VN-EU FREE TRADE AGREEMENT
The Role of the New Investment Law and EVFTA
The New Investment law, which was passed by Vietnam’s National Assembly in June 2020, has taken effect on 1st January 2021. Since it is aimed to ease the doing of business in Vietnam it will have a positive impact on the attraction of Foreign Direct Investment (FDI) and the improvement of Vietnam’s business environment. This effect is perfectly timed with the positive effects of free trade agreements such as RECEP, CPTPP and EVFTA (EU-VN Free Trade Agreement). This creates synergies that Vietnam needs right now in times of Vietnam’s attempts of repositioning after the Covid19 crisis.
The direct impact of the law on the attraction of FDI to Vietnam
In general, the new Law on Investment helps resolve overlapping investment-related laws, clarifies conditions and principles to select investors for projects involving land use, including the auction of land use rights, bidding to select investors, and the approval of investors and investment practices. What are the biggest changes in specific?
- Foreign investors are entitled to the same market entry conditions as applicable to domestic investors for sectors both Foreign and domestic investors can invest without any conditions (except for areas subject to market entry conditions and are to be listed by the Government)
- It is saving time for both, foreign investors and licensing authorities in determining and appraising investment proposals and applications for registration of M&A
- New investment incentives are introduced. They are based on performance and investment time and towards attracting for Foreign Investors to enter the VN market
- New forms of investment in the context of global transforming Industry 4.0 are allowed, especially via incentives in the area of innovation and technology start-up projects
- It provides more industries with investment incentives, e.g. tertiary education, medical materials and supply, science and technology products as well as products contributing to the global value chains...
- To ensure the quality of foreign investment, the amended law includes specific conditions for sectors and projects that are entitled to investment incentives.
- These sectors are carefully selected and designed to lift Vietnam’s economy to the next level of Industry 4.0. This includes high tech sectors like IT, R&D, new and clean energy
- The investment procedures in the area of M&A are also clarified and made easier for foreign investors. However, advice from law firms will be still important, especially if there are changes in the ownership ratio of foreign investors in the target company.
These changes underline the government’s efforts to further improve Vietnam’s business environment as well as enhance the position in international rankings such as the Ease of Doing Business report by World Bank and Regional Risks for Doing Business by World Economic Forum
Synergies of the revised investment law and EVFTA
The new law comes at the right time, because of the many Free Trade Agreements Vietnam has signed and/or ratified in the last months. Among them, the most advanced and modern one is the EVFTA. The advantages for Vietnam due to EVFTA are clear:
- It gives access to the biggest market worldwide
- Along with the Covid19-crisis, Vietnam can make use of the great interest of EU countries governments to recover.
- Vietnam could profit from technology and technology transfer from the EU, especially in connection with EVIPA, which will hopefully be ratified this summer.
- Adapting the high EU standards would strengthen Vietnam’s competitiveness in the world market.
- The option for Vietnamese companies to invest in Europe (“reverse investment”) also has good prospects.
- As far as the upcoming trade war between the US and China is concerned, Vietnam is able to diversify imports, exports and FDI, involving the EU as a neutral 3rd party..
- EVFTA is definitely one essential part of Vietnam’s repositioning strategy.
The synergies of the new investment law and EVFTA are obvious: Foreign investment has been one of the key drivers of socio-economic growth in Vietnam over the last decades. Both, EVFTA and the New Investment law are promoting FDI by improving Vietnam’s global competitiveness. The new law is increasing Vietnam’s attractiveness just in those days, EVFTA is showing its positive effects. Combined with EVIPA, which will hopefully be ratified this year, the synergetic effects will be even bigger.
The positive effects of foreign investors to have projects and certificates of investment registration before establishing a creative start-up business
It is very positive that foreign investors must not apply for Investment registration certificate if they want to invest in Startup or Investment fund for Startup in the area of high tech, digitalization, smart building, or energy.
These industries are the essential prerequisites for Vietnam to meet the requirements of the Industrial Revolution 4.0. Against this context, promoting this development, whether by domestic or foreign investors, makes a great deal of sense. Subsequently, Vietnam would be an interesting place for attracting high-quality investment. Hence, Vietnam can be encouraged to continue on this path. It will support Vietnam’s repositioning in the world after Covid19. Moreover, it demonstrates the shows the openness of Vietnam’s leaders to speed up the economic recovery and development. There will be no significant changes here even after the party congress.
With the new Investment Law, Vietnam has proven its openness to foreign investors, who are thirsty for legal certainty. Besides all the other positive signs giving by Vietnam, the law is one of the reasons, why – for instance - the German business is very bullish regarding Vietnam in general and their own business in Vietnam in specific.
According to a recent survey of the German Chamber of Commerce AHK, 55% of German companies expect Vietnam to recover this year, and 32% next year. Regarding their own business in Vietnam, 50% of these interviewed German companies expect a better business in 2021. Only 41% out of them see their business unchanged. Just 9% are pessimistic. Compared to other countries, these figures are outstanding.
Again, openness and legal certainty as seen in the Investment Law play an important role. However, there is always room for improvement.
Recommendations for domestic and foreign businesses to take advantage of the investment law
Despite the good conditions created by the new Investment Law, success is not guaranteed. One of the key success factors is to get the word out to the business in Vietnam and abroad. "Knowledge is power": this saying also counts here. Unfortunately, many business people are not yet aware of the positive effects of the law. This is where awareness campaigns must come in. In Vietnam, VCCI, EuroCham and the national European Chambers of Commerce are natural partners for dissemination, together with the Friedrich Naumann Foundation in Vietnam. Abroad, the Vietnamese embassies can play a supporting role here. For example, the Vietnamese ambassador in Berlin, Dr. Nguyen Minh Vu, is very well connected with the German business organisations. These contacts can be used for another Vietnam image campaign.
However, it remains essential for foreign investors to involve lawyers at an early stage. the aim here is to identify stumbling blocks in good time and remove them.
To put it in a nutshell: In order to reposition Vietnam after the Covid19 crisis, the new investment law is an important element for recovery. It stands for the open and liberal politics of Vietnam. It moves in the direction of legal certainty and makes Vietnam - especially in conjunction with EVFTA and EVIPA - more attractive for foreign investors.