Singapore's effective foreign investment attraction policy reference experience and solutions for VietNam

Looking back at Singapore's effective FDI attraction policy, which has made many enterprises choose Singapore an attractive destination for enterprises to invest. Thereof some experience and reference solutions can be drawn for Vietnam.

For the first 6 months of 2020 only, Singapore has attracted about SGD 14.3 billion 

A recent OECD research found that global FDI activity is estimated to drop down by about 30% this year. This drop is especially evident in the agricultural and manufacturing sectors compared to the service sector or in research and development (R&D) intensive activities.

Thanks to the favorable business environment that will be a factor that helps Singapore attract more foreign investment capital, especially in the field of engineering and technology.

For the first half of 2020 only, Singapore has attracted about S$14.3 billion in fixed asset investments – equivalent to 95% of total committed investment for the whole of 2019. Singapore has attracted S$15.2 billion in 2019 is the highest rate within the past 7 years.

Said Kiren Kumar, Singapore Economic Development Board Executive Vice President, thanks to the friendly business environment, strict compliance with the laws and deep connections, Singapore continues to be a hub for many foreign companies to increase their investment and operations.

Said Mr. Kiren, some of the companies that have announced they would invest in Singapore this year including Paypal, Rakuten, Kajima, Johnson Controls, Twitter and Zoom. Descartes Underwriting insurance technology company based in France is also planning to open an office in Singapore, after having raised a capital contribution of S$25.3 million. 

Singapore's particularly effective FDI attraction policies 

1. Non-discrimination against foreign investment:

Although there is no specific law on investment, Singapore is one of the most successful countries in ASEAN in qualified foreign investment attraction. Instead of enacting a specific law, investment activity in Singapore is governed by common laws, such as general contract law, corporate law and industry-specific laws. In general, there is no discrimination between foreign investment and domestic investment, except for some special cases provided for by specific laws.

Singapore restricts foreign investment in such sectors as telecommunications, media, banking and land ownership. Restrictions on foreign investment are set forth in the relevant industry law. For example, the Press and Printing Law restricts foreign control of press companies. In practice, restrictions on foreign investment are made by the relevant regulatory authorities. For example, Singapore’s Monetary Authority stipulates foreign investment in the banking sector through a licensing system, established under Section 7 of the Banking Act.

Singapore also launched a series of investment encouragement initiatives for all investors, not for the foreign investors only. For example, Chapter 10 of the Economic Expansion Promotion Act allows tax deduction for the capital expenditures in the approved project. This incentive including the designation of investments as approved projects, is administered by the Economic Development Board (EDB) and is open to domestic and foreign companies.

Although there is no specific law on investment, Singapore is one of the most successful countries in ASEAN in qualified foreign investment attraction. Instead of enacting a specific law, investment activity in Singapore is governed by the common laws, such as common contract law, corporate law and industry-specific laws. In general, there is no discrimination between foreign investment and domestic investment, except for some special cases provided for by specific laws.

2. Combination between financial policy and labor policy:

In the 1960s, Singapore first introduced such tax incentives as incentives for pioneering companies, incentives and investment support activities, and incentives when enterprises base their headquarters in Singapore, aimed at FDI attraction through the Law on Encouragement of Economic Expansion. In 2010, the act was amended to facilitate various technical and professional services to encourage previously restricted industries such as banking, press-printing, electronics and telecommunications.

In the late of 1970s and 1980s, in order to be able to compete with neighboring countries at low costs, Singapore found that they are necessary to move up to high-value manufacturing activities and upgrade the skills of the workforce. The concentration continued to shift in the late 1980s and 1990s to promote high-value manufacturing activities. From 2000-2010, Singapore focused on promoting investment and growth based on innovation and knowledge. Pharmaceuticals and biomedical technology is one of the recent fields of interest.

For over the years of development, Singapore has built a high-quality infrastructure, a stable investment environment, a stable political background and an industrious and disciplined workforce, one of the world's most favorable places for business activities. Particularly, Singapore is famous for its best enforcement of intellectual property rights.

To resolve the shortage of skilled workers, companies are encouraged to hire foreign workers. 4% tax levied on employers who pay workers less than the legal limit is an effective way to force companies to improve the skills of workers. After the crises of 1985, although this tax rate drops down to 1%, it still plays an important role in improving the skills of workers.

More recently, EDB has adopted a clustering approach, focusing on companies engaged in the electronics-semiconductors, petrochemicals, and processing industries. The clustering approach is an industrial policy tool to attract FDI, at the same time, strengthen the linkages and spillovers; detect gaps and potentials, help the government policy to deal with the underlying causes of market failure and can support services or prepare infrastructure for the common use purpose.

3. The administrative apparatus processes the affairs extremely quickly:

For over the years, Singapore is famous for its smooth and fast administrative apparatus, with effective collaboration between the relevant agencies to help enterprises operate and develop easily. Foreign enterprises only need to apply for an operating license and register for establishment, through the control of the Accounting and Business Administration (ACRA), in such many forms as opening subsidiaries, branch offices, representative offices. The registration procedures are very transparent and consistent, as well as the preferential tax regime and effective partnership and 100% foreign ownership.

Moreover, Singapore government also creates favorable and easy conditions for entry and residence visas for aliens who want to do business in Singapore. With the government’s maximum support through programs and incentives, Singapore is recognized as the world's easiest place to carry out business as well as the most competitive economy in the region.

4. Simple and friendly tax system:

Another advantage of Singapore is the tax system, which is considered as "simple and friendly with investors". The highest corporate tax rate is only 17%. This is the lowest corporate tax rate in the world. In addition, Singapore has signed double taxation agreements (DTA) with more than 70 countries around the world, thereby making an important contribution to reducing tax burden for foreign enterprises. The expansion DTA network, coupled with zero capital gains tax and dividend income, has made Singapore as an attractive place for business investment through the partnership form.

