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GETTING STARTED - An Insider's Guide to Starting a Business in Vietnam
By Peter N. Sheridan

Part V - Fully (100%) Foreign Invested Enterprises

Table Of Contents:

Part I - Introduction

Part II - General Business Considerations

Part III - Cultural Differences

Part IV - Mechanics of Foreign Investment - Representative Offices and Joint Ventures

Part V - More Mechanics of Foreign Investment - Fully (100%) Foreign Invested Enterprises

Part VI - Still More Mechanics of Foreign Investment - Business Co-operation Contracts and Build-Operate-Transfer Enterprises.

PART FIVE - FURTHER MECHANICS OF FOREIGN INVESTMENT

• Fully (100%) Foreign Invested Enterprises

The favored vehicle for foreign investment in manufacturing operations. A fully (100%) Foreign Invested Enterprise (FIE) sometimes called a Foreign Owned Enterprise (FOE) affords the most control and the least risk, providing the foreign investor understands the business climate and is comfortable in all regards with operating in this very foreign (to western and other eastern nations) environment. The MPI will look closely at all FIE and may seek to steer the investor to a joint venture.

Comfort levels increase over time. Some foreigners have substantial experience with Vietnam already, or have overseas Vietnamese staff willing to return here to support the new enterprise. (Please see the article: Vietkieu.  Who Are You?) Comfort can also be achieved with the use of the services of VVG or others similarly experienced and well-situated to help guide the start-up phase.

MPI Approval. Fully (100%) FIEs are approved by the Ministry of Planning and Investment (MPI). When approved, the FIE will be a limited liability company. The foreign investor should be prepared to justify to the MPI the necessity for a 100% FIE, particularly as the MPI favors providing Vietnamese citizens with a share of developing business. Some licenses for 100% FIEs are not being issued.  In January, 1998 it was announced there will be no further 100% FIEs approved in the forestry industry.

State Option to Convert to Joint Venture. In the event a determination is made that a proposed investment is in an area of particular importance to the State, the MPI will advise the foreign investor to insert a possibly repugnant provision into its application for a license. The provision is that the foreign company will consent to a Vietnamese enterprise, on the basis of an agreement to be reached, to purchase a share of the capital (based on the declared value of the Total Legal Capital) of the 100% FIE.

If no such provision is made, at any time an amendment to the charter is sought, perhaps for an extension of the licensed period of operation or to hire more domestic or foreign employees, the State can revisit this aspect. The MPI may then insist on the insertion of such a provision. In that a case, it will become important to set in the record the names of the Vietnamese principals, the proportion of ownership, the compensation terms and the timing of any required assignment of ownership interest.

Total Legal Capital is similar to Paid-In-Capital.   It is the sum total of that amount of cash, cash equivalents, machinery, equipment, construction and outfitting that the foreign party contributes to the enterprise. In Vietnam, it includes all capital the investor projects it will contribute over the life of its licensed operation (usually 20-50 years).

Total Investment Capital is the Legal Capital in addition to all loans taken during the life of the enterprise.

By law, the Total Legal Capital must constitute at least 30% of the Total Investment Capital. Any change in the value of the Total Legal Capital after approval and licensing MUST be approved by the MPI with an amendment to the Charter and Feasibility Study. There is no restriction to changing the value of the Total Investment Capital beyond that initially approved.

The duration of a fully (100%) FIE is determined by the MPI on a case bases, and usually is not permitted to exist beyond 50 years. The usual period is 20 years. However, in special situations and only when granted approval by the National Assembly, licensed approval can be as long as 70 years.

A Legal Entity. A fully (100%) FIE is a recognized, separate legal entity in Vietnam. Its liability is limited to its legal capital, the amount of money invested by the owners of the enterprise. This limitation concept may be more illusory than real. There is no precedent to protect liability with regard to third party claims. However, as a practical matter, the ability for a Vietnamese entity to collect on a local award beyond the limits of Vietnam’s jurisdiction may be restricted. Liability claims may be brought in other lands to the extent that the matters giving rise the to claim may effect other countries. In that instance, the issue of limiting a third party’s liability may raised.

Major Advantage: No Limited Shareholder Control. Recall that in a Joint Venture, the foreign investor may suffer the desires of a minority partner's control of "important decisions." That partner may not make a capital contribution equal to its minimum required 30% share of the equity in the enterprise.   Yet that minority partner will claim a 30% share of future profits, and balk if the long-term interests of the foreign company does not call for profits in the short-term.   This may NOT be the best method for a foreign investor, particularly in a manufacturing enterprise that produces goods primarily for export.

Business & Cultural Differences. We discussed cultural differences in Part II and Part III.  We repeat our caution for those considering doing business in Vietnam without a local partner. While the system in Vietnam is conducive to all transactions, the style of doing business here is NOT like that in any other developing nation. There are major problems to overcome when doing business, period.   There are more problems to overcome when doing business as a foreigner acting alone in Vietnam.

Agent Introductions. Foreigners "believe" they need high-level introductions to business and political leaders. Southerners say northerners have the "powerful" jobs. Bribes are often cited by travelers as necessary to complete transactions in Vietnam. The system is likened to China, Thailand and even Nigeria and Saudi Arabia. Such comments and comparisons are not wholly accurate.

People from the north do predominate in SOEs and the government. However, the immediately previous and the current Prime Minister were born and raised in the south. There are many good and competent people in all parts of Vietnam who are bright and hard-working. Many do indeed lack substantial if any experience in operational management of free-enterprise business, and risk management.

Doors are open to most foreigners.  They are particularly open to nearly every American business person. Simply write to the office stating the preferred dates and the subject matter, and go there for a visit. Of course it’s not always that easy.

