7.2.1. Rural Investment Climate Constraints
The following conclusions related to identification of rural investment climate constraints and understanding the major obstacles of rural investment climate are listed.
First, access to land is the most severe constraints of rural investment climate in Northern part of Vietnam. Among the agro-enterprises surveyed, 49% reported that access to land is a major obstacle in rural investment climate (Figure 4.3, page 79). The main causes leading to difficulty in access to land include short term use of land, cumbersome administrative procedures in access to land, costs of land use, compensational negotiation, and clearance of land area (Figure 4.4, page 81). However, some of agro-enterprises surveyed had good ways to overcome these difficulties. Examples include creating jobs for household members who lost agricultural land and signing the contract farming with farmers instead of land use right transfer. These experiences may be worthy lessons for other agro-enterprises.
Second constraint is the access to credit services accounting for 48% of the agro-enterprises surveyed (Figure 4.3, page 79). The high inflation rate in recent years has forced the government to adopt a tight monetary policy with a high interest rate (over 20% per year). This is the biggest reason leading difficulty in access to credit services (Figure 4.5, page 83). Other reasons caused difficulties in access to credit services include complex lending procedures and collateral conditions.
Most of the agro-enterprises that have difficulty in access to credit services are small and medium sized and privately owned enterprises.
Third, administrative procedures account as a major constraint on rural investment climate according to 26.5% of agro-enterprises surveyed (Figure 4.3, page 79). The inadequacies of administrative procedures are mainly in permits and licenses, business start-up, and administrative procedures in access to land (Figure 4.7, page 85). The main causes are due to cumbersome administrative procedures, complications of administrative processes, and lack of coordination
and standardization among agencies in the process of issuing licenses and permits.
Corruption is also evident.
Fourth, infrastructure and taxation are also major constraints of rural investment climate as cited by 30% and 22.5% of agro-enterprises surveyed, respectively (Figure 4.3, page 79). Infrastructure was considered as one of the most severe constraints because of electricity, transportation, irrigation, and maritime port (Figure 4.6, page 84). Taxation was cited as a major constraint because of the complexity intax procedures, high tax rates and tax officers’ bureaucracy (Figure 4.8, page 87).
Finally, at less severe level, some constraints such as skills and education of workforce, and macro uncertainty were cited by few agro-enterprises (Figure 4.3, page 79). This is attributed to shortage of workers trained while evidences of macro uncertainty are mainly due to weakness in monetary policy, slow pace of economic growth, and high rate of inflation (Sub-section 4.3.2.6, page 87). Legal environment and market entry are also some of the reasons why few agro-enterprises, especially foreign investors, are not secured on their investment. The weakness and inefficiency of legal system are considered to be the main cause of incomplete legal environment and the unfair treatment between state enterprises and private enterprises. These are considered as one of the biggest reasons that impede market participants.
7.2.2. Government’s Efforts in Strengthening Rural Investment Climate
As indicated in Chapter 1, an element of the second objective of the research was to analyze the situation of rural investment climate. Accordingly, descriptive findings of the government’s efforts to strengthen rural investment climate were presented in Figure 4.9 (page 88). This figure summarized the government’s efforts to eliminate major constraints of rural investment climate.
The government’s efforts to reduce complications of administrative procedures, improve infrastructure and legal environment, and reform tax towards efficient and equitable system have achieved encouraging results. In terms of infrastructure, some of
the agro-enterprises surveyed said that rural infrastructure was a major obstacle of rural investment climate in 2010 leading to a decrease in 2008, from 33% to 30% (Figure 4.9, page 88). Besides the great success in improving telecommunication, it is worthy to discuss the government’s efforts to improve rural infrastructure system in Northern part of Vietnam such as the electricity and rural transportation. Accordingly, the number of times of sudden power interruption and number of days to deal with outages were reduced 4.5 times and 6.2 days, respectively during the period 2008-2010, besides increase in cost of electricity service (Table 4.1, page 91). Similarly, decreases in the delayed number of days merchandizing delivery in domestic destinations became 0.5 days and the ratio of transport costs to market value of products appeared at 0.31%.
However, this achievement seems to be insufficient in meeting the requirements of economic development. Consequently, improvement of rural infrastructure remains as the
"ring" connection in Northern part of Vietnam, especially in Northern midland and mountainous areas and North central region.
The results from the government's efforts to simplify administrative procedures have also been widely recognized. Some of the agro-enterprises surveyed that cited administrative procedures as a major obstacle of rural investment climate has decreased from 35% in 2008 to 26.5% in 2010 (Figure 4.9, page 88). The creation of a one-stop shop has reduced a number of administrative procedures, number of waiting days to deal with administrative process and the costs in the fields of starting a business, and business licenses and permits (Table 4.2, page 93). To summarize, the positive change in simplifying administrative procedures in firm’s business activities is mostly recognized by domestic enterprises but this does not include majority of foreign investors.
