 2.3 The major sources of problems were those related to behavioralproblems and conflicts, and misunderstanding or attitudes

Table 2.3 Perceived Sources of Problems in Foreign Operations in ASEAN Countries

As perceived by foreign partner (%) As perceived by local partner (%)

- Change in economic condition - Competition

- Imitative competition - Bad debts

- Local content push

- Bureaucracy

- Remittance

Behavior of local partner & employees 47 Behavior of foreign manager 65

- Lack of managerial skills - Lack of trust

- Lack of dynamism of local partners - Too high technology expectation

- Lack of trust from local partner - Too high sales growth

- Lack of communicationSource: Lasserre (1983)

On the other hand, Table 2.4 demonstrates that the sources of the problems as perceived

by partners in successful partnership were more behavioral in nature The application fromthis is that if there are unsatisfactory cases of joint venture, problems are mostly caused bypartnerships

Table 2.4 Perceived Sources of Problems in Satisfactory and Unsatisfactory Partnershipbetween European and ASEAN Firms

Cases

Problems linked togeneral conditionsand government

Problems linked tobehavior ofpartner andemployee

Total number ofcases

The study of Beamish and Lane (1990: 87-102) on joint ventures in developing countriesshows that identifying and selecting a partner is possibly the most important consideration inestablishing a cooperative venture It may also be the most difficult and time consumingventure Even though partner selection could be the determining factor in making a businesspartnership a success or failure, it usually is not given the time and attention that it deserves.Firms are often in a hurry to find a partner in order to quickly enter an attractive market As aresult, they are careless in their selection process and often mistakenly select a poorlyqualified partner in their desire for quick action and not to miss the business opportunity.Partners are often selected only for short-term and political reasons When the situationchanges and the partner has nothing more to offer, the relationship may come to an end.The selection of suitable partners has equally become more problematic because mostdeveloping countries do not possess sufficiently coordinated information systems Insummary, problems that may arise during the selection of partners for joint ventures are(Blodgett, 1991):

 Less time and attention being given to selection process

 Limit information on the partners

 Careless in selection, and

 Less attention being given to the assessment of the capability of the partners incomparing alternatives

2.3.3 Negotiations

Negotiating a joint venture agreement differs from case to case, but it normally includefinancing, capitalization of know-how, products and markets, the business plan, reportingand meeting procedures, board representation, selection and approval of key people, supply

of materials, components, and services by the partners, transfer of and payment fortechnology, independent audit, dividend payment, minority shareholders protection, andbuyout and termination procedures (Berlew, 1984: 48-54)

The negotiation to form a joint-venture is a long and arduous process in many countries Adescription of the major sources of concern and the elements of difficulties during thenegotiations for both foreign and local partners are shown in Table 2.5 and 2.6 (Lasserre,1984: 42-49)

Table 2.5 Elements of Importance during the Negotiations

EuropeanPartner

Local Partner

- Marketing aspects: distributorship, 20% 17%

brand, protection of share, quota

Issues Frequency of answers

European Partner Local Partner

Source: Lasserre (1984)

The major concerns of both partners are often related to the financial aspects of theagreement, e.g.: share evaluation, intangible asset evaluation (when parts of the shares ofthe foreign partner are constituted by patents or a trademark) or asset evaluation (when it isconstituted by equipment) Dividends, royalties, and management fees are also part of themajor items to be discussed

Lasserre (1983) also shows that the negotiation process is not instrumental, either as a toolfor mutual knowledge or as a means for anticipating the major sources of future problems in

an industrial joint venture Technological elements relating to the production process and tothe effective means of transferring know-how remain hidden until financial, commercial andlegal aspects are discussed at length

The partners embark on an industrial venture without any prior knowledge of each other ormutual understanding of the crucial issues they are likely to face, which in the future willmake their venture difficult to manage

In some countries, negotiations are further complicated by cultural, legal and bureaucraticfactors which sometimes bring prospective foreign parents to a point of despair (Robinsonand Richard, 1964) For example, in the case of China, the Chinese often bring too manypeople to the negotiating table Chinese representatives are usually acting merely asmessenger boys for their absent bosses (Eiterman, 1990: 59-66)

2.3.4 Management of Joint Ventures

The problem in managing joint ventures stem from one cause: there is more than oneparent The owners, unlike the shareholder of a large, publicly owned corporation are visibleand powerful They can and will disagree on just about anything: How fast should the jointventure grow? Which products and markets should it encompass? How should it beorganized? What constitutes good or bad management? (Ramanathan, 1992).

