Upon reflection, Singapore’s successful foreign investment attraction policies have made it an attractive destination for many enterprises to invest in. As a result, Vietnam can use this experience as a reference for potential solutions to attract foreign investment.
Singapore has developed particularly effective foreign direct investment (FDI) attraction policies
1. Non-discrimination against foreign investment
Singapore is one of the most successful countries in the Association of Southeast Asian Nations (ASEAN) when it comes to attracting qualified foreign investment, even though there is no specific law regulating investment in the country. Common laws, including general contract law, corporate law, and industry-specific laws, govern investment activities. There is generally no discrimination between foreign and domestic investment, except in cases where specific laws apply, such as restrictions on foreign investment in telecommunications, media, banking, and land ownership. These restrictions are outlined in industry-specific laws, such as the Press and Printing Law, which limits foreign control of press companies. Regulatory authorities such as Singapore’s Monetary Authority make decisions on foreign investment restrictions in practice, primarily through licensing systems like the one established under Section 7 of the Banking Act.
In addition to these restrictions, Singapore has also implemented investment encouragements available to all investors, domestic and foreign. An example of this is Chapter 10 of the Economic Expansion Promotion Act, which allows for tax deductions on capital expenditures for approved projects. The Economic Development Board (EDB) oversees these incentives, which include designations of investments as approved projects.
2. The combination between financial policy and labor policy:
Singapore initiated tax incentives for foreign direct investment (FDI) during the 1960s with the Introduction of the Law on Encouragement of Economic Expansion. These incentives included support activities for pioneering companies, support for investment, and incentives for enterprises with headquarters based in Singapore. In 2010, the law was amended to include previously restricted industries like banking, press-printing, electronics and telecommunications.
To enhance its business-friendly environment, Singapore spent years developing high-quality infrastructure, promoting a stable political background, and nurturing an industrious and disciplined workforce. Consequently, Singapore has become one of the most favorable places for business activities, renowned for being particularly effective at enforcing intellectual property rights.
To cope with a shortage of skilled workers, companies are encouraged to employ workers from abroad. One effective tool for promoting worker skill development is the 4% tax levied on employers who pay less than the legal limit. Although the tax rate has dropped to 1% since the crisis of 1985, it continues to play a critical role in improving worker skills.
More recently, the Economic Development Board (EDB) has started to use a clustering approach focusing on companies in the electronics-semiconductor, petrochemicals, and processing industries. This approach attracts FDI and strengthens linkages and spillovers, detects gaps and potentials, and supports services or prepares infrastructure for common use purposes, enabling the government to address the underlying causes of market failure.
3. The administrative apparatus is highly efficient and processes affairs expeditiously
Singapore has a reputation for its efficient administrative apparatus, with collaboration between relevant agencies that helps businesses operate with ease. Foreign enterprises can apply for operating licenses and registration through the Accounting and Corporate Regulatory Authority (ACRA) in various forms, including opening subsidiaries, branch offices, and representative offices. Registration procedures are transparent and consistent, and the tax regime is favorable.
The government also provides favorable conditions for entry and residence visas for those doing business in Singapore. With maximum support from the government through programs and incentives, Singapore is recognized as the world’s easiest place to conduct business, with the most competitive economy in the region.
4. Simple and friendly tax system:
Singapore’s tax system is widely regarded as simple and investor-friendly, with a corporate tax rate of only 17%, the lowest corporate tax rate in the world. Additionally, Singapore has signed double taxation agreements (DTA) with over 70 countries worldwide, effectively reducing the tax burden for foreign enterprises. The DTA network expansion, coupled with zero capital gains tax and dividend income, has made Singapore an attractive place for business investment through the partnership form.
In Singapore, the process of a company selling its shares to new investors takes only a few hours, while it can take weeks in many other countries. However, despite its tax benefits, Singapore cannot be considered a tax haven like some other places that frequently appear on foreign investment lists. Nevertheless, thanks to an anti-double taxation agreement between the two countries, there is no additional tax burden for investors.
5. Singapore’s legal system is widely recognized for its transparency, fairness, and impartiality.
The efficiency, transparency, and consistency of Singapore’s legal system are well-known. Authorities regularly update the legal framework to meet the needs of the current cultural, economic, and commercial environment. Although Singapore inherited its legal system from the UK, it has since developed its own identity and gained a reputation for effectiveness. The legal process in the country is streamlined, ensuring that the legal system does not hinder business efficiency.
The government of Singapore sees the law as a critical economic value that contributes to Singapore’s reputation as a top legal and commercial hub in Asia. Singapore’s commercial law system, known for its fairness and impartiality, makes it a sought-after destination for dispute resolution, including conciliation and arbitration. The regulatory framework provides foreign investors with a level playing field, as there are no foreign ownership restrictions or foreign exchange controls.
