Underground fees discouraged foreign investors

Posted on April 22, 2011

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Underground fees (bribes to government officials) deter foreign investors from making investments in Vietnam

Foreign investors in Vietnam have pointed out that underground fees are the biggest problem for them when doing business in Vietnam. Experts have warned that tax incentives and a cheap labor force will not be enough to attract foreign investors to Vietnam, if the problem cannot be solved.

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FIEs (foreign invested enterprises) have to pay too much on “commissions”
Unlike domestic enterprises, FIEs highly appreciated the dynamism and infrastructure conditions in localities. However, the positive feelings cannot help drown the worry about bribery and the lack of transparency in policies.

Dr. Edmund Malesky, representative from USAID, said foreign investors are complaining that unofficial expenses are the most serious problem in Vietnam. 20 percent of FIEs say “they had to pay such a fee when registering business.” 40 percent of enterprises said they had to pay a “commission” when joining bids for public procurement projects.” 70 percent of enterprises had to pay the so called “lubricating fees” in order to get goods cleared quickly. Meanwhile, FIEs have no other choice than paying the unreasonable fees. Fruit importers and exporters, for example, always have to try to get imports and exports cleared as soon as possible, or products will get spoiled soon.

However, the problem is though even for enterprises paying such lubricating fees. They still cannot join the market more easily. Mr. Edmund Malesky from USAID said “FIEs always have to struggle with the regulations set by local authorities. It takes businesses more than one month to complicate legal procedures (it took domestic enterprises half a month), which is really a burden on FIEs.”

It seems that FIEs also bare more inspections from state management agencies than domestic enterprises. The stability level in land use also proves to be lower. Only 1/3 of FIEs have the land use certificates, while ½ of domestic enterprises have such certificates.

The quality of the labor force is also a problem. Only 18 percent of enterprises have positive feelings about the labor force index. Many enterprises say they have to spend money and time to retrain laborers.

Tax incentives will not be enough to attract foreign investors
According to Dr. Edmund Malesky, there are 10 main factors which influence investor’s decisions on whether to make investment in Vietnam. These include the investment costs and quality of the labor force, the tax incentives and land use, the political certainties, the expected expenses on materials. Besides, they also consider the purchasing power of consumers, the scale of the domestic market, the infrastructure in industrial zones and macroeconomic stability.

Surveys have shown that the tax incentive policies applied by local authorities are ineffective. That explains why investors chose to set up factories in the provinces which do not offer many preferences.

The current average profitability rate in the foreign invested sector in Vietnam is 20 percent, or 17,000 dollar per labor unit, which is considered relatively high. Especially, the rate is very high, at 28 percent in the service sector. However, some investors still reported losses in 2010. This has raised a debate why the enterprises took a loss, and if the loss is the result of the so called “price transfer”.

According to the expert from USAID, “FIEs, both profitable and unprofitable ones, say they don’t think the market conditions and current policies can help them succeed.” In other words, the strategy on attracting foreign investors, and currently applied investment incentives have not brought efficiency.

He said it deserves thinking about why not many FIEs want to choose domestic enterprises as subcontractors, and why 54 percent of goods and intermediate services have been purchased from other countries instead of domestic sources.

A question has been raised for Vietnamese policy makers is: what should Vietnam do in order to retain existing foreign investors and attract more investors in the future? The expert from USAID said “Vietnam not only should offer tax incentives, but also need to improve the information providing, upgrade the training of the labor force, and take actions to help investors reduce the time costs.

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Posted in: Business, Corruption