Foreign Investment in Privatised Firms: Deep or Wide?

The initial restructure and reorganisation of a privatised enterprise in Vietnam is a decisive factor for their failure or success in the future, according to Professor Patrick Gougeon from France’s ESCP-EAP European School of Management.

Restructure or reorganisation does not purely mean making a shift to personnel and divisions like many privatised enterprises but defining core development targets. In reality, hardships in the corporate privatisation of Vietnam are normally seen at this initial decisive stage. According to Professor Gougeon, the main reason cannot be their lack of interests or careful consideration but their unclear targets for the reshuffle of their enterprises. They have not yet raised the question “What makes investors pour money into enterprises?”

According to Prof Gougeon’s studies, private investors, especially foreigners, are keen on an enterprise with clear operations and transparency and detailed strategies. In the meantime, a majority of Vietnamese enterprises lack transparency and seemingly fail to interpret this for investors. Prof Gougeon stressed that financial publicity is not easy for enterprises in Asia, but investors need clear and regular information about financial issues to secure their investment.

A few privatised enterprises have tried to expand their business scopes in an effort to maximise the investment efficiency and human resources. In fact, their leaders have suffered pressures from stakeholders about profits and they have had to seek profit-making businesses or at least foreseen profitable ones to reassure their shareholders. The pressures, in some cases, triggered a negative impact on business goals. Others chose short-term but profitable directions, which are suitable for “free-risk” investors, mainly shareholders, and left a small amount of space for strategic investors.

It is commonly known that investors always want to diversify their investments to avoid risks that will take all their money away. But lots of corporate leaders also don’t know that investors don’t want to pour their money into enterprises with “general” businesses. Gougeon explained that investors are interested in investing in enterprises that are engaged in specific industries because they want maximum profits from their investments. Specialised enterprises have smaller scale but have more competitiveness than multi-sectored enterprises. The former are more attractive to investors in terms of profit generations.

Under the draft Common Investment Law to be submitted to the National Assembly, foreign investors are free to invest in non-restricted and unconditional industries and businesses. The percentage of investment in conditional industries will be increased to 49 per cent from the current 30 per cent. It is estimated that there will be a new foreign investment inflow in Vietnam.

However, according economists, commodity sources for the two securities trading centres are mainly from privatised enterprises and, as a result, the attractiveness of the market as well as the ability to make a foreign investment inflow depends on the policies of privatised enterprises. If the number of listed enterprises on the two securities trading centres doesn’t increase, and in particular if the newly formed privatised enterprises fail to make themselves attractive to investors, it will be difficult to lure foreign investors to provide a strong enough inflow.

• Quynh Chi