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Series: “Offshore Expansion by Small and Medium Enterprises” Part 3 Key Points in License Acquisition and Setting up Local Firms in Host Countries | Tatsuya Hoshino, Research Director Vietnam Economic Research Institute (VERI) [Date of Issue: 30/June/2011 No.0196-0800]

Date of Issue:30/June/2011

Series: “Offshore Expansion by Small and Medium Enterprises” Part 3
Key Points in License Acquisition and Setting up Local Firms in Host Countries

Tatsuya Hoshino
Research Director
Vietnam Economic Research Institute (VERI)

Getting permission to set up a business operation in a foreign country usually requires obtaining an investment license before a local company can be established. ASEAN members and other such countries are keen to attract foreign investment, and in areas such as manufacturing, software and IT, new technologies and the processing of agricultural and fishing products, as long as the amount invested is under the set ceiling, registration is the only requirement for investment permission and company establishment. Countries that are moving even more proactively to encourage foreign investment require only a simple registration process to grant permission for company establishment, with a license needed only if the foreign company is applying to receive incentives. Detailed investigations are made in the case of some types of industry to protect domestic industry or society. Many local companies are established on a wholly-owned basis. Local company management is critical, and foreign companies should carefully consider business and personnel policies. Talented personnel from the parent company should be selected to head local companies.

I. License Acquisition in Host Countries

1. Form of entry
Companies generally establish offshore operations in one of three forms:
(a) A foreign firm sets up a local firm. Business operations are conducted locally by that firm, as is corporate accounting, with tax on any profit paid to the local government.
(b) A representative office is set up in the host country. Such offices cannot conduct business locally (no carry-on business). The sole activities of the office are to liaise between the parent company and host country companies and to conduct PR activities in the host country.
(c) No company is established locally, and consign the manufacturing or processing to a company in the host country. The host country company is paid a processing fee.

2. Conditions for license acquisition
(a) In the case of consignment of manufacturing or processing, because the actual activity in the host country is being undertaken by a local firm, the company commissioning the work does not need to obtain permission to operate in that country. Representative offices are not engaged in any actual business activities, so it is relatively easy to get permission to establish these.
(b) When a foreign firm establishes a local company, the prerequisite is that the firm will have a business or project in which to invest. The license for that investment becomes the basis for company establishment. Where the host country has incentives in place for the particular business or project in which the company is investing, licenses are comparatively easy to acquire, and in some areas registration alone is enough to gain permission. The agency granting licenses and permission will be stipulated in legislation such as foreign investment laws. In the case of Vietnam, the relevant legislation is the Common Investment Law, and the Department of Planning and Investment under the provincial People’s Committee (or, for large-scale projects or projects approved or authorized by the Prime Minister, the Ministry of Planning and Investment within the central government) are in charge. The government actively encourages manufacturing, software and IT-related operations, labor-intensive operations, agricultural and fishing product processing operations, and operations involving new materials, new energy, biotechnology and manufacturing machinery, etc. For all such operations where the amount invested is no more than around 1.5 billion yen, companies only need to register (submit the relevant forms), with permission granted within 15 days of receipt of application. Business in the fields of finance, insurance, culture, publishing, entertainment facilities, real estate management, health and education, as well as any other project in which investment is more than around 1.5 billion yen, requires submission of the relevant forms followed by investigation procedures (rather than registration procedures). The investigation period for such cases is stipulated as 30 days (which can extend as far as 45 days). Cases requiring investigation will be duly licensed to the extent that they do not contravene the policy guidelines, laws or ordinances of the Vietnamese government.

In Laos, the Investment Promotion Department under the Ministry of Planning and Investment inspects and approves investment applications. It also provides a one-stop counseling service for companies wishing to set up operations in Laos. Foreign firms do not need an investment permit before they can launch operations, and company establishment is easily registered under the Business Law.

In Cambodia, there are no areas where investment is restricted, other than certain limits on land ownership. To receive investment incentives such as corporate tax breaks, exemptions on import duties for raw materials, and VAT refunds, foreign companies must make an application demonstrating investment feasibility. The authority granting approvals is the Council for the Development of Cambodia. The approval is granted not to the company but to the investment project. If the foreign company does not apply to receive incentives, it can set up a local company simply by registering the latter with the Ministry of Commerce and can also engage in investment activities.

II. Establishing a Local Firm

(1) Forms taken by local firms
(i) Local firms take the form of wholly-owned firms, joint ventures or firms operated on the basis of a business cooperation contract (BCC). Wholly-owned firms enjoy smooth decision-making in terms of management of the local firm, and some joint ventures too are subsequently transformed into wholly-owned operations.

(ii) Some rationales for joint ventures are that the partner company has access to resources and materials, is familiar with local sales, or owns land and buildings. In other cases, the host country government makes the joint venture format a condition of investment approval. Where foreign companies form M&As with local companies, they often buy some or even most of the local company’s stock to smooth the acquisition process, which can end up effectively creating a joint venture.

(iii) The BCC format entails forming such a separate BCC with a local firm for each investment project and applying for permission from the relevant local authority (planning and investment departments, etc.). If permission is granted, business can be conducted locally for that particular project in the same way as if a local company had been established. For BCCs, host government permission is necessary for each investment project. Even small-scale repair operations falling outside the scope of the usual