Foreign direct investment is an activity that promotes economic development of the investing country and the host country. However, when implementing such activity, investors need to clearly understand the definition, procedure, form, advantages, and disadvantages of foreign direct investment. In the following essay, NPLaw will provide our client with issues relating to foreign direct investment.
What is foreign direct investment?
Definition
Pursuant to Clause 13, Article 3 of the Law on Investment 2020, foreign investment means that investors transfer capital investment from Vietnam to abroad, and use the profits from such a capital resource to implement activities of business investment abroad.
According to Clause 22, Article 3 of the Law on Investment 2020, an economic organization with foreign capital investments is an economic organization with foreign investors as members or shareholders.
Therefore, foreign direct investment is the form of long-term investment of an individual or company from one country in another country in the form of the establishment of a manufacturing base and business with the purpose of profits.
Characters
- Foreign direct investment is essentially private investment with the first purpose of earning profits;
- The owner investor implements self-decisions on investment, activities of business investment, and is responsible for losses and interests in the business. The investor’s income depends on the enterprise’s business results, in which the investor invests capital, and is income in nature without revenue;
- Foreign direct investment often involves technology transfer to the host country through the referral of machines, appliances, patents, inventions, technical secrets, managerial staff, etc. to the host country to implement projects;
- The foreign investors have to contribute the minimum level of capital in legal capital or charter capital, depending on the regulation of each cọuntry for taking control rights or participating in control business.
For example: Foreign direct investment
Foreign investment includes the following forms: logistics and production, repurchase, retail, service, merger, etc.
For example:
In 2017, Apple Inc. has headquarters in the USA, and announced an investment amount of 507,1 billion dollars to promote the work of research and development in China. The announced investment amount will promote the growth of Tim Cook CEO in the China market, although Apple’s turnover in the China market has decreased 12 percent from a similar quarter of last quarter.
According to the China Ministry of Commerce, China's economy has been promoted by capital investment from FDI in production and high-tech services in the country, and it grew in turn by 11.1% and 20.4% in the first half of 2017. While, the India Law on FDI shall allow the investor to invest directly with 100% foreign investment in retail without the Government’s approval.
The forms of foreign direct investment
Foreign direct investment includes the following forms:
- According to the investor’s motivations
- Capital from efficient seeking: These are capital sources that apply low input prices of businesses in the host country, such as the cheap price of raw materials, the cheap labor cost, the price of production factors (electricity and water), the communication cost, the transportation cost, the cheap price of business premises, the preferential tariff, and legal conditions.
- Capital from market seeking: This investment form will help to expand the market and protect the market from competitors.
- Capital from resource seeking: These are capital sources that help to exploit cheap and plentiful resources in the host country, and exploit labor sources with plentiful experience or little skill but cheap.
- According to the character of capital flow
- Equity capital: The foreign investors can purchase businesses’ stocks or securities that are issued by one company in the host country at a level that is enough to participate in the company’s administrative decisions;
- Reinvestment capital: The enterprise with capital from FDI can use profit gained from business activity in advance to invest extra.
- According to the nature of investment
- Merger and Acquisition: merger and acquisition means two or many enterprises with capital from holding FDI implement a merger together, or one enterprise (operating in the host country or abroad) redeems another enterprise with capital from FDI in the host country.
- Investment in operation means: when a holding company invests to purchase and establish new means of business in the host country, so such a form helps to increase investment.
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The advantages and disadvantages of foreign direct investment
The advantages
- Foreign direct investment is a means that supports investment and development of infrastructure, and creates work for the employee;
- Foreign direct investment promotes economic growth for the host country and the investing country;
- Foreign direct investment helps countries expand their investments into the international market.
The disadvantages
- Foreign direct investment has the regulation and supervision of the Government, so the risk level of politics will be higher;
- Using many capital investments from foreign direct investment can cause less special importance to maximum mobilization in domestic capital investments, resulting in an unbalance in investment structure and dependence on foreign capital investment.