If you have the current address and fax or telephone number, letters and phone calls need follow-ups. Vietnamese value established relationships. They prefer a personal visit to a phone call or a fax letter.  They want to know you think well of them to take the time for a visit.  If you live in Hanoi, they want you to visit them in person, and not call on the telephone.  Out-of-town visitors have an easier time.   Letters are generally returned.  Many telephone calls are not.

As with many other peoples, an official's friend can generally make an appointment with a busy official faster than can a stranger. However, the American Embassy in Hanoi and Consulate Office in HCMC provide some assistance with out charge.

Bribes - Completely Unnecessary, unless.... A few words about bribes. The Vietnamese custom of "bonus" payments makes bribes easier to condone here than in America. Introduce a buyer to the private or public seller of a television and the seller will pay a small sum (5% - 10%) to the "agent." Some would-be agents stand outside a seller’s shop and then direct customers already looking for the shop, inside. Those "agents" then demand their bonus!

The concept of a bonus payment takes on an entirely different aspect when applied to large projects.  Illegal presents, still quietly demanded some by some officials, tend to give credence to the presumed necessity of paying bribes. One official we know reportedly will not talk substance unless the visitor carries in a gift-wrapped box.    Local Vietnamese partners in a Joint Venture are therefore supposed to run interference and insulate the foreign investor from such crimes. However, such "problems" are more apparent than real.

It has been our experience that NO bribes have ever been asked and NO bribes are expected by government officials, except in the area of customs, immigration and local police. It must be the rare, higher-level official who will ask for or accept a bribe from an American. We’ve heard the story of the "necessity" of giving a secretary a gold pen to make an appointment to see her boss. We once (at the Saigon Taxi Company) were denied the chance to see the General Director and "knew" that a bribe was needed.

We chose to take our business to one of the many other taxi companies with absolutely no difficulty, rather than engage is the practice demanded. Failure to give a bribe will not be fatal to a transaction. We know of few who, if offered, would refuse to accept payment. We know of no one who can guarantee favorable treatment, with or without payment.

As to the official who reportedly demands a wrapped gift?  We've successfully been doing business with him and his office for four years.  We have never carried or sent any wrapped gift, and none has ever been sent on our behalf.

Slow-downs. We have been told the absence of a bribe may slow a process down. However, the system of doing business in Vietnam is already time consuming. It is often painfully slow. For example, the people are NOT comfortable discussing business on a telephone. Even appointments must be made in person or by letter. It is considered rude to refuse to meet, have tea, and discuss even the most routine matter in person.

In the airport, customs and immigration officials willingly and openly accept "coffee money."  If it is not offered by returning Vietnamese and Chinese, it sometimes but not always will be asked for, politely.  If not given, the visitor may be delayed. The official may claim the documents have to be re-written.  Bags may have to be searched.  Rarely are western visitors any longer put to such an ordeal.

Our recommendation is to NOT pay any coffee money, and not try to do anything illegal.   The trip to Vietnam is a long one.  Some folks have waited ten years or more; than flown for 24 hours.  What is another 30 minutes to one hour delay in such a case?  If we all stop paying the money, the border officials will soon stop asking.  OR, the State may choose to realize what a blight this practice is on the honest people of Vietnam, and of its own accord, put a halt to this atrocious practice.

Still More On Cultural Differences. The biggest problems most foreigners have in Vietnam are due to the vast cultural differences that can become nerve wracking, distracting, and actually interfere with good business. An example of some cultural traits:

• People laugh when they screw-up;
• Time seems to be  meaningless and have little value;
• Vietnamese drive as demons possessed, yet smile at you on a near fatal miss;
• It is impolite to say "no."
• One does not answer questions as expected.
• Personal contact and friendliness is very important.

It has been said that the three most important principals for doing business in Vietnam are Patience, Patience and Patience.

Life in general, and particularly business in Vietnam, can be more of a challenge than a pleasure for a foreigner uncomfortable in this culture, and who does not have a local partner.  The partner must be more than just bi-lingual.  He must be fully informed and comfortable to explain such matters, to guide the foreign staff, and to stand up to the authorities who may make unreasonable requests.

Survival Tips:  These are necessary simply to survive, and more necessary to succeed, in business. The foreign visitor and business person should at all times:

• Keep a sense of humor,
• Not show anger,
• Be tolerant of mistakes,
• Be generous with greetings,
• Show marked interest in the life and family of one’s associates and workers, and
• Accept responsibility for the emotional and personal well-being of one’s workers and vendors.

The failure of foreigners to abide by these differences are some of the major reasons one will so often hear that doing business in Vietnam is NOT like doing business in any other country. Overcoming these differences is mandatory to successfully work with the people of Vietnam.

Should these distractions be difficult for you and your staff, and if you cannot hire a local Vietnamese national you can trust, the foreign investor should consider NOT forming a fully (100%) Foreign Invested Enterprise (FIE).

For a discussion on the use of overseas Vietnamese who are expected to bridge the needs of the foreign company and the local environment, please see a related article, Vietkieu. Who Are You?

State Foreclosure on Market Entry. A reason to enter Vietnam’s markets now rather than later is due to the expectation that certain entries will be foreclosed from further 100% foreign owned operations. As mentioned above, in early January 1998, a complete ban on further fully foreign invested enterprise in forestry projects was announced. This is in face of a national priority project with total invested capital of $1.5 billion to plant 5 million ha of trees.

Please Read More From This Article:

Part I - Introduction

Part II - General Business Considerations 

Part III - Cultural Differences

Part IV - Mechanics of Foreign Investment - Representative Offices and Joint Ventures

Part V - More Mechanics of Foreign Investment - Fully (100%) Foreign Invested Enterprises

Part VI - Still More Mechanics of Foreign Investment - Business Co-operation Contracts and Build-Operate-Transfer Enterprises.

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