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Written by Administrator   
Saturday, 03 December 2005

Industrial Parks (IPs) & Export Processing Zones (EPZs) Contribution

Almost half of the foreign investment capital registered in Vietnam during 2004 came through the country's IPs. Just over USD$1 billion or 45% of the total capital registered via new foreign investment projects set up last year, was earmarked for Vietnam's IZs and EPZs, a 33% increase on a 2003. There were 232 projects established in the IZs and EPZs in 2004, an increase of 10%. Three quarters of all new projects opened up in Ho Chi Minh City, Dong Nai and Binh Duong in southern Vietnam. In total, the zones absorbed just over $1.8 bil­lion of freshly registered for­eign investment in 2004, including $759 million or 40% of the total added by foreign investors to 358 pro­jects as supplemented capi­tal. These figures represented a 33% rise in unit volume and 40% increase in capital over 2003. Most expanded projects were based in Dong Nai, Binh Duong, Long An, Ho Chi Minh City and Hanoi.

The country's key eco­nomic zones contributed 56% of GDP in 2003; 70% of industrial production value; 70% of export value; and around 73% of budget collection . HCMC , Dong Nai, Binh Duong and Ba Ria­ Vung Tau, have 3 EPZs and 56 IPs accounting for almost 65% of the total industrial acreage nationwide. They are far more efficient than those in other regions and provide jobs for over 425,000 people. In recent years, Dong Nai and Binh Duong have been the two most popular provinces with 451 operational projects worth USD$5.4 bil­lion and 853 FDI operational projects worth USD$4.5 billion respectively. In recent years they have attracted almost as much as FDI from existing investors (expansion investment) than from ‘new' investment per se . This is both good and bad news: it shows that most investors are profitable and confident in the future of Vietnam as a manufacturing base, but also that Vietnam is losing its battle with China and its ASEAN rivals in attracting new investors. Setting up in Vietnam can be easy and in places, literally carried out in a morning. However, although it is straight forward if you are looking for a reasonably long term operation, thus, necessarily with a relatively larger ‘registered capital' than would typically otherwise be the case, it is much less easy to set up operations for only a few years. Thus, Vietnam struggles to attract ‘secondary' supplier type industries.

In the last 6 years, the number of IPs and EPZs in the county has soared from 46 in 1998 to 108 of which 68 are operational, with most established in the northern and southern delta provinces. The northern key economic zone has contributed 15% of the country's GDP and 25% to the nation's industrial production, and the southern key economic zone accounted for 30% of the country's industrial production and about 40% of the country's export revenue. The combined area of the 108 parks is about 20,200 hectares of which 13,809 hectares (68%) have been leased, excluding Dung Quat and Chu Lai Open Economic Zones and 124 industrial clusters or small-medium sized indus­trial parks which cover more than 65,000 hectares. The industrial areas have gener­ated jobs for nearly 600,000 people and employed more than one million others indi­rectly. They have also served as a catalyst for the establishment of many new urban ar­eas and the development of auxiliary industrial and services sectors.

Vietnam has seen a sharp fall in the scale of investment in its IPs & EPZs. While the average invest­ment per project for the country was USD$23 million in 1997, the rate dropped to a mere USD$3.44 million in 2003 and has only slightly recovered to USD$4 million since. The export per person from Vietnam's EPZs and IPs is only USD$8,711 compared with Taiwan's USD$140,000 principally because 60% of exports are secondary processed goods and therefore value addition is not high. Thus, although some Vietnamese firms have been exporting under their own brand names, most domestic producers are too small to be regarded as engines of industrial growth. It is therefore important that Vietnam makes better use of technology while expanding its production process to cover not just the sub contracting / assembling phase but also other crucial phases such as research and development, design, marketing and distribution.

Despite low average monthly IP workers' salaries of only USD$42-48 per month, productivity and product quality remains less competitive than in other competitor countries. Total Factor Productivity contributes only 22.5% to GDP – much lower than Thailand's 35%, the Philippines' 41% or Indonesia's 43%. The ‘added value' for each Vietnamese dong in industrial production in 1995 in HCMC was VND0.4 but only VND0.32 in 2004, demonstrating the decreasing eco­nomic efficiency and competitiveness of the city's economy. Thus, Vietnam's high export growth rates are based mainly on the exploitation of local resources (such as agriculture, natural resources and the low labour costs), and not from technological renovation or greater man­agement efficiency. A recent analysis by the Ministry of Trade showed that external factors (rising international prices) and quantitative factors (higher manufactured volumes) were the two main reasons for the recent export growth, instead of from any substantive ‘added-value' improvement. The reasons for this are complex but include the lack of central planning ; the price of “ land rental ? ; and the restrictions and limitations placed on potential foreign investors.

