With large populations, growing economy, and competitive tax incentives, both Vietnam and Indonesia have emerged in recent years as potential hubs for business and foreign investment. Ever since opening its door to the world in 1986, Vietnam has become one of Asia’s leading exporters. Additionally, the growing cost of labor and trade tariffs in China has redirected investment to Vietnam as a cheaper alternative. On the other hand, Indonesia is proving itself as a strong competitor in attracting foreign investment with its liberalization policy and economic packages. This article provides a broad comparison comparison of doing business in vietnam and indonesia. 

Investment potential of Vietnam and Indonesia

1. Vietnam’s strong track record

 In 2020, the US news and World report ranked Vietnam as the 8th best country to invest in, followed by Malaysia (13th), Singapore (10th) and Malaysia (12th) and China (19th). Rankings were compiled based on results of a global perceptions-based survey among more than 6,00 business decision-makers on attributes such as  economic stability, entrepreneurship, tax environment, etc. A total of 125 countries invested in Vietnam in 2019, with Korea ranking first with a total investment capital of 7.92 billion USD, accounting for 20.8% of the total investment capital into Vietnam. By location, Hanoi capital city attracted the most FDI with 22.2% of total investment capital. Until December 20th, the whole country has 30.872 valid projects, mostly focused on the processing and manufacturing sector. Vietnam also began establishing special economic zones (industrial parks) to attract labor-intensive manufacturing  in the late 1990s, where 60-70 percent of all FDIs are located. 

Vietnam also developed one of the most competitive tax regimes in ASEAN, drawing in investors who might take advantage of the lower costs for doing business in Vietnam and to position themselves ahead of competitors. 

Also see: Top locations to set up a business in Vietnam

2. Indonesia’s positive prospects

Indonesia continues to offer vast potential thanks to  resilient economic growth, low government debt, large young population, and prudent fiscal management. According to UNCTAD's World Investment Report 2020, FDI investment in Indonesia increased by 14% between 2018 and 2019, achieving USD 23,4 billion; while FDI stock reached USD 232 billion in 2019. Indonesia ranks 4th in 2020 as the world best economy to invest in by US News and World Report. FDI growth in the second quarter of 2019 mainly concentrated in electricity, gas and water, transportation and telecommunication. 

A set of economic policy packages implemented by the Indonesian government on liberalisation, business certainty, interest rate tax cuts, energy tariffs cuts for labour-intensive industries, tax incentivesfor economic zones, and lowered tax rates on property greatly stimulated FDI growth. Investors are shifting towards Indonesia as a potential FDI hub for its increasing political and economic stability. 

According to Indonesia Investment Coordinating Board (BKPM), investment in the first quarter of 2020 increased by 8% compared to the same period in 2019. Top five countries investing in Indonesia include Singapore, China, Hongkong, Japan, and Malaysia, with FDI from SIngapore totalling 6.527 billion USD in the first quarter of 2020, accounting for 23.1% of the total investment capital. 

See also: Foreign Direct Investment in Indonesia

Foreign Ownership limitations

1. Vietnam

Vietnam is the second country after Singapore that aggressively negotiates Free Trade Areas (FTAs) with ASEAN members and other foreign blocs such as EU. The FTAs provide preferential tariffs and investment protections, which are incentives to foreign investors. Compared to Indonesia, Vietnam is more open towards FDI with less restrictions and greater incentives. According to Vietnam Law on Investment and Vietnam WTO’s Commitments, it is allowed to set up entirely foreign-invested businesses in Vietnam in most sectors. For example, trading, IT, and manufacturing welcome FDI. Some business lines such as tourism and advertising, however, require a Vietnamese joint venture partner.

There are several types of legal entities allowed for foreign investors in Vietnam, the most common of which include Limited Liability Company (LLC), Joint stock company (JSC), and Representative office. In most sectors it is also possible to register a branch of a foreign company. Business incorporation is regulated by the DPI (Department of planning and investment).

SEE MORE: What are the Types of Legal Entity in Vietnam

Vietnam law does not explicitly require a minimum amount of investment capital in setting up a company. However, the Department of Planning and Investment will assess the amount of capital contribution and see whether it corresponds to the planned expenses of the company. To set up a company in Vietnam, however, you would need a local registered address. 