In particular, managing joint ventures in developing countries often encounter the followingdifficulties:

a Objectives/Interest of the Partners

The major problems relate to the conflict of interest between the two partners Theseconflicts may arise due to differences in opinions on the rate of production, level of output ordividend policies Conflicts can also arise on technological issues The host partner maywish to expand production through new capacity to enable exports, while the technologysupplier partner may be satisfied to install only that equipment which is necessary to servethe home market (Ramanathan, 1992)

There may also be conflicts with regard to the nature and quality of output The foreigninvestor may wish to cut down the payback period whereas the local partner may beinterested in the growth of the company, which could lead to clear conflict of interest individend policy (Lasserre, 1983)

There may be also no matching of objectives of the two partners If it happens then there will

be great impact on managing the joint venture This asymmetry of objectives is quite typical

of joint venture transaction, particularly those bringing together parents from developed anddeveloping countries (Shenkar, 1990: 82-90)

b Board of Directors

The board of directors (BOD) has particular importance in all joint ventures Because of themultiplicity of parents’ headquarters and because of their frequently conflicting objectives,the BOD tends to “take over” various managerial functions, serving as a “buffer” toconflicting demands The board decision making process is frequently cumbersome Insome cases, e.g China, the problem tends to be more serious because of bureaucraticinterference (Shenkar, 1990)

c Managing Human Resources

Many ventures encountered the problem of surplus workers (Park,1983: 105-126) Theproblem may be particularly severe in international joint ventures which took over operatingplants from the local parents

When skilled staff is available, the local parent is often reluctant to transfer it to the jointventure and would prefer instead to transfer superfluous and less qualified personnel(Shenkar, 1990: 82-90) Furthermore, overcoming personnel shortage by means of anexpatriate work force is difficult in the developing country due to legal constraints Suchproblems have been encountered in many developing countries (Bivens and Lovell, 1996)

Compensation is another problem for foreign expatriates in all joint ventures For example, inthe People’s Republic of China (PRC), one such problem is downward pressure onexpatriate salaries generated by Chinese demands for parity of pay to foreigners andChinese employees holding similar titles (Cohen and Harris, 1986) Another major problem

in the developing country is replacing expatriate personnel within a few years, which make'start-up' costs for such personnel much higher

Another problem may be that both host and foreign parent's managers who work for a jointventure may have a conflict of loyalty between the venture and the parent companies Thelocals tend to remain loyal to their parent company rather than to the venture (Shenkar,1990: 82-90)

d Staffing

Usually, joint ventures that draw functional managers from both parents are more difficult tomanage than those that do not Managers of all joint ventures may not only havecommunication problems because of language barriers, they may also have differentattitudes toward time, the importance of job performance, material wealth and desirability ofchange These differences can delay the creation of an effective, cohesive managementteam (Killing, 1982: 120-177)

e Foreign Exchange Repatriation

The major problem, particularly in recent years, concerns the depreciation of the currency The second problem of foreign investors arises from the risk of committingresources to an underdeveloped country where a changing political structure may affect thereliability of returns from the ventures (Shenkar and Zeira, 1992)