Singapore’s economic strength lies in its open trade policies, stable political and legal environment, sound macroeconomic policies, competitive tax rates, transparent regulatory framework, and effective regulatory environment. These factors make Singapore an attractive destination for multinational companies in the region.
What’s experience for Vietnam?
To learn from Singapore’s successful strategies for attracting foreign direct investment (FDI), Vietnam could examine and adopt some key policies. By looking at Singapore’s approach, Vietnam could improve its legal system to make it more efficient, transparent, and fair.
1. Singapore has clearly identified that FDI attraction focuses on 3 priority fields: new manufacturing, construction and export
Furthermore, Singapore’s approach to FDI attraction involves targeting specific industries based on the prevailing economic conditions. Investors have directed investment capital toward industries such as computer and electronics manufacturing and the production of consumer goods, with the rapid growth of the electronics sector and other advanced technologies. Investors have also made investment in the oil refining and mining engineering sectors.
To facilitate its export-oriented industrial development strategy, Singapore established the Economic Development Board (EDB) as an independent government agency focused on providing a one-stop-shop for research and development. The EDB takes into account investors’ requirements and focuses on developing national key industries, including ship repair, metalworking, chemicals, equipment, and components.
Recently, the EDB has implemented a strategy of clustering, with a particular emphasis on companies operating in the electronics-semiconductor, petrochemical, and processing industries. This type of clustering is an industrial policy tool that helps attract FDI and enhance linkages and spillover effects. Along with this strategy, FDI attraction aims to capitalize on Singapore’s advantageous geographical location and compensate for the scarcity of natural resources. Additionally, in keeping with the country’s high level of economic development, FDI attraction also includes promoting a system of service industries to facilitate international investment.
2. Singapore government has created a stable and attractive business environment for foreign investors
The Singaporean government has made a public commitment not to nationalize foreign companies. Furthermore, there is a strong focus on infrastructure development to support productive activities, and the licensing process is straightforward and efficient. Some projects can apply for and obtain a license within a matter of months, while others can begin production in as little as 49 days after application.
3. Singapore has built a complete, strict, fair and effective legal system and issued the policies to encourage foreign capitalists to invest capital.
The Singaporean government takes a strong stance against corruption, treating both domestic and foreign enterprises equally while promoting a culture of lawfulness. The authorities offer high salaries along with compulsory retirement savings deductions as incentives for encouraging ethical behavior among public employees. Employees may face imprisonment and forfeit their savings if they engage in embezzlement during their employment. The Singaporean government refers to this system as the Integrity Fund for Officials.
Singapore also offers special preferential policies to foreign investors, including the right to repatriate profits when businesses are profitable. Investors who deposit at least S$250,000 in Singapore and have an investment project are entitled to Singaporean citizenship for themselves and their families, as well as the privilege of residence, upon entry and naturalization.
Recommendation for Vietnam
Although it may not achieve the same status as Singapore, which is more of an FDI “hub”, Vietnam has the potential to attract foreign investment and become an FDI “destination”. To fulfill this potential, Vietnam must make certain structural reforms before it can be compared to Singapore in terms of FDI attraction. These reforms include improving administrative efficiency, corporate governance rules, legal processes, and workforce skill levels.
Vietnam is a compelling destination for FDI due to its semi-skilled workforce and competitive wage rates compared to other global manufacturers, and has emerged as a viable alternative to China as a production hub. However, Vietnam is also facing challenges such as having one of the world’s fastest aging populations and a shortage of younger, highly productive workers in the medium term. To address this, Vietnam needs to offer more systematic incentives to attract foreign talent or investment in specific activities.
To attract more high-value investments that create added value, Vietnam needs to review its national capacity in R&D and other areas such as logistics and marketing, which may require reforms in the education system.
The Vietnamese authorities can also pursue a policy of building industrial clusters, as demonstrated by Apple’s headphone assembly industry cluster in Bac Giang province. Building industrial clusters can attract other component suppliers to the area near assembly factories, making it easier to recruit a skilled workforce.
Ultimately, a shift to more value-creating activities in Vietnam requires a change in the mindset of entrepreneurs and enterprises, from focusing on tangible assets like factories to intangible assets such as R&D, reputation, knowledge, and design skills. This presents a real challenge for current and future generations of enterprise leaders in Vietnam.
Conclusion
Vietnam needs to carry out some necessary structural reforms in terms of efficiency, corporate governance, legal process, and a highly skilled workforce in various fields before Vietnam can compare to Singapore as an FDI attractive destination. Vietnam is possible to remain a “destination” of FDI activities rather than a “hub” like Singapore.
HMLF is always available to offer assistance in understanding the procedures with authorities.
Harley Miller Law Firm “HMLF”
Head office: 14th floor, HM Town building, 412 Nguyen Thi Minh Khai, Ward 05, District 3, Ho Chi Minh City.
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Website: hmlf.vn Email: miller@hmlf.vn