Questions arise when implementing foreign direct investment
Can the investor or enterprise open an account for the direct capital investment in foreign currency?
Clause 5, Article 3 of Circular No. 06/2019/TT-NHNN stipulates an account for the direct capital investment in the exchange control of foreign direct investment in Vietnam, as follows: “an account for the direct capital investment means a spend account in foreign currency or Vietnamese Dong that an enterprise with foreign direct investment or a foreign investor opens at the bank entitled to implement transactions relating to the activities of foreign direct investment in Vietnam according to Articles 5, 6, 7 of this Circular.”
Therefore, the investor or enterprise can open an account for the direct capital investment in foreign currency or Vietnamese Dong as defined by Articles 5, 6, and 7 of Circular No. 06/2019/TT-NHNN instructing the exchange control of foreign direct investment in Vietnam.
What are the supporting policies when implementing foreign direct investment?
Preferential objects of foreign direct investment as defined by Clause 2, Article 15 of the Law on Investment 2020 include:
- The investment projects belong to the profession of investment incentives according to Clause 1, Article 16 of the Law on Investment;
- The investment projects belong to the area of investment incentives according to Clause 2, Article 16 of the Law on Investment;
- The investment projects have a capital scale of 6.000 billion dong or more, implement disbursements of a maximum of 6.000 billion dong within three (3) years from the date of being granted the Investment Registration Certificate or accepting the investment policy. Simultaneously, the investment projects have one of the following criteria: total turnover with a minimum of 10.000 billion dong per year within the latest duration after three (3) years from the year of receiving turnover, or use from 3.000 employees or more;
- The construction investment projects of subsidized houses or the investment projects at rural use from 500 employees or more; the investment projects use disability as employee according to the Law on Disability;
- There are High-tech Enterprises, Science and Technology Enterprises, Science and Technology Organization; projects with technology transfer belonging to the list of technologies incentivized transfer according to the Law on Technology Transfer; Science and Technology Business Incubator according to the Law on High-Tech and the Law on Science and Technology ; enterprises for manufacturing and providing technologies, appliances, products, and services to serve the requirements of environmental protection according to the Law on Environmental Protection;
- The investment projects for innovative star-up, Ulis Innovation Center, Development Research Center;
Therefore, if foreign direct investment is one of the objects of investment incentive, it will receive investment incentives and investment support policies. Pursuant to Article 18 of the Law on Investment 2020, the support policy for foreign direct investment shall include:
- Support for the development of technical infrastructure systems, and social infrastructure within or beyond a fence of investment projects;
- Support for training and development of human resources;
- Support for credit;
- Support for approaches to production and business premises; support for moving manufacturing bases and businesses according to the state agency’s decision;
- Support for science, technology, and technology transfer;
- Support for market development and information provision;
- Support for research and development.
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What are the things that investors need to notice when implementing foreign direct investment?
When implementing foreign direct investment, the investors need to be interested in the following problems:
- The form of investment: the investors need to choose a suitable form of investment so that the investment is implemented smoothly and advantageously.
- The capital source: the capital source must be stable, and an account must be opened for the foreign direct investment according to the Law.
These are all information relating to the regulations for foreign direct investment as prescribed by Vietnamese Law. Please don’t hesitate to contact us, if the clients have any further questions.
NPLAW is proud to be a prestigious law firm unit and has the trust and belief of clients, enterprises, and individuals. NPLaw specializes in providing legal services all-around relating to domestic and abroad investments such as Enterprise, Real Estate, Intellectual Property, Labor; Drafting Consultation, negotiations and concluding support for the Commercial Contract, domestic and abroad Service Contract; consultations and support for implementing licensed procedures of licenses, etc,. NPLaw, with our professional Lawyers and Specialists, we have the full ability to consult with and support customers as they implement the above procedures. Along with the slogan “Your benefits - Our Priority”, NPLaw definitely becomes the accurate, and safe choice for your legal issues.
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