host-f Transfer of Technology

Technology transfer is not without its consequences The imported technology brings with itmany unwelcome elements of western culture (Afriyie, 1988: 51-62) Such elements associal inequality and different perception of relations between people and nature wereidentified Some of the problems of technology transfer may be due to lack of effectiveleadership and commitment to successful technology transfer in the developing countries(Madu, 1989: 115-124) Another potential source of conflict is the desire of the foreigninvestor to keep full control over the technology involved in the venture In order to maintainthe control of technology in situation of conflict, the foreign investor seeks to maintain hismonopoly over technological change The reason for that is also fear of losing competitiveadvantages, fear of leakage for the benefits of other competitors (Ramanathan, 1992).Another main problem for the foreign investor in technology transfer to developing country isthe inadequate protection of property rights, both patented and unpatented

g Size and Direction of Exports

The desire for increasing exports in developing countries has frequently been in conflict withthe interests of the technology suppliers This conflict has taken two major forms i.e., size ofthe export flows and desire to affect the direction of the export flows The host state maywish to influence the direction of exports, because it may increase the price received for theproduct, the size of potential markets, and because the government may have more general

strategic political interests The technology supplier may resist these policies because theyconflict with the international competitive strategy of the firm (Kaplinsky, 1976: 197-224;Ramanathan, 1992).

h Taxation

A joint venture company has to pay turnover tax, income tax and a so-called tax on wages.Taxes can be used effectively to increase the share of the host state This may be animportant area of conflict But, there are variety of mechanisms which the technologysupplier can use to evade these tax payments (Berg and Friedman, 1980: 143-168)

2.3.5 Problem Related to the Host Country Environment

All governments with restrict ownership policies have made exceptions for insisting on thewhole ownership To counter this, foreign investors in India, for example, have foundcreative ways to respond to the government’s demands Sometimes they retainedmanagement control of critical activities, while at other times they gained exceptions to thedemand for shared equity (Casseres, 1989: 17-26)

The attitudes of some countries toward foreign investment are not distinct Legislation isdiscriminatory in a number of countries, with too many restrictions on foreign investors

“Forced negotiations” do not create a good impression on many investors (Alen, 1973) Forexample, the discriminatory treatment to Japanese firms in Korea Korea governmentdemanded that 97% of all locally produced Matushita products must be exported Thestrong pressure by the Korean government on Japanese firms to use Korean parts andcomponents became another serious obstacle to them in Korea

Another problem may occur when the host government has established a number ofrestrictive policies to force foreign investors to transfer their shares in ownership to localpartners Also the host government may applied strong pressure on the foreign investor togive up its control of joint venture, and the foreign firm has little chance but to sell itscontrolling share to local partner (Matshura, 1988) There may also be a discriminatory taxsystem on foreign firms with heavy shares in joint ventures than those on with small shares.Another possible problem is managerial conflict due to different cultures For example, allimportant decisions in South Korean corporations are made by the top owner, who is oftencalled “emperor” The meeting of top executives are often called “imperial meetings”,whereas in other country decision is made by consensus (Matshura, 1988)

There may also difficulty for foreign investors by procedures of immigration authorities whichwill causes more harassment (Matshura, 1988)

Managers of all joint ventures may not only have communication problem because oflanguage barriers, they may also have different attitudes toward time, the importance of jobperformance, material wealth, and the desirability of change (Shenkar and Zeira, 1992: 55-75)

Chapter 3Current Situation of Foreign Direct Investment in Viet Nam

This chapter will present the government policy towards FDI, the current status of FDI and

JV in Viet Nam

3.1 Government Policy on Foreign Direct Investment

In principle, foreign investment in Viet Nam is regulated by the Law on Foreign Investmentwhich was passed by the National Assembly on 29th December 1987 and subsequentlyamended on 30th June 1990 and 23rd December 1992 respectively This law issupplemented by the regulations of 16th April 1993 In addition, a number of circulars andregulations have been issued by Ministries, People's Committees and other state agencies

to concretize and guide the implementation of this law Hereunder are some importantfeatures concerning FDI in Viet Nam

2 Joint Venture (JV, bilateral or multilateral): One (or more) Vietnamese party (parties)together with one (or more) foreign party (parties) will jointly contribute their capital to set up

a new venture and jointly conduct business and share the benefits, risks and rights Thenew entity which shall enjoy the status of juridical person shall be required to have as itslegal capital, at least by 30% of the total investment capital Exceptional cases will bedecided by SCCI (now MPI), the ministerial level body empowered to examine FDI projectsand issue investment licenses

