The PCI-Foreign Invested Enterprises

2011 Survey American Chamber of Commerce

June 6, 2012, New Saigon World Hotel, HCMC

Jim Winkler, Ph.D. USAID/VNCI Director

Findings taken from the PCI 2011 report, Lead Researcher, Dr. Edmund Malesky

Organization of the Presentation

• Overview of PCI and the role of Foreign Direct Investment in Vietnam

• Overview of the 2011 PCI – Foreign Invested Enterprises (PCI – FIEs) survey

• Key Findings: – Profile of FIE respondents – Drivers of investment – Business environment analysis – Implications for Vietnam’s investment policies

• Annual mail-out surveys to over 200,000 domestic firms since 2006 and 20,000 foreign invested firms since 2010 in all 63 cities and provinces

• PCI calculation: 60% survey results and 40% hard data • PCI assesses and ranks provinces by their economic

governance in developing business-friendly regulatory environments for private sector development in 9 areas:

PCI Methodology

1. Entry costs 2. Land access 3. Transparency 4. Time costs 5. Informal charges

6. Pro-activity 7. Business support services 8. Labor Training 9. Legal institutions

PCI 2011

• PCI measures actual quality of provincial governance by way of the “voice” of local firms.

• PCI 2011 represents the collective “voice” of 6,922 private firms across 63 provinces.

• 2011 PCI-FDI Survey was conducted on a sample of 1,970 foreign invested enterprises across 61 provinces in Vietnam.

PCI 2011 Map PCI 2011 Rankings

PCI 2011-collective voice of

nearly 7,000 private firms

PCI 2011 median score is 59.15/100, one point higher than 2009 and 2010

PCI workshop in Quảng Ninh province in

2010- live conference

to 9 remote districts of

Quang Ninh

PCI promotes public-private dialogue for better governance

Lao Cai province launched their own website on PCI in Nov 2011: www.pcilaocai.vn

PCI tops Da Nang Policy Agenda

- Slip in PCI ranking from 1st to 5th topped and concluded the agenda of Mr. Nguyen Ba Thanh, Da Nang Party Chief, when addressing 4,500 local officials on the provincial socio-economic situation on 24 February 2012

Observed “Convergence” of PCI scores over time

Range PCI

Max Min

Impact of Good Governance on Wealth/Growth

FDI and GDP

Source: World Bank Development Indicators

-4

-2

0

2

4

6

8

10

12

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Axis

Titl

e

FDI inflows as % of GDP, 2000-2010, in Asia Pacific

Vietnam China

Thailand Malaysia

Indonesia Philippines

Korea, Rep.

FDI and GDP

0.001.002.003.004.005.006.007.00

FDI inflows as % of GDP in Asia Pacific, 2005-2010 average

Source: World Bank Development Indicators

FDI and GDP

40.67 38.96 38.24 37.76 36.99

47.26 47.75 48.27 48.82 49.42

12.07 13.29 13.48 13.42 13.59

0

20

40

60

80

100

2005 2007 2008 2009 2010

Share of GDP

State Non-state FDISource: GSO

• FDI makes a sizeable contribution to GDP • FDI is widely accepted as an important driver of growth

FDI and Investment

17.6 17.4 16 14.2 14.9 16.2 24.3 30.9 25.6 25.8

0

20

40

60

80

100

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Share of investment by ownership

State Non-state FDISource: GSO

FDI is an important source of investment, especially in fiscal and monetary difficulties of 2008-2010

WTO Accession

FDI and export

45.2 47.1 50.4 54.7 57.2 57.9 57.2 55.1 53.2 54.1 59

0%10%20%30%40%50%60%70%80%90%

100%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Export share by ownership, 2001-2011

Domestic FDISource: GSO

FDI is a key driver for export growth, accounting for over half of export volume

FDI and employment

11.52% 12.44% 14.84% 16.62% 18.11% 19.57% 21.52% 22.84% 22.43%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2000 2001 2002 2003 2004 2005 2006 2007 2008

State Non-state FDI

FDI is an important source of employment, accounting for over 20% of all the jobs

Source: GSO, Vietnam enterprise 2000-2008

Shifting away from manufacturing?

50.98% 45.15%

17.06% 30.07%

42.67% 40.01%

76.67% 45.35%

6.36% 14.84%

6.26%

24.58%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007 2008 2009 2010

Registerd FDI by sector, 2007-2010

Manufacturing Property/construction/finance Other

There’s evidence that FDI is shifting away from manfacturing towards property and finance in recent years

Source: GSO

The 2011 PCI – FIEs survey

• The 2nd annual survey conducted by VCCI and

USAID/VNCI • Mailed out to over 9,000 registered FIEs in

Vietnam based on the list of General Tax Authority

• Assess FIEs’ performance and their perception of local business environment

• Identify challenges and opportunities facing Vietnam in attracting high value added investment

Profile of FIE Respondents

• Survey includes 1,970 Foreign Invested Enterprises (FIEs) from 45 countries, equal to about 16% of those found in the GSO Enterprise Census