2. Indonesia

Starting a business or legal entity in Indonesia can be hazardous to foreigners who lack profound experience with the country and do not have useful contacts or networks. Indonesia is not the world’s most business friendly country, which is reflected by the World Bank Index. Investors wishing to set up a partially or wholly foreign-owned company in Indonesia should consider the regulations on foreign ownership regarding the line of business. 

There are two legal entities permitted for foreigners in Indonesia: a foreign investment limited liability company (PT PMA) and a representative office (KPPA). Under Law No. 25 of 2007 regarding on Investment, any form of direct foreign investment in Indonesia must be in the form of a limited liability company. Company incorporation requires approval from BKPM (the Capital Investment Coordinating Board) and relevant authorities for certain industries. 

Limited liability company must generally comply with the following:

• Allowed activities: all business activities related to the sector it is engaged in and received approval from BKPM.
• Foreign ownership restriction depends on the business lines set out in the Negative Investment list. 
• Minimum capital: USD 680,000
• All shareholders, directors and commissioners eligible for work permit, unlimited amount of business visa sponsorships, work permits can be issued to foreign experts. 

The most up-to-date 2016 Negative Investment list includes business fields that are restricted to foreign investment. Fields  reserved for investment by or partnership with domestic  enterprises include construction consultancy services at less than USD 700,000. Fields open for partial foreign ownership include internet service, professional training courses, distribution and warehousing, department stores with retail space of 400 to 2,000 sq. meter, general sale agencies for foreign airlines.

Representative office has less requirements for operation; however, its activities are restricted to market research, networking… and forbidden from marking profit/revenue or engaging in sales. 

See also: Facts about entity format in Indonesia

Other factors in doing business

1. Major types of Taxes

Most business activities and investments in Indonesia and in Vietnam will be affected by the following taxes:

• Corporate Income Tax
• Individual Income Tax
• Value Added Tax (VAT)/ Sales Tax
• Withholding Tax
• Social Insurance, Unemployment Insurance ad Health Insurance Contributions

General corporate income tax rate is 25% in Vietnam and 20% in Indonesia. With businesses operating in the petroleum, gas and natural resources sector, the tax rate is 32 - 50% for companies in Vietnam with at least 40% of its shares traded on the stock exchange. 

Both Indonesia and Vietnam use a progressive individual income tax rate between 5% - 30% and a flat rate of 20% for non-residents. Sales tax in both countries is 10%.

2. Labour

Vietnam’s minimum wage is slightly below that of Indonesia, at $130-190 per month compared to $240-300. However, the availability of labour skill in Vietnam is comparatively low and concentrated in major cities, which is a limitation to businesses in niche sectors such as IT. 

3. Number of holidays

Compared to Indonesia (20 holidays), Vietnam had 9 holidays less in a year, meaning it has 9 more working days. Additionally, Vietnamese people do more working hours a day than in any ASEAN country. 

4. Political stability

Vietnam has proven over time to be a politically stable country. Indonesia has had several political unrest in Jakarta and Papua. A stable country offers foreign investors a supportive legal framework, predictability, and assurance of longevity.

5. Natural disasters

While Most areas in Asia are prone to natural disasters, Vietnam’s industrial centers are mostly safe from the destruction of natural disasters. 

To sum up, there are various advantages and disadvantages associated with each country in terms of foreign investment, business incorporation, and conducting business. Depending on the industry and line of business, priorities may vary and it is advisable to assess all criteria before doing business in Vietnam and Indonesia. Our VietTonkin experts with longstanding presence in both countries are always available to assist you along the way. 

When setting up a manufacturing business in Vietnam, investors need to consider a lot of factors and conduct profound researches on locations in which the factory will establish. No matter who you are, what your nationality is, understanding clearly about regulations and procedures of setting up a manufacturing business in Vietnam is certainly important.

This article today will provide you with must-know regulations and procedures for establishing a manufacturing business in Vietnam.

Regulations of setting up a manufacturing business in Vietnam

Four fundamental regulations mentioned in this sub-part are minimal capital requirements, special requirements, tax reporting, and resident director.