3 Enterprise with 100% Foreign-owned Capital: Under this form, the proposed enterprise iswholly owned and operated by the specific foreign investor

4 Production Sharing Contract (PSC): PSC is applied in oil and gas exploitation and otherexploitation areas

5 Build - Operate - Transfer Contract (BOT): The form in which a Vietnamese government’sauthorized party and one (or multiple) foreign parties agree to pull their resources into thebuilding, and operating of a project (mostly infrastructure-related) for a specific period oftime, and transferring the project back to the Vietnamese government on expiration of theterm agreed upon

· High-technology industries using skilled labor, investment for more intensive utilization ofthe available resources and for raising output capacities of the existing economicestablishments.

· Labor-intensive production using materials and natural resources available in Viet Nam

· Building of infrastructure, and

· Foreign currency-earning service industries: tourism, ship repair, port repair and otherservices

3.1.3 Investment Incentives

The Vietnamese government has provided various incentives for foreign investment Theseare listed below:

· Up to 100% ownership by the foreign company

· Full remittance of profit and other income accruing to the company or its personnel

· Full repatriation of capital upon sale or dissolution

· Losses may be offset against profits of the next five years and any reinvested profits areentirely exempted from tax

· Exemption or reduction of import duties are also proposed, depending upon their natureand volume The foreign invested enterprise and the foreign partner to a businesscooperation contract shall be exempted from import tax in the following cases:

a) Equipment, machinery, spare parts, production and business facilities, includingmeans of transportation and material imported into Viet Nam for capital construction

of the enterprise

b) Raw material, spare parts, accessories and material imported for production of exportcommodities Upon export in finished form, these commodities shall be granted a taxrefund proportional to the export of the finished products

c) Patents, technological know-how, technological processes or technical servicescontributed as part of the legal capital by the foreign invested enterprise shall beexempted from taxes related to technology transfer

In case of sale of the above items in Viet Nam, the foreign investors must obtain thepermission from the Ministry of Trade and pay the import tax in accordance with theVietnamese law

The priority category includes investment which meets two of the following criteria:

a) Enterprises which invest no less than ten million US dollars

b) Enterprises which export at least 80% of their products or earn at least 80% oftheir income in foreign currencies

c) Enterprises which transfer at least two of the following kinds of technology:

· Technology which improves both the quality and quantity of the product,

· Technology which creates new products which Viet Nam needs,

· Technology which saves raw materials and energy

d) Enterprises which have a very low profit rate

e) Investment projects located in depressed areas

In exceptional cases where encouragement for investment is needed, special financialincentives may be granted to a JV as follows:

a) A cooperate profit tax varying from 10% to 14% of actual profit; and

b) Exemption of corporate profit tax for a period not exceeding 4 years and a 50%tax reduction for another maximum period of 4 succeeding years, following thefirst profit making years

Normally, the company tax rate is set at 15-25% depending on either priority category (15% to20% of profit) or standard category (21%-25% of profit)

· Tax on profit remittance overseas: foreign individuals or organizations are given the right

to remit abroad their salaries and other legal income after reduction of their income taxesand living expenses in Viet Nam The remittance tax rates specified in the table below:Table 3.1 Remittance Tax

Rate of Remittance Project's Legal Capital Contribution (US$)

· Financial operations of enterprises can be done through the Bank for Foreign Trade ofViet Nam, branches of joint Vietnamese-foreign banks or any foreign banks in Viet Nam

as may be authorized by the State Bank of Viet Nam

3.1.4 Investment Insurance

The foreign investment law ensures the foreign investor’s security of property, an effectiverole in business management and possibilities of earning high profits The invested capital,property and assets of foreign organizations or persons shall not be requisitioned orconfiscated under any administrative procedure The law also grants the rights to export thecapital, profit and other income managed by the enterprises The law states that foreigneconomic organizations and persons have the right to remit abroad:

· The share of profits accruing to them from business operations,

· Any approved payments for services or transfer of technology,

· The principle and interest on any loans made by them to the enterprises, and

· Any other sums of money and assets in their legal ownership

In addition to the investment insurance specified in the Law on Foreign Investment, VietNam is willing to sign a special agreement with any foreign enterprise in order to guaranteethat particular enterprise will have full protection from the government as far as investment

is concerned To overcome the problem of double taxation, Viet Nam is willing to enter intoagreements with countries whose firms are investing in Viet Nam So far, Viet Nam hassigned several agreements to this effect such as with France, Thailand, South Korea, theNetherlands Furthermore, the government has adopted additional regulations on customs,immigration, residence and communications intended to create favorable businessconditions in Viet Nam

3.1.5 Land Rental

The rental rate for land in urban areas shall be calculated by the following formula:

Y =X1 * X2 * X3 * X4Where: Y: land rental rate

X1: minimum land rental rate of urban group

X2: location factor (X2=1 or X2=2)

X3: infrastructure composition factor (X3=1; 1.5 or 2)

X4: trade category factor (X4=1.2; 1.5 or 2)Urban group 1: US$ 2.25-18.0/m2/yearUrban group 2: US$ 1.50-16.6/m2/yearUrban group 3: US$ 1.50-12.0/m2/yearUrban group 4: US$ 1.00-8.0/m2/yearUrban group 5: US$ 0.50-4.0/m2/yearRental rate for rural land is specified as follows:

· Land on rocky mountains or bare hills and uncultivated land: US$ 50-200/ha/year

· Other kind of land: US$ 200-700/ha/year

Projects using land for agriculture or forestry shall be exempted from payment of the specified rental rate during the period that they do not turn out the products

Project using land for other purposes shall be subject to the maximum payment of not over 50% of the specified rental rate during the period of exploring, surveying or capital construction

3.1.6 Stipulations on Labor in Foreign Invested Enterprises

Working Conditions

· Minimum wage: minimum wage is set at US$35 a month for employees in Hanoi and Ho

Chi Minh City and UD$30 outside these cities

· Working hours: Eight hours a day with a maximum of hours a week.

· Holidays: One day off a week plus a minimum 18 days of paid leave a year Seven and

half days are designated public holidays Workers with 10 years continuous service, aswell as those employed in remote areas or carrying out highly toxic and dangerous jobsare entitled to an additional five days off

· Maturity leave: female workers are entitled to 12 weeks of maturity leave and with

babies under 12 months are an extra one hour break a day for feeding

· Termination: The length of notice for termination is specified in the labour contract The

minimum lengths of notice for the different types of contracts are 45 days for definitelabour contracts, 60 for indefinite labour contracts and 1 day for project- basedcontracts

Recruitment

Foreign companies are not permitted to employ any Vietnamese below 18 years old, and inthe case of trainees, 16 years They may recruit local labour in several ways: through thelocal government-owned labour agency, by entrusting the task to labour supply companies

or by direct employment if the other two methods are inadequate Expatriates may beemployed only if no Vietnamese can be found to fill a position

Labour Contract

Labour contracts are required for the employment of Vietnamese They should be based onthe model issued by the Ministry for labour, War Invalids and Social Affairs, i.e they mustgive a job description, specify the work place, wage/salary, duration of contract andprobation period, and provide social insurance and labour protection Under certaincircumstances, the contract may be terminated An employer may dismiss a worker forfailure to carry out his tasks, breach of discipline, serious injury or illness, or if the enterprise

is forced to reduce production

Collective Labour Agreement

An enterprise with more 10 workers must sign a collective labour agreement with theworkers’ labour representatives within six months after it begins to operate The term of theagreement must accord with the labour regulations and once signed, a copy must beregistered with the local labour agency The agreement will be valid for a minimum of oneyear and a maximum of three years, and should include details like salary, conditions ofwork, welfare and social insurance