• 75% of FIEs in Vietnam are from neighboring Asian countries (especially Taiwan, South Korea and Japan)

• Average FIE is relatively small in: – Employment :

• 75% have less than 300 employees • 11% have over 500 employees

– Investment size: • 63% licensed for less than $2.5 million capital; • 13% licensed for over $25 million

• 65% are involved in some form of low-end manufacturing; 30% in services sector

Country of Origin of Vietnam’s FIEs

0 2 4 6 8 10 12 14 16 18 20 22 24

Brunei DarussalamChileCuba

Czech RepublicFinland

PanamaPoland

South AfricaSri LankaSwaziland

TurkeyUkraine

CambodiaIsraelLaos

SpainSweden

SwitzerlandNew Zealand

PhilippinesAustriaNorway

ItalyDenmark

IndonesiaBelgiumRussia

NetherlandsIndia

CanadaUnited Kingdom

GermanyNorth Korea

AustraliaMalaysiaThailandFrance

USASingaporeViet Nam

ChinaJapan

South KoreaTaiwan

Share of Investors by Province

0 2 4 6 8 10 12 14 16 18 20 22 24

Gia LaiHa Tinh

Hau GiangSon La

Quang NgaiDong ThapNinh BinhQuang Tri

Thanh HoaTra VinhYen Bai

Nam dinhNinh Thuan

Thai NguyenHoa BinhNghe An

Lang SonBen TreLao Cai

Phu YenBinh Dinh

Binh PhuocKhanh Hoa

Quang NinhThua Thien Hue

Can ThoQuang Nam

Thai BinhBinh Thuan

Ha NamLam dongHung YenVinh Phuc

Phu ThoBac Giang

Long AnHai Duong

Tay NinhBac Ninh

Hai PhongDa Nang

BRVTDong NaiTP HCM

Ha NoiBinh Duong

6 provinces, cities in Southern Vietnam are among top FDI

attractions

Convergence in Economic Governance among Successful FDI Magnets

Increased Performance Yet Growing Pessimism among FIEs

• Performance improved: – Gross sales revenue in 2011 was $1.3 mil, up $300,000

compared to 2010 (biggest increases in manufacturing) – Profitability on invested capital increased from 11% in

2010 to 22% in 2011

• Yet, FIEs were more pessimistic about investment plans for the next 2 years – 39% were optimistic about expanding business

compared to 66% in 2010 – Pessimism was most pronounced in manufacturing

sector (only 33% planed to expand)

Performance of 2011 PCI-FIE Respondents

Sales 2011 2010 Manufacturing Construction Service Agriculture Natural Total sales of median firm (Million of USD) 1.3 1.01 1.6 1.5 0.60 0.56 0.50 Median sales per unit of labor (1000s of USD) 12.7 10.5 11.1 35.9 16.2 3.5 6.8

Expenditures 2011 2010 Manufacturing Construction Service Agriculture Natural Total expenditures of median firm (Million of USD) 0.66 0.8 0.9 0.99 0.24 0.35 0.00 Median expenditures per unit of labor (1000s of USD) 7.92 8.33 7.3 21.13 8.57 7.82 0.04

Profitability 2011 2010 Manufacturing Construction Service Agriculture Natural Profit/Capital Investment (median) (%) 21.9 11.04 25 10.33 20.55 11.99 11.08 Profit/Total Sales in 2010 (median) (%) 33.3 20.0 30.77 20.13 39.74 40.00 62.63 Firms with losses in 2010 (Calculated) (%) 16.4 19.42 17.52 20.00 12.24 21.43 40 Firms with losses in 2010 (Self-Reported) (%) 21.9 18.99 20.97 2.13 29.09 3.36

Limited Spill-Over to Domestic Private Sector

• 84% are 100% Foreign Owned (same as 2010 PCI – FIE survey)

• FIEs purchase 57.5% of their intermediate products from overseas; only 40% sourced locally

• Outputs of FIEs primarily destined for export – 46.7 % of all firms and 57% of manufacturing enterprises

export more than half of their output directly or indirectly – 15% of all FIEs sell to foreign individuals and companies

within Vietnam • There are positive benefits for trade-related services => Lack of linkage to domestic private sector limits

technology, management, and productivity spillovers

Determinants of FDI in Vietnam

• 32% of FIEs currently in Vietnam considered other countries (mostly Thailand, Cambodia and China), of these – 72% selected Vietnam over competition – 28% chose Vietnam as part of a multi-country

investment strategy • FIEs in Vietnam continue to select Vietnam for:

– Labor cost advantage, political stability, and tax or land incentives and

– Heavily discount other governance factors (such as intellectual property, access to decision makers, investor protection, and contract enforcement)

Why FIEs selected Vietnam?

