Don’t judge a book by its cover

23-Jul-2019 Intellasia | The Saigon Times | 6:02 AM Print This Post

On July 5, the Politburo issued a resolution on foreign investment based on which the government will detail institutions and policies to improve the quality and efficacy of foreign investment to the year 2030. According to the prime minister, going hand in hand with investment attraction is screening. Therefore, what are the selection criteria and what is the screening mechanism?

Foreign investment, both foreign direct investment (FDI) and foreign portfolio investment (FPI), may favourably or adversely affect the host country in an array of aspects, such as economy, environment or social issues. With respect to FDI, the criteria for appraisal are more conspicuous, like the investment scale, fields of investment, job creation possibility, technological transfer, managerial skills, environmental impacts and the origin of capital.

Vietnam’s current FDI statistics often refer to the number of projects, registered capital, disbursed capital and the nation/territory the investor comes from. That means that the origin of FDI capital before it is poured into Vietnam is fairly highly regarded, in which sources of capital from developed economies are often preferred to those from China.

In reality, however, identifying the source of investment is almost always a tough job. A research study by Wojcik (Oxford University) and Haberly (University of Sussex) in 2014 shows that between 30-50 percent of global FDI came from the network of offshore shell companies. Closely attached to these companies are often tax havens, such as the Netherlands, Luxembourg, Bermuda, Cayman, British Virgin Islands, Samoa, Cyprus, Hong Kong and Singapore.

The labyrinth of the sources of capital is a formidable challenge for the hosts which are developing countries because they often find it hard to know exactly what happens behind the capital inflows or outflows, especially the impact on the national balance of payments. Take for example, Ireland, whose GDP increased virtually by 26 percent in 2015 only because in that year Apple transferred its asset worth $238 billion to this country to dodge taxes.

Cast a glance at Vietnam’s list of top-10 FDI investors and you’ll see that four of them are from the above networkSingapore, Hong Kong, British Virgin Islands and the Netherlands. Therefore, identifying the origin of investment capital is by no means an easy job. It may even be an impossible task because some tax havens observe the unwritten rule that bans the disclosure of the registration of a company in question. The mother company of an enterprise investing in Vietnam with registration in the Netherlands, or France or the United States may be in fact headquartered in Hong Kong or another tax haven. China is a special case. Nearly half of Chinese overseas investment departs from Hong Kong, which is considered a financial hub as well as a “black box.” A Chinese companyfor instance, China Mobileis registered in Hong Kong, and owns, or is owned by an offshore shell company registered in British Virgin Islands.

Meanwhile, although direct relationships cannot be seen so clearly like in case of FDI, the impact of FPI via corporate control in some industries should capture due attention. The identification of FPI source is as challenging as in the case of FDI. Foreign investors coming from different countries or territories can exert considerable influence on some economic sectors in may ways. The simplest of all is to buy the controlling stake of a market leader or conduct mergers and acquisitions. If the measure [used by foreign investors] is put under control or restricted, foreign investors may resort to gaining non-controlling stakes at different firms in the same industry. What’s more, foreign investors may play some trick by transferring debt into stocks. This way, foreign institutions may extend loans to domestic companies and later turn debts into stocks, whereby they take control of these firms.

Screening mechanism: strict compliance with the law

Several empirical studies have pointed out that occasionally no law is better than a good law if the law is not enforced. In the case of Vietnam, it can be said that the country currently has a glut of laws and regulations. However, their overlapping and lax enforcement have forced the entire system to devote time and effort to fine-tune them while ignoring another crucial pointthat is the stringent law enforcement is the absolute prerequisite. In fact, a comprehensive set of legal documents without enforcement always results in one way or another incompliances and loopholes, which disregard the strictness of law. Foreign investors highly appreciate this strictness because it is the law which they trust in the end, not an incumbent government.

A case in point refers to Chinese investors who develop overseas projects. Although some of them have left negative impressions on some countries, in other nations whose legal systems are stringent and highly enforceablesuch as in Canada, the United States, Germany or FranceChinese investors have had to comply with local regulations on labour, environment and financial accountability.

Consequently, in addition to the improvement of investment conditions and environment to lure as many as possible qualified international investors, the activation of a screening mechanism is essential and it is necessary to focus on the enforceability of the law system. Where a foreign investor comes from may not be as important as whether that investor is ready to abide by the rules of the game set by the local government. percente2 percent80 percent99t-judge-a-book-by-its-cover.html


Category: Economy, Vietnam

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