Trade Union and Labour Disputes

All enterprises must allow their workers to form trade unions In the case of disputes,management and workers should negotiate for a settlement If this fails, the two parties maybring to arbitrate either through:

· A conciliation council comprising an equal number of representatives from both sidespresided over by the Minister of Labour, War Invalids and Social Affairs

· A council established and presided over by the Minister of Labour, War Invalids andSocial Affairs

3.1.7 Immigration and Residence

Foreigners who are entering Viet Nam to study and prepare for investment shall be granted

a multiple-entry visa which is valid for three months and can be extended every threemonths

Foreigners engaged in the implementation of an investment project shall be granted amultiple-entry visa which is valid for one year and can be extended every year in accordancewith the operation term of the project

Entry visa shall be issued at Viet Nam diplomatic agencies or consulates abroad within atleast 5 days from the date of application for the visa

3.2 Current Status of FDI in Viet Nam

The number of FDI projects and total investment capital are increasing year by year.According to official statistics, by the end of 1996, the total licensed projects were 1,836 with

a total invested capital of US$26,233 billion (MPI, 1996)

Table 3.2 Growth of FDI in Viet Nam from 1988 to 1996

193

265

343 366 326

0 50 100 150 200 250 300 350 400 88-90

1.615 1.278 1.967 2.688 3.588

Year

Investment capital (US$ bil.)

Figure 3.2 Foreign Investment Capital (1988-1996)

The tempo of attraction of foreign investment capital has increased rapidly The averageannual rate of foreign investment capital was 51.6 percent in the period between 1988 and

1992 The growth rate of total investment capital has steadily increased afterward: 54% in

1992, 37% in 1993, 45.4% in 1994, 75% in 1995, and 40.3% in 1996

In terms of types of industry, the FDI projects were distributed as following:

Table 3.3 Foreign Investment by Types of Industry

Types of industry Number of projects Registered capital (US$)

9 44

38 23 41

Heavy Industry Hotel, Tourism Offices, Departments Light Industry Construction Transport-Telecom Food Industry Oil Industry Agriculture, Forestry EPZ Comstruction Education, Medicine Service

Finance, Banking Fishery

Figure 3.3 Foreign Investment by Types of IndustryForeign investment was concentrated in locations having favorable infrastructure conditions.Out of 20 provinces engaged in foreign investment activities, four of them, namely Hanoi, HoChi Minh City, Dong Nai and Ba Ria-Vung Tau have been leading the league occupying 225

of the nation’s 360 new projects, making up US$4.6 billion out of the total US$6.4 billion ininvestment capital (VIR, 1-7 January 1996) (Table 3.4)

Table 3.4 Foreign Investment by Province by Year-End 1995 (US$ million)

Song Be

Ba Ria-Vung Tau Hai Phong Quang Nam-Da Nang Lam Dong

The top five countries having the highest number of investment projects and total capital inViet Nam are Taiwan, Hong Kong, Japan, Singapore and South Korea After the lifting of the

US embargo in April 1994, American investment in Viet Nam have increased significantly,quickly becoming the sixth on the top list of countries investing in Viet Nam with 54 projectsvalued over US$1,141 million Officially, the top twenty leading countries investing in VietNam are listed in the following table:

Table 3.5 The Leading Foreign Countries Investing in Viet Nam (Year-End 1995)

Taiwan Hongkong

South Korea

Japan Singapore France

Thailand

USA Australia Malaysia British Virgin islands Netherlands

Britain Sweden Switzerland

0 500 1000 1500 2000 2500 3000 3500

Total capital Number of projects

Figure 3.5 Leading Foreign Countries Investing in Viet Nam (Year- End 1995)

3.3 Current Status of JVs in Viet Nam

In comparison with the other forms of foreign direct investment, the number of joint ventureprojects has been highest Between 1988 and 1995, the percentage of joint venture clearlysurpassed other forms of FDI, making up 70% of the total invested capital

Table 3.6 Foreign Investment by Forms from 1988 to 1995

Source: MPI (1996)

Joint Venture

100%

Foreign-Ow ned

Business Coor.