A company selling its shares to new investors can be done in a few hours in Singapore, while that process takes weeks in many other countries. Since there is an anti-double taxation agreement between the two countries, there is no additional tax burden, but Singapore is definitely not a "tax haven" like some other places that often appear prominently in the foreign investment lists.

5. A transparent, fair and impartial legal system:

Singapore's legal system also works very efficiently. The legal ground is continuously updated and renewed to suit the current cultural, economic and commercial environment. Singapore inherits the legal system from the UK and develops into its own identity, Singapore's legal system has been highly appreciated for its efficiency and consistency so far. Enterprises in Singapore must not have to witness the slow legal process, reducing business efficiency.

Singapore government considers the law approach as a fundamental economic value, operated to enhance Singapore's reputation as a leading legal and commercial hub in Asia. Singapore's commercial law system is known as fairness and impartiality, making the Lion Island nation become the natural choice for dispute resolution, especially conciliation and arbitration, in the Southeast Asia. Singapore's regulatory framework has created a fair playing field for foreign investors, as there are no restrictions on foreign ownership and no foreign exchange controls.

Singapore's economic strength lies in an open trade mode, a stable political and legal environment, prudent macroeconomic policies, competitive tax rates, a transparent regulatory environment and an effective regulatory framework, thereby Singapore is turned into the most attractive destination for multinational companies in the region.

What experience for Vietnam?

Looking back at Singapore's effective policies in FDI attraction, which has made many enterprises choose an attractive destination for them to invest, to take few experiences for Vietnam.

1. Singapore has clearly identified that FDI attraction focuses on three priority fields: new manufacturing, construction and export. In addition, depending on the specific conditions of each period, Singapore plans FDI attraction into appropriate industries. Along with the rapid development of the electronics industry and a few other advanced technologies, the investment capital is spent on such industries as: manufacturing computers, electronics, and selling consumer goods, oil refining industry and mining engineering... To implement its export-oriented industrial development strategy, Singapore established the Economic Development Board (EDB), which is an independent government agency that operates on the rule of one-stop, research and development, considers investor requirements and aims at the national key industries (e.g ship repair, metalworking, chemicals, equipment and components).

In the recent time, EDB has adopted a clustering approach, focusing on the companies engaging in the electronics-semiconductor, petrochemical, and processing industries. The clustering approach is an instrument of industrial policy to attract FDI and strengthening the linkages and spillover effects. In order to exploit the advantages of geographical location, as well as overcome the shortage of natural resources, in accordance with the high development level of the economy, FDI attraction also aims at creating a system of service industries to promote international investment.

2. Singapore government has created a stable and attractive business environment for foreign investors. Singapore government has publicly stated that they shall not nationalize foreign enterprises. In addition, Singapore also pays great attention to building infrastructure, serving production activities. The licensing procedure is simple and convenient. There are the projects that apply for a license and then go into production within a few months, and there are the projects that can go into production within 49 days.

3. Singapore has built a complete, strict, fair and effective legal system. Corruption is prosecuted very seriously, all domestic and foreign enterprises are treated equally, everyone works and obeys the law. In addition, the State pays very high salaries to public employees. Every month, they have to deduct part of their salary as a retirement savings. If they commit embezzlement in the course of work, this accumulation will be cut off and dismissed. Employees not only lose money accumulated by them over the years, they could also be sentenced in jail. It is called as this the integrity fund for officials.

4. The Singapore government has issued the policies to encourage foreign capitalists to invest capital. Singapore applies very special preferential policies, which are: When business is profitable, foreign investors are free to repatriate profits; The investor has the right of residence on entry (privilege on entry and naturalization); Investors who have deposited capital in Singapore from S$250,000 or more and have an investment project, their family is entitled to Singapore citizenship.

Recommendation

From the reality of the recent years, Vietnam is potential to remain a "destination" of FDI activities, not a "hub" like Singapore. However, Vietnam needs to implement some necessary structural reforms in terms of administrative efficiency, corporate governance rules, legal process and a team of highly qualified workers in many different fields before being able to compare Singapore as a FDI hub.

Vietnam is an attractive destination for FDI attraction because Vietnam has a semi-skilled workforce with competitive wages compared to the global manufacturers. And Vietnam is a viable alternative to China and Vietnam has become a production hub in the recent times.

However, it should be noted that Vietnam is one of the countries with the fastest aging population in the world, Vietnam will be short in young and high-productivity workers in the medium term. Vietnam also needs to offer more systematic incentives to attract foreign talent to Vietnam, or offer the targeted incentives to attract investment in specific activities.

It is important thing for Vietnam to attract investments that create a lot of added value. In fact, Vietnam is probably in charge of the lowest value-added part in the global value chain that is assembling and sewing products. Vietnam must seriously review its national capacity in R&D, like logistics or marketing. This requires a review of the education system at many levels.

Vietnamese appropriate authorities can also actively pursue a policy of building industrial clusters. A recent similar success is Apple's headphone assembly industry cluster in Bac Giang province. Assembly companies have attracted other component suppliers to base the production facility near their factories. Ultimately, this budding industry cluster may attract other headphone manufacturers here thanks to the availability of skilled human resources in the audio department.

And the most important thing, the shift to more value-creating activities in Vietnam requires a change in the mindset of entrepreneurs and enterprises. People are focusing too much on "tangible assets" like factories, but not enough on "intangible assets" like R&D, reputation developing, knowledge or design skills. Consolidating business capability in these categories is a real challenge for the current and future generations of enterprise leaders.

Vietnam is possible to remain a "destination" of FDI activities rather than a "hub" like Singapore. 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 hub.

Source : Phaply.net