Central Planning : - Vietnam does not have a single national strategic planning authority to oversee and promote industrial FDI or to focus and concentrate the industrial agglomeration of similar types of industries in target areas and provinces. Under the present decentralisation mechanism, the 64 provincial People's Committees and the 43 Industrial Zone & Export Processing Zone Administrative Boards compete directly against each other (as well as other regional countries) to attract the same potential investors. According to Joseph Stiglitz, who was awarded the Nobel prize for economic science in 2001, many cities and provinces in Vietnam have introduced various tax and other incentive policies to lure investors, which has led to growing compe­tition among them. He added that they should not strive to attract investment projects at any price but should better consider whether the community would benefit from them.

Land Rental: - The 64 provincial People's Committees and 43 Industrial Zone & Export Processing Zone Administrative Boards have certain powers to manage FDI activities, which has principally been done by offering cor­porate, import & value added tax concessions and / or holidays and by providing cheap credit and low land rental prices. The problem is that most of these incentives are so great that provincial authorities often have to use the local budget to fund them. This sort of mindset comes at the expense of local tax­payers, robbing the local authori­ties of any chance to improve lo­cal living standards. It is also a fertile ground for favouritism and cronyism. Another problem is that in the provinces' race to develop and lease their industrial zones, many developers have reduced rental prices so steeply that, according to government estimates, only 20% of developers are profitable (most of which are State Owned Enterprises Joint Ventures). In HCMC IP land rental is USD$30-108 per square metre a year but in Binh Duong it is between USD$32-38 and in Tay Ninh Province only USD$0.45 per square metre a year. In the Cuu Long (Mekong) Delta prov­inces land rentals are lower than construction costs: Long An IPs are between USD$0.7-1.8 per sq metre a year; USD$0.8 in Tien Giang; USD$0.6-0.8 in Vinh Long; and USD$0.7-0.9 in Can Tho, even though these provinces have to invest upto USD$14 in each square metre of IP infra­structure. According to a 2004 research paper on domestic investment encouragement conducted by the HCMC National University and the Vietnam Competitiveness Initiative (VNCI) project (funded by the United States Agency for International Development), most businesses said they could barely break even in their first years of operations, rendering tax breaks meaningless. Another finding of the research paper is that the local au­thorities stand to lose between VND0.60-0.75 in tax collection for every VND1 invested in encouraging projects or regions (HCMC 82 cents & Binh Duong 72-88 cents). They concluded that this high ratio proved that tax incentives were not the right way to kick start development in poorer areas. From an investors' perspective, tax in­centives only rank seventh on their list of priorities when select­ing an investment destination and 85% of IP enterprises surveyed said that they would still have invested in Vietnam with­out any tax incentives.



Area (ha)

Rent $/sqm & years

Av Rent $/yr

Song Than 1

Binh Duong




Song Than 2

Binh Duong





Binh Duong




Viet Huong1 (VHIP1)

Binh Duong




Tan Dong Hiep A

Binh Duong




Tan Dong Hiep B

Binh Duong




Dong An

Binh Duong




My Phuoc

Binh Duong




Viet Huong2 (VHIP2)

Dong Nai




Bien Hoa 2

Dong Nai




Ho Nai I

Dong Nai




Long Binh - Amata

Dong Nai




NhonTrach 1, 2 & 3

Dong Nai




Linh Trung

HCM City




Tan Thuan

HCM City




Tan Tao

HCM City




Le Minh Xuan

HCM City




Tay Bac Cu Chi

HCM City




Trang Bang

Tay Ninh





Binh Thuan




Phu Tai

Binh Dinh




Duc Hoa 1

Long An




My Tho

Tien Giang




Tra Noc

Can Tho




Sa Dec

Dong Thap




Hiep Phuoc

HCM City




Cat Lai (2 nd stage)

HCM City




Phong Phu

HCM City




Vinh Loc

HCM City




Go Dau

Tay Ninh




Long Khanh

Dong Nai





Land Rent $/sqm

A nnualised Equivalent (/50 yrs)













Kuala Lumpur




Land 50yrs:$/sqm

A nnual Rent : Land & Buildings-$

Caohejing Hi Tech Park



Zhangjiang Hi Tech Park



Minhang Eco & Tech Dev Zone



Hangzhoi Eco & Tech Dev Zone



Shanghai Baoshan IZ



Xinzhuang IZ



Jiading IZ



Qingpu IZ



Investment Restrictions & Limitations : - Apart from the cost comparison, what is interesting to note from the above table, is that in Vietnam, the word “rent? in the above context, typically means “buy? (ie a non-transferable long leasehold interest). To better explain, industrial zones are almost invariably set up as Joint Venture development companies owned (at least in part) by the local authorities - directly or via a State Owned Enterprise. As such, many industrial zones view the real estate aspect of their business as secondary to the tax collection aspect. They are primarily interested in whether a potential investor will register their Vietnamese legal entity in their park / province, and in how much money they have to invest – the “registered? capital. As such, many can generally offer land and buildings for sale at cost or slightly above, in the hope of securing MNCs (multinationals) who will invest and pay future taxes in their park. Furthermore, even those that are more profit maximization / property investment driven, are typically only interested in “the cash today? than from any form of regular periodic income stream. After all, they are all fixed-term Joint Ventures rather than property investment companies. Thus, whereas in other countries it is normal for a landlord and a tenant to negotiate “the term? of “the lease,? in Vietnam the duration is often automatically deemed to be the unexpired term of the developer's Joint Venture. Although inconvenient, things would not be as disadvantageous as they infact are because of the following factors : -