100%

Foreign-Ow ned

Business Coor.

Contract

Figure 3.6 Foreign Investment by Forms from 1988 to 1995

However, in 1996, foreign investors have shown some changes in their choice in the FDIforms From the statistics issued by MPI in the first six month of 1996, foreign investors haveshifted their preference to 100% foreign-owned form rather than joint venture Almost halfthe country’s licensed projects were in the form of 100% and as much as 30% of the totalinvestment capital being invested thorough licensed projects was in 100% foreign-ownedcapital (VIR, 19-25 August 1996)

Why do the foreign investors choose other forms of FDI over JV? What are the problems ordifficulties for foreign investors in forming a JV? These questions will be discussed in thenext chapter

Chapter 4 Major Findings and Discussions

This chapter deals with the major results obtained from the mail survey in combination withfindings from the face-to-face, in-depth interviews and desk research Details of thequantitative findings are included in Appendix B

4.1 General Information Regarding the Companies

In our survey, we received totally 37 usable questionnaires, in which 24 respondents werefrom joint-venture companies, 9 respondents from 100% foreign-owned companies, and 4respondents from BCC

The foreign respondents were investors from USA, Hong Kong, Taiwan, Japan, Thailand,Russia, Hongkong, Korea, Singapore, overseas Vietnamese; and from the companies ofvarious types of industry such as: heavy industry, light industry, hotel-tourism, offices,department for rent, food industry, fishery, construction, services The list of companies isshown in Appendix C

4.2 Favorable and Unfavorable Factors for Foreign Investors

In this part, the factors motivating and discouraging foreign investors to invest in Viet Namand choose the JV form are discussed

4.2.1 The Factors Motivating Foreign Investors to Invest in Viet Nam

As regards the investment decision in Viet Nam, foreign investors are motivated by the topfive factors as shown in Table 4.1 and depicted in Figure 4.1

Table 4.1 The Factors Motivating Foreign Investors to Invest in Viet Nam

2 Developing raw material supplies (including processing) 3.16

3 Exploiting the incentives offered by the Vietnamese government 3.11

4 Developing a regional base to serve markets close to Viet Nam 3.08

Most important

Very important

Somew hat important

Less important

Not important

Mean

Figure 4.1 The Factors Motivating Foreign Investors to Invest in Viet Nam

The utilization of the abundant and cheap labor force (with the highest mean score: 4.11) is

seen by all foreign respondents as the most important criteria This reflects the generalopinion of all foreign investors coming to do business in Viet Nam For instance, in views ofTaiwanese investors: “Viet Nam is considered to be the most attractive venue for Taiwaneseoverseas investment because of its cheap labor, abundant natural resources andinexpensive raw materials” (VIR, 12-18 August, 1996) As a result, the cost of production will

be considerably low on a comparison basis of countries in the region as one Korean investorobserved: “The cost of production here will be lower than in Korea because labor ischeap”(VIR, 3-9 June 1996)

The natural resources for developing raw material supplies (mean score 3.16) is the second

important factor of interest of foreign investors, especially in such businesses as gas, oil,mineral and agricultural products, as generally observed, “Viet Nam is resource-rich” (VIR,

27 May-2 June 1996) and “Viet Nam has natural resources endowment which may meet therequirement of the investors” (Nguyen 1994 ; O’Neil 1994)

Incentives offered by the Vietnamese government is ranked as the third motivated factor for

foreign investors (mean score: 3.11)

In an attempt to lure foreign investors into Viet Nam, adequate incentives are alwaysconsidered and offered by the Vietnamese government As Dang Vu Chu, the Minister ofIndustry said: “The government should give more incentives to encourage the industrialprojects” (VIR, 3-9 June 1996) or according to MPI, “Viet Nam will give priority to projects inagriculture, forestry, material production zones, export goods and food processing plants;and extra incentives should be given to businesses setting up in these areas, includingfavorable terms on land lease rates and other tax rates” (VIR, 22-28 July 1996)