Doing Business in Vietnam: Advantages and Challenges
Two great wars have passed, and the great fears of the past have been relatively forgotten. Vietnam is now a thriving South East Asian country that presents thousands of opportunities to business people and investors worldwide. Blessed with plenty of natural resources, an open economy, great diplomatic policies, low tax, low labor cost, and a growing middle-class, Vietnam is one of the best destinations for foreign businesses looking to establish their presence in Asia.
However, doing business in Vietnam is not without its cons. Vietnam is still a developing country, and they can’t compare with other developed countries in many respects. You should acknowledge both the advantages and challenges of the business environment in Vietnam to best prepare yourselves for entry.
In this article, we will explore the benefits and difficulties of doing business in Vietnam and explore the opportunities in this Southeast Asian country in 2022.
1. Overview of Vietnam
1.1. A few facts about Vietnam
Vietnam has transformed from a country ravaged by war to one of the most robust economies in the region. From a purely agrarian economy, Vietnam has now opened up and committed to global economic integration.
Ho Chi Minh City (HCMC), more colloquially known as Sai Gon, is the economic hub of the country. With only 8 million inhabitants out of the 97 million population, HCMC accounts for more than one-fifth of the economic output of the entire country. This city is where hundreds to thousands of the world’s top factories in various industries are located. When entering Vietnam, most businesses choose this city as their destination. It is a beautiful city with endless opportunities for those who know how to seize it.
Despite the COVID-19 pandemic, Vietnam still managed to achieve a positive growth rate of 2.91% in 2020 and 2.58% in 2021, which is impressive. Although the economy hasn’t fully recovered yet, Vietnam is ready for that “new normal”, and everything is picking up. Investors and businesses worldwide can start developing their 2022 Vietnam entrance strategy.
1.2. Dominant Industries in Vietnam
Some of the most developed industries in Vietnam:
- Food Processing
- Oil and Gas
1.3. Business Culture
Business Culture in Vietnam is similar to many countries around the world: 8 hours per day, 5 days a week. There are 11 public holidays in the Vietnamese calendar when people are allowed to take days off. The most important one is the Lunar New Year – which typically lasts from 10 days to 15 days. Most companies close during Tet, even essential goods stores.
2. Advantages of doing business in Vietnam
2.1. Booming Economy
The “Đổi Mới” changed Vietnam forever, and its impact can still be felt today. Vietnam has a booming economy. With the constant foreign investment, lots of investment incentives, growing middle-class, increasingly educated population, and labor force, Vietnam has everything in store to catch up with countries in the regions and in the world.
2.2. Tax Incentives
There are a lot of tax incentives granted to foreign investors and businesses in Vietnam:
- Preferential tax rates and tax holidays for new investment projects based on locations, industry, and scale. The high-tech sector, or garment, textile, footwear, information technology (IT), automobiles assembly, or mechanics sector are some of the included industries.
- Tax reductions for business activities employing female staff or ethnic minorities
- Tax reduction for R&D funds
- Tax incentives for investments into economic zones, high-tech zone, or difficult socioeconomic areas. Specifically, income from investments into particularly difficult socioeconomic areas will be subject to 15 years of CIT (Corporate Income Tax) at 10%, 4 years of CIT exemption, and 50% tax reduction for the next 9 years.
- Income from projects with investment capital scale of up to 6 trillion VND (approx. $257 million) being disbursed no later than 3 years from the date of the investment certificate is subject to 15 years of CIT at 10%, 4 years of CIT exemption, and 50% tax reduction for the next 9 years.
2.3. Ease of doing business
It is relatively easy to do business in Vietnam for so many reasons:
- Low inflation rate: Vietnam’s inflation rate from 2019 to 2021 is 2.8%, 3.22%, 2.03%, respectively. Compared to its 4% target and global’s average, this is a good achievement
- Huge population: being a country ranking in the 15th position of the world’s population, Vietnam has huge purchasing power. Businesses can capture endless opportunities by selling to this enormous market. Vietnam also has a growing middle-class who are willing to spend for the development of the economy.
- Declaration of the EVFTA and EVIPA in 2019: the Declaration of EVFTA and EVIPA in 2019 brought Vietnam closer to the European Union and opened it up to the opportunities in this challenging but rewarding market.
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2.4. Competitive Labor Cost
Many foreign businesses set up their factories and plants in Vietnam for this very reason. Vietnam’s labor cost is significantly lower than other countries in the region.
However, “low cost” in Vietnam does not equate with “low quality”. Vietnamese workers can bring a lot of value to the businesses they work for if they’re treated properly.
With a young, increasingly educated, and high-potential workforce, Vietnam surely is a good choice if you are looking for a cost-effective destination.
2.5. Strategic Location
Vietnam has a favorable location if you want to establish a regional presence.
Vietnam shares border with China – the 2nd largest economy in the world with 1.4 billion citizens. Both countries are high-potential markets with lots of opportunities to seize. It doesn’t take long to reach Beijing and Shanghai – 2 of the 4 economic hubs of China – from Vietnam.
In the West of Vietnam is Laos, Cambodia, and Thailand. In the Northeast is Japan and Korea – the leading economies of Asia. Vietnam also has lots of favorable conditions for international shipping and trading.
Thanks to this attractive location, Vietnam is a must for any business wanting to gain access to the supply chain in China.
3. Challenges of doing business in Vietnam
3.1. Vietnam is still a developing country
No matter how many incentives it offered, Vietnam is still undeniably a developing country.
Compared to other more developed countries in the region, such as Thailand or Singapore, Vietnam is still falling behind in many respects, including infrastructure, telecommunications, and labor quality. However, we have to admit that Vietnam is growing day by day thanks to the strategic moves and policies of the government.
Corruption or bribery is likely to be an issue in Vietnam that you’ll encounter due to a weak legal system, weak enforcement, and conflicting bureautic decision-making.
Relationship building is a crucial part of doing business, and bribery, in various forms, is a common way to develop your business connections. It is a huge obstacle to doing business in Vietnam. However, corruption has reduced significantly in the past decade. The government has tackled this issue by introducing new laws and policies to discourage bribery. The legal framework for tackling corruption has also been better developed.
3.3. Lengthy Procedure to Start A Business in Vietnam
Vietnam has one of the most complex start-up environments in the world. There are up to 10 procedures to go through when opening a company. Some procedures are completely unfamiliar to foreign businesses, such as registering the seal sample at the Police Department, or publicly announcing the company in a local newspaper.
Dealing with Construction Permits is another challenge that businesses have to go through. It takes around 110 days and 11 procedures to get permits for construction in Vietnam.
Vietnam is a wonderful market with a lot of untapped potential. That unexplored potential is where foreign businesses can thrive. Vietnam’s business environment indeed has a lot of attractive aspects for foreign businesses and investors, but it also has its downsides.
What do you think about doing business in Vietnam? Feel free to tell us your thoughts in the comment section below.
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