  • In Vietnam mortgages (for foreigners), sub-letting and assignment are all illegal.
  • A ‘Sale & Leaseback', though not technically illegal, is impossible in practice, since in so doing an IP based enterprise would be reducing its registered capital (which is illegal), which is almost by definition composed of an enterprise's land, building, and machines.
  • Lease terms are usually uncommercial and extremely one-sided in favour of the landlord, including restrictive user covenants (eg “to be used for the purpose producing ladies fashion undergarments only?); prohibition against assignment and sub-letting (even if / when legally permitted); prohibition against merger; prohibition against even threatening to cease occupation; but the duty to pay the landlord an annual service fee “as shall be imposed.?
  • Many parks will only “lease? a minimum of one hectare, which assuming a permissible building foot-print site cover of 70% equates to a 7,000 sqm facility – typically too large for small and medium sized enterprises.
  • Even though only 10% of HCMC's IPs are set aside for non-State businesses, and although SOEs account for 95% of the leased land in Hanoi's IPs, most parks still have land available for investors, so ‘secondary' markets have not yet developed. This problem should be partially mitigated equitisation of SOEs and by the introduction of the new Bankruptcy Law in November 2004, which now allows the banks to repossess land.

Since most parks were licenced in the mid to late 1990's for 50 year terms, tenants are therefore typically expected to commit to between 40 and 50 year “leases? in Vietnam. Whilst this maybe acceptable and even desirable for large MNCs, who intend to invest millions of Dollars, and who are necessarily looking to amortise their setting-up investment costs over the long-term, for many small to medium sized enterprises, that need to be “foot-lose? and able to react to the frequent changes in demand brought about via the effects of globalization effectively, efficiently and economically (especially in terms of global real estate commitments), it is simply a totally unacceptable proposition. Thus, when Vietnamese parks refer to “renting? land, what they are actually talking about is the annual equivalent of ‘day-one' purchase, calculated on a straight line basis over the unexpired term of the park developer. Similar “rental? figures are sometimes also provided in respect of the bricks-and-mortar buildings that can also be paid for up-front or by way of a series of staged payments, with interest. Very few can actually offer a ‘Ready Built Factory' and of those that can, the size and specification maybe not be suitable nor the quoting rentals regionally competitive: several parks quote rentals of between USD$2 - 4.5/sqm/month ‘gross gross gross' which when converted to a ‘net net net' basis equate to over USD$5/sqm/month. The concept of bespoke “design & build to lease? is extremely unusual, partially because of legal and foreign investment restrictions but also because the concept of buying secondary ‘investment property' is also extremely unusual.

Investment Incentives

Development zones in Vietnam can be classified into four categories : industrial parks; enterprise processing zones; open economic zones; and hi-tech parks. It is important for an occupier to perform due diligence when selecting a zone since while most offer similar preferential policies to companies, benefits will depend on the nature of the business and how it is structured in Vietnam. But some standard policies for foreign manufacturing companies include : -

· A Corporate Income Tax (CIT) rate of 10% for export processing manufacturers and those in Hi-Tech Parks & Open Economic Zones.

· A CIT rate of 15% for manufacturers in IPs and in service sectors in EPZs.

· A CIT rate of 20% for companies in service sectors in IPs.

· VAT zero rating for companies involved in certain business sectors in EPZs.

· After tax losses can be carried forward for a maximum period of 5 years.

· The 2004 abolition of profits remittance tax and standardization of CIT to 28%.

The above preferential CIT rates can also apply to companies engaged in either business sectors that are specially encouraged (eg computers, sugar, cotton & afforestation) and / or geographical areas (provincial Wards in Districts) with difficult economic social conditions. Depending upon the exact location, the type of business, and whether or not a new business is engaged in production or services, an exemption from CIT maybe granted for upto four years from when a profit is first registered, and then a further 50% reduction obtained for upto an additional nine years. However, for a new manufacturing businesses looking to locate in an established IP in one of the more popular provinces, a CIT exemption shall usually be granted for between two and four years after first turning a profit with the possibility of a further 50% tax reduction for upto four years, largely depending upon whether the export ratio is less than 50%, less than 80%, or more than 80% of total production.

Last Updated ( Saturday, 14 October 2006 )
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