• FIEs in Vietnam primarily are in low cost operations – 65% are involved in some form of low-end

manufacturing requiring low cost labor: apparel, shoes, light electronics, and food processing

• FIEs in Industrial zones tend to select tax and land incentives

Drivers of Investment – 2011 PCI-FIE Respondents

Factors Driving Selection of Provinces

Hold-ups during Customs procedures (by province)

Customs procedures

FIEs paying less bribes to expedite customs procedures (55% in 2011 v.s 70% in 2010)

Yet, custom hold-ups increased

Perception of Key Business Environment Indicators

• Improvements in: Entry costs, Land Tenure, Informal Charges, Transparency (relationships less important) and Infrastructure

• Areas for further reform: – Transparency of legal normative documents,

issuance of LURCs, and customs bottlenecks for existing FIEs.

– IPR enforcement, contracts, and labor quality to attract higher value-added FDI

What about US and EU FIEs?

• Smaller labor size: average of about 200 employees compared to about 250 for the rest

• Invest less in manufacturing, more in services, finance, banking and insurance

Characteristics of the US and EU FIEs in the PCI 20 US EU Whole sample

Number of firms in the sample 59 (3.02%) 147 (7.53%) 1970

Legal Form of Investment

100% foreign-invested enterprise 91.07% 82.86% 85.41%

Joint venture with a Vietnamese private company 1.79% 8.57% 7.15%

Joint venture with a Vietnamese SOE 3.57% 5.71% 3.40%

Registered as a domestic company 1.79% 1.43% 2.08%

Domestic company w/overseas Vietnamese capital 1.79% 0.71% 0.17%

Other 0.71% 1.79%

Sector

Industry/manufacturing 48.5% 41.5% 65.0%

Construction/infrastructure investment 4.6% 4.1% 4.1%

Service/commerce 36.2% 50.2% 29.4%

Agriculture/forestry/aquaculture 2.4% 0.1% 1.4%

Mining/natural resource exploitation 2.2% 0.0% 0.3%

Finance/banking/insurance 6.2% 4.2% 1.1%

Size of Labor Force

Less than 5 3.12% 8.35% 3.57%

5 to 9 10.32% 3.44% 5.10%

10 to 49 24.77% 28.08% 28.43%

50 to 299 38.83% 39.97% 38.00%

300 to 399 4.78% 5.70%

400 to 499 13.76% 4.30% 8.25%

500 to 999 7.76% 2.22% 5.64%

1,000 and over 1.44% 8.87% 5.31%

What about US and EU FIEs?

• Larger investment on average

• Directly export more • Buy more from

domestic supppliers stronger linkage with domestic firms

Characteristics of the US and EU FIEs in the PCI 2011 SurveyLicensed Investment Size US EU Whole sample

Under 5 BVND ($2,500,000 US 56.75% 64.35% 55.20%From 50 to under 200 BVND ($25 million USD)

31.47% 18.99% 26.57%

More than 50 BVND ($25 million USD)

6.03% 4.97% 6.55%

Median (USD) 1,835,800 854,775 1,500,000 Major CustomerSold domestically to SOE 2.32% 2.60%

Sold domestically to state agency

2.72% 2.04% 2.04%

Sold domestically to private individuals

37.96% 22.73% 33.90%

Sold domestically to foreigners

12.80% 19.10% 14.76%

Exported directly 43.79% 52.55% 44.10%

Exported indirectly 2.72% 1.26% 2.60%

SupplierSOE 0.29% 3.10%

Domestic private company 35.58% 68.12% 38.04%

Household business or individuals

0.97% 0.02% 1.69%

Produced in-house by your local operations

0.05% 2.43% 13.53%

Imported from branches of your corporations in other countries

16.94% 11.42% 19.89%

Imported from abroad outside of your corporation

46.45% 17.72% 23.76%

What about US and EU FIEs?

• More profitable compared to the rest

• More optimistic with higher percentage of firms planning to expand compared to the rest

Characteristics of the US and EU FIEs in the PCI 20 US EU Whole sample

SalesTotal sales of median firm (millions of USD) 0.8 1 1.3

Median sales per unit of labor (1,000s of USD) 5.2 15.6 12.7

ProfitabilityProfit/capital investment (median) 32.77% 27.29% 21.86%

Calculated profit/total sales (median) 25.00% 50.70% 33.33%

Investment PlansClose business 2.04% 1.59%

Considerably reduce size 0.41%

Reduce size 2.46% 2.96%

Continue operating at present size 58.97% 45.59% 56.22%

Increase size of business 11.36% 22.15% 16.59%

Considerably increase size of business 29.67% 27.76% 22.23%

Policy Implications

• Focus on Productivity Improvements: – Reduce the costs and risks for investors – Explore outsourcing of key services to private sector to increase

efficiency (e.g. customs) – Improve infrastructure connectivity and efficiency

• Improve Investment Attraction of Higher-value added Investors – Improve labor quality and education – Enhance quality of governance and public consultation – Develop industry-specific strategies and investment promotion

strategies • Improve overall performance and efficiency of the market

economy

Questions for discussion

• Is the data surprising to foreign investors? • What regulations and factors are most

detrimental to existing FIEs to increase investment and profitability?

• What regulations and factors are most detrimental to attracting new investors with higher value manufacturing and services?

Thank you!

Please visit PCI website at www.pcivietnam.org

E-mail: pci@vcci.com.vn or pci@vnci.org