First, minimal capital requirements. In fact, the Vietnamese government currently has no requirement about the minimum capital for investors to open a business. Nevertheless, the project will merely be approved by the authority when you present sufficient capital to cover all planned activities. Plus, regarding shareholding, the highest ownership allowed for manufacturing businesses for foreign investors is 100%. 

Second, special requirements in terms of environmental impacts, foreign contractors, and the location of the manufacturing business. Depending on the project, a foreign firm needs to provide an environmental impact assessment, which is used to evaluate the potential negative environmental impact of enterprises, while determining the risks and necessary precautions.

Furthermore, foreign contractors, including general contractors, main contractors, joint venture contractors, and subcontractors are legally obliged to obtain a proper license (construction permit) in order to operate in Vietnam. In the aspect of the location that the manufacturing business is set up, once the foreign firm has agreed on the location to establish operations, the coming significant step is obtaining the certificate of land use.

There are many types of land usage rights; nevertheless, under current law, foreigners are entitled to retain a land-use certificate for only 50 years, while locals can have one indefinitely.

Third, tax reporting. When you own a business, you need to have a tax report. The tax report of a business should include the following types of tax: corporate income tax, business license tax, value-added tax, foreign contractors without holding tax, and some other taxes namely specific sales tax, export and import duties, natural resources tax, property tax, and registration fee. 

Finally, the resident director. It is required that a resident director who has a resident address in Vietnam is appointed if you are a foreign investor and would like to set up a business in Vietnam. In case the director is not a founder and a foreigner, he/ she must have a work permit in Vietnam. 

Steps to set up a manufacturing business in Vietnam

Choose the main corporate form

There are three main options for setting up a business in Vietnam for your firm to consider and prepare before setting up a company in Vietnam

1. Establishing a new business entity

2. Investment via Merger and Acquisition

3. Other forms of investment such as participating in contractual business forms of buying stakes of an existing enterprise.

These options are available for several corporate forms such as Limited-Liability company; Joint-stock company; Partnership; Business cooperation contract; and Public-Private Partnership Contract.

Registration process

As Vietnam requires multiple layers of restriction, the verification and review procedure to form a business in Vietnam might be more complex than the US or Singapore. 

-The first step is applying for licensing to establish a foreign company

-Then, foreign investors must register their investment with licensing authorities through two steps: obtain the Investment Registration Certificate (IRC) and obtain Enterprise Registration Certificate (ERC)

Required documents

Business owners should prepare the following documents:

- A request for implementation of the investment project; 

- A copy of ID card, 

- Passport or business certificate of registration; 

- A proposal of the project's investment; 

- Demand for land use, 

- Explanation of technology application

Engrave the seal

After receiving IRC and ERC, the company needs to engrave the seal and apply for the company's seal specimen. 

Publicize the company establishment on a national information portal

Investors are required to provide the authorities with fundamental information regarding the company's profile. Such information is essential for validations and verifications. Investors have to provide the registered name of the company, business address of the company, charter capital or investment capital of the intended company as well as the registered business lines. 

Furthermore, investors are also obliged to justify the company business location by providing the following documents:

- A certified lease contract of headquarters

- A certificate of land use right

Tax declaration

The final step involves applying for the initial tax declaration at the Department of Taxation where enterprises are established. Within five to seven working days, the submitted documents will be verified for validation.

Factors to be considered in deciding the ideal location for manufacturing

When considering the best location to set up a manufacturing business, the following factors are important aspects that can signify the long-term business plan. Four factors that should be considered are infrastructure development, labor, incentives, and types of industries.

Infrastructure development

When it comes to infrastructure development, business owners can reckon whether the location is suitable for supply chain infrastructure, logistics, and access to customer markets. The location of the manufacturing business has connectivity with the global supply chain.

Connectivity matters since it can easily make the difference between seamless production and endless delays. Hence, understanding how products and components will be able to be shipped between various stages of production is of monumental importance for foreign investors. Besides, moving the manufacturing plant closer to the customer base can aid profit maximization or increase market share through advantages such as speeding up delivery times, reducing inventory as well as cost-cutting solution.

