United States: Vietnam – Private Sector Development – Outlook On The European Union Vietnam Free Trade Agreement (Evfta)

The private sector is an intrinsic part of the economic and social development. Yet Vietnam does not have as many private enterprises as its neighboring countries.

Private enterprises enhance job creation, Gross Domestic Product and competitiveness. In order to achieve the private sector development, Vietnam should provide elements enhancing technological reform and innovation support, develop measures against corruption and finally encourage the return of Vietnamese young talents to Vietnam.

Encouraging innovation, international cooperation and global supply chain operation

The agriculture industry serves as a good example of differences we can find between Vietnamese industries and developed countries' ones. In Vietnam, the agricultural sector is mostly made of small and medium enterprises (SMEs) with low product value and most of them did not invest in hi-tech equipment. Thus to raise productivity, not only technological reform, but innovation as well as investment in hi-tech sectors must be encouraged. Cooperation with foreign enterprises would accelerate the development and exploitation of new technology products, inventions, machinery that undoubtedly increase product value and competitiveness.

In addition, with establishment of international brands, Vietnamese enterprises could attend international fairs and exhibitions where they would approach other enterprises and techniques. Vietnamese enterprises would then be more likely to receive knowledge and to develop international cooperation with foreign enterprises. The Vietnamese Government and Vietnamese associations could co-organize business delegations to exhibit, outside Vietnam, its industry and production to compare the product value and understand the expected requirements.

Private enterprises do not manage to operate a complete supply chain which has a great impact on export. Indeed, it implies higher costs for finished products, longer delay for production and finally a decreased competitiveness. Policies aiming at promoting local investment and international cooperation for the acquisition of new techniques and technologies must be promulgated. With the Trans-Pacific Partnership, the EVFTA and all free trade agreements Vietnam has signed, new requirements are expected from Vietnam.

Fighting against corruption and supporting credit to SMEs

The Ministry of Planning and Investment noted that half of Vietnamese enterprises is having difficulties to obtain credits due to the lack of transparency in their operation, lack of transparency caused by unofficial payments to Government's agencies. The Government has already manifested its will to combat corruption in the Directive 12/2016/CT-TTg issued by the Prime Minister in April 2016, which tasks Ministries, People's Committees and the Government Inspectorate with direct inspection and handling corruption-related matters. Moreover, the Government is drafting a law to support SMEs and enhance their role in the global supply chain. A practical mean to control corruption could be to encourage the use of non-cash payments to Government's agencies and to adopt business codes of conduct.

The Government has duties to enhance private enterprises' development and businesses by encouraging account transparency and implementing preferential tax policies. To fulfill its duties and facilitate credit access for SMEs, the Government should also establish itself a link between enterprises in need for capital and credit institutions. Therefore in order to facilitate loan procedures, the Government should lower interest rates and require credit institutions increase loans to businesses.

Improving the Corporate Governance

Development of the private sector goes together with the improvement of the Law on Enterprise 2014,  in which the Government's policies appeared to be more comprehensive than in the previous Law on Enterprise 2005. Nevertheless, regarding the corporate governance, more efforts could be managed to reach international standards. Regarding the advantages, most of foreign private enterprises choose the form of Single-Member Limited Liability Company (SMLLC) to establish their presence in Vietnam.

The question of how a SMLLC manager exercises its powers shows the necessity to improve the corporate governance and integrity. Article 75 of the Law on Enterprise gives the manager a supreme authority in dealing with his business. However, the owner cannot directly use its power and must act through the Member's council or the Company's President which means that he only has the power to nominate the people acting on behalf of the company and ratify their decisions. The regulations should thus be more specific on what decisions require the owner's approval and which do not.

A general clarification of provisions related to corporate governance will help the development of a clear and transparent business and contribute to promote integrity in businesses' establishment and transactions.

Attraction and training of qualified workforce

Young talents such as Vietnamese students or young professionals overseas must be attracted back to Vietnam as they constitute a highly efficient mean to allow transmission of foreign know-how and considering the undeniable need for innovation. The Government should then encourage the promotion of talents' knowledges especially those acquired abroad. In order to attract them, private enterprises should offer students or professionals a deserved remuneration and the opportunity to become part owners in businesses, as the best way to secure a lasting professional relationship.

In addition, for the enterprises to receive foreign knowledges and deepen the spillover effects, local workforce needs a specific training in order to meet with industrial requirements regarding productivity, products quality etc. It is only then that SMEs will be able to perform a complete supply chain. The Government should assist the creation of specialized schools and the development of intensive program centers in cooperation with local universities.  Indeed, the private enterprises' competitiveness starts with a highly qualified labor force.

Outlook on EVFTA

On December 02 2015, the EVFTA is signed and is planned to enter into force by January 2018. Under this agreement, almost all tariff lines disappear and many tax duties are reduced. For some products such as agricultural products, tariff rate quotas are put in place.

We can expect many consequences. Firstly, the consolidation of Vietnam's privileged position in the ASEAN as one of few countries to have signed a free-trade agreement with the EU (except for Singapore which concern different trade). Secondly, Vietnam will have to meet more requirements especially in productivity, product value and workforce qualification. Then, a lot of investment will flow from Europe to Vietnam and will bring capital to more businesses helping them to finance innovative products and techniques and to perform a complete supply chain in the textile and footwear industry.

Finally, real wages of qualified laborers are expected to increase by up to 12%, leading to attract more students and young professionals overseas to Vietnam. The EVFTA will assist the Government in helping private enterprises through investment and expected requirements.

The most important issues

–       The situation is, at the present time,  precarious for SMEs. The development of private enterprises remains a priority and the EVFTA is expected to help the Government support private enterprises.

–       Innovation is the key to access a complete supply chain and requires precise needs in order to perform it: young talents, favorable policies and capital.

–       Education, by means of well thought programs and abroad studies, is necessary to prepare the workforce to embrace new requirements and increase products value and private enterprises' competitiveness.

–       Corruption is a drag in the private sector development because it limits credit access and discourages foreign investment. This issue also impacts the whole economy development and requires immediate reaction from the Government through mandatory measures.

–       Reorganization of the corporate governance will benefit companies especially SMLLC by creating a clear and transparent business environment and promoting integrity.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.

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