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Vietnam's Big Chance

5 MINS READNov 16, 2006 | 04:11 GMT
Summary
The Asia-Pacific Economic Cooperation Council is meeting in Hanoi, Vietnam, amid increasing foreign investor attention to the country. Although Vietnam has tried — and failed — to increase its attractiveness to foreign investors in the past, this time around appears different. As the aura around China dims, Vietnam is in a position to learn from China's mistakes — and to become the next developing Asian nation to experience a foreign investment boom.
The Asia Pacific-Economic Cooperation (APEC) Council is meeting in Hanoi this week, putting the international spotlight on Vietnam just as it is attempting to attract more attention from investors. Although this is not the first time Vietnam has tried to attract foreign direct investment (FDI), it is the first time it has a real chance of succeeding — if it does not drop the ball. Hanoi made its first stab at moving toward free market practices in the 1980s under a plan called Doi Moi, or "change and newness." Some progress was made under Doi Moi, but then the 1997 Asian financial crisis hit, effectively stalling the plan. Although Vietnam was insulated somewhat because it was not floating the dong at the time, it grew less competitive as other Asian currencies became cheaper, and the country ultimately lost its shine for FDI. After the crisis hit, Vietnam focused inward, trying to solve some of its Doi Moi failures. Now, it is taking steps to re-emerge as a solid, investment-friendly country. The Doi Moi effort was characterized by a move from a centrally planned command economy toward a market socialism model that would be more favorable toward foreign business. Examples of Doi Moi principles included the payment of wages in cash, the abolishment of internal customs checkpoints, the devaluation of the Vietnamese dong to market rates, the elimination of price controls and a reduction in the government workforce. Although these principles were committed to paper, most were not followed consistently, likely because there was little external incentive to do so. Things could be different this time around, primarily for two reasons. First, China's current financial situation provides an opening. Second, Hanoi appears more serious than before. Financial analysts and multinationals already are pointing to Vietnam as "the next China." Vietnam has a strong and mostly stable political environment, a young population of 84 million (the second-largest population in Southeast Asia), a cheap workforce that includes many English-speakers, and good natural ports (although they need upgrading). Also, Vietnam is much smaller and less geographically fragmented than China, and it has a more unified society. As Vietnam is showing off its capabilities, China is becoming less foreign-investor-friendly: The Communist Party of China appears to be turning inward now and is growing less hospitable toward "nonessential" foreign industries. Meanwhile, labor costs are rising, and China still has not attempted to deal with the question of intellectual property rights — a contentious issue for the United States and other countries. On the other hand, although Vietnam has one of the highest global rates of software piracy, it recently committed to instituting high piracy fines, and did levy fines against an office of South Korea's Daewoo Corp., the first time Hanoi has addressed corporate users of software. Vietnam, then, has China to thank in many ways for its increasingly attractive image. Indeed, it may be able to learn from China's mistakes to become a — possibly better — hotspot for foreign business investment in Asia. Foreign investment in Vietnam already is growing steadily. Intel recently announced a $1 billion plan to build what it calls the world's largest semiconductor assembly and test facility in Ho Chi Minh City. In fact, in 2005 Vietnam ranked No. 4 among Asian-Pacific countries in the number of new foreign investment projects (generally, not just in the electronics sector), beating out Hong Kong, Thailand, the Philippines and South Korea, and coming in just behind Singapore (India and China still win by far the most new foreign projects in this region). In 2005, Vietnam's FDI totaled $5.8 billion, a record in the past eight years. Additionally, Vietnam has just joined the World Trade Organization, which gives it a push to become more free market-oriented, to better compete with the standards of developed countries and to boost its exports substantially. Despite the international attention and the growing interest in Vietnam, the country is not yet ready to handle all the increased investment, especially in the area of infrastructure. In particular, the country needs to update its electricity production, build higher-capacity roads and supersize its ports to handle the biggest super-cargo ships. Moreover, the old problems that Doi Moi attempted to solve remain. Hanoi still hangs on tightly to business operations in the country, the banking system remains tightly controlled by the government, corruption continues and laws are not consistently enforced. Hanoi, however, is making efforts to solve these problems. In 2000, the government passed an enterprise law that significantly boosted the creation of private businesses. New Prime Minister Nguyen Tan Dung and President Nguyen Minh Triet also appear to be attempting to reinvigorate the Doi Moi model by cracking down on corruption, and emphasizing deregulation and privatization. Additionally, the government is trying to modernize its legal system, recently abolishing a law that allowed the state to detain people for two years without trial. Meanwhile, Vietnam is spending a large percentage of its gross domestic product on infrastructure improvements, many of them projects undertaken by foreign firms. Finally, Hanoi announced this week that it approved a joint venture with Singapore to build a high-capacity port in the southern Ba Ria-Vung Tau province by 2017, which will handle super ships of 80,000 dead weight tons. The APEC summit is giving Vietnam a stellar opportunity to demonstrate that it is moving in a pro-business direction. After the summit, when the international attention dies down, Hanoi will show whether it is truly committed to foreign investment and all that will entail. It is up to Vietnam to take the ball and run — or miss the opportunity it has been presented.

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