Furthermore, the industrial zone (IZ) provides a much-needed solution and has been growing increasingly popular among foreign investors because of its competitive advantage in infrastructure. Many IZs throughout Vietnam have close proximity to key road networks, ports, and rail systems, which significantly reduce disruptions and wait times. Some popular industrial zones in Vietnam are Dinh Vu Industrial Zone, Hoa Khanh Industrial Zone, and Vietnam - Singapore Industrial Zone. 

Labor

The business owner should also consider the labor force when choosing a location. Each region in Vietnam has different minimum wage range. Vietnam's key attraction to foreign investors is the low cost of labor. The minimum wage is ranged from US$125 to US$180 per month, varied by regions. Major cities such as Hanoi or HCMC demand higher minimum wage compared to Vinh Phuc, Phu Tho or Bac Giang. In addition, industrial workers and managers are expected to earn from $US500 to $US 180 on a monthly basis. 

According to a report published by Vietnam Briefing about “Vietnam’s key regions and economic zone”, the Northern labor force also has a competitive advantage in terms of qualification. Cities in the North such as Hai Phong or Ha Noi have an abundant supply of qualified workers. As the talent pools are more focused on heavy industry and natural resources than other regions in the Central and South Vietnam.

Whereas regions in the Central such as Da Nang, Quang Nam, Quang Binh have more scared talent resources compared to the North and the South, since workers in technical fields often find greater opportunities in the other two regions, making it challenging to find the right workers in the Central.

While Ho Chi Minh City (HCMC) has an ample talent pool, the environment between employers for talent is highly competitive. As such, the Turnover rate might result in significant delays for companies that seek to initiate production. 

Incentives

Preferential tax rates are also available in several industrial zones in Vietnam, which are determined on a zone-by-zone basis and can be extended to both personal and corporate rates. This enables investors to offset the higher wages and rental fees that are often found in these areas. The Vietnamese emerging market has been quietly undergoing one of the most competitive tax regimes throughout Southeast Asia, a standout feature of Vietnam's tax regime. Specifically, there are three forms of incentives that are available to operate companies:

1. Reduction or exemption of import tax on goods imported as fixed assets on raw materials

2. Application of lower rate of corporate income tax, which is currently levied at a rate of 20 percent on locally sourced profits

3. Exemption of land rents.

Notably, Land Rental Incentives are also applied depends on the scale on condition of one's project. According to the Land Law 2013, the government allows up to the whole rental period for the project that invests in especially encouraged investment sectors. Moreover, mega-projects that having total capital of at least VND 6,000 billion in especially encouraged investment sector also benefited from the exemption.

Types of industry

Foreign Investment Enterprises (FIEs) should compare if the geographic location's elements are aligned with the company's purpose and distinct features. This process requires careful weighing the advantages and disadvantages of different locations.

Options can be narrowed down by geographical concentration of industries as some regions host more enterprises from a specific industry than others do (see infographic above). Representing some of Vietnam’s main export sectors, garment and textile manufacturing are concentrated in both north and south Vietnam, while footwear and furniture manufacturing are both concentrated in south Vietnam.

The north is arguably the better choice for an enterprise importing input goods from China, while the south has the advantage of being near the largest commercial port in Vietnam. Proximity to key destinations such as airports, seaports, major cities, main highways, and borders are also important. As some regions are specialized in a specific industry than others do, the options can be narrowed down by geographical concentration of industries.

While the garment and textile manufacturing are populated in both the North and the South, footwear and furniture manufacturing are concentrated in South Vietnam. On the other hand, the North is evidently a wiser choice for firms that import goods from China as input as the region is consistently in need of machinery and capital to facilitate the heavy industry and natural resources.

In conclusion, the three most significant points to open a manufacturing business are fundamental regulations of setting up a manufacturing business, steps to set up a manufacturing business and categories to be considered to set up a manufacturing business. Vietnam is trying to become an ASEAN hub to attract more foreign investors to create more projects in Việt Nam.

Hope that the article provides you helpful insights so that you can make a wise decision when setting up a manufacturing business in Vietnam. If you need any help for incorporating a company, we're ready to help you.