Regarding improvement of tax system, the Government has been making efforts to reform the tax regime towards more efficient and equitable manner to attract investment and promote economic development, especially in rural areas. Evidence of these efforts includes the government’s initiative to have online tax declaration since 2010. Accordingly, enterprises can reduce time in applying tax documents to tax authority. Approximately, about 112 hours per year were reduced. The rate of corporate income tax has also been reduced from 28% to 25% since 2009 and some tax incentive
policies were promulgated to support agro-enterprises which operate in difficult rural and remote areas (Sub-section 4.4.3, page 93).
As indicated in subsection 4.4.4 (page 94), the legal system of Vietnam has been improving both in terms of diversity and efficiency in recent years. Series of laws relating to business which are considered the biggest barriers for business activities of enterprise have been reviewed and revised such as Land Law, Enterprise Law, Investment Law, Commercial Law, Tax Administration Law, Accounting Law, Intellectual Property Law, etc. However, the submission of the important legislations to National Assembly for consideration was delayed which in turn limited this positive change.
Besides the significant results in strengthening rural investment climate as mentioned above, the Government did not seem to achieve the goal of improving access to land and access to credit service (Subsections 4.4.6, page 95 and 4.4.7, page 96). In fact, the number of days required to complete inaccess to land in 2010 increased to 8.8 days compared in 2008. Meanwhile, the conditions for agro-enterprise to obtain a loan from credit institutions such as the number of days needed to approve lending documents, interest rate, and estimated value of collateral needed (as a percentage of the loan) became more stringent (Table 4.4, page 97). These partially explain why increase in the proportion of agro-enterprises cited access to land (8%) and credit services as major obstacles of rural investment climate, in the period 2008-2010 (Figure 4.9, page 88).
7.2.3. Impacts of the Factors of Rural Investment Climate on Agro-enterprise’s Performance
The following are conclusions on the impacts of rural investment climate factors on agro-enterprise performance. These were estimated using data that were partly extracted from the survey with 200 agro-enterprises in Northern part of Vietnam.
First, using estimates of productivity that account for endogeneity problems in the production function (Subsection 5.3.1 and Table 5.1, pages 104-105), the empirical results supported the view that extending time in using agricultural land improves agro-enterprise performance (total factor productivity) in Northern part of Vietnam (Subsection 5.3.2, page 105). This finding is to strengthen using estimates of productivity
that account for endogeneity problems. Accordingly, increase in number of year in using land lead to an increase in agro-enterprise’sproductivity from 0.18 to 0.31% (Tables 5.3 and 5.4, pages 108-110). Furthermore, administrative procedures and outages are major obstacles of rural investment climate which significantly debased agro-enterprise productivity in total value added. This finding also strengthens the World Bank’s argument that administrative procedure is considered as a major constraint for firms to operate in Vietnam (World Bank, 2011).
Interestingly, increase in number of hours using internet daily to communicate in work and conduct business with client is useful for the agro-enterprises to improve their productivity. This finding suggests that the agro-enterprises should exploit internet effectively to communicate in work and conduct business with clients, especially distant clients. Finally, empirical results showed the negative effect of macro uncertainties in forestry and in the North-east region. This may implies the ineffectiveness of the local government in the North East region on the advantages of forestry.
7.2.4. Influences of the Factors of Rural Investment Climate on Agro-enterprise’s Investment
Research findings on the influences of the factors of rural investment climate on agro-enterprise’s investment decision to invest were tested using Heckman two-step model and data that was partly extracted from the survey with 200 agro-enterprises in Northern part of Vietnam.
Results from empirical analysis showed that variables of agro-enterprise and manager characteristics such as manager’s educational level, profit on investment and size of agricultural land have significant and positive effects on agro-enterprise’s investment decisions with a statistically significant level ranging from 1% to 10% (Tables 6.2 and 6.3, pages 124 and 127). Among agro-enterprises surveyed, 48% of them have decided to invest with the mean level of investment at 7,053.3 million VND (Table 6.1, page 121).
Inversely, the results from the two models are empirical evidences proving the closed relationship between rural investment climate and firm investment. In mixing
estimated results from the two models, the indicators of rural investment climate include outage, administrative procedures, and access to credit. These have significantly and negatively affected the probability of the agro-enterprises to decide to invest and their level of investment. Meanwhile, some other indicators of rural investment climate such as level of market competitiveness and ratio of transport costs to market value of products have also negatively affected the probability of investment but still have no significant effects on the level of investment. Meanwhile, the effect of land tenure security is positive. However, the results seem to suggest that thegovernment’s efforts to strengthen rural investment climate are still inadequate to satisfy the agro-enterprises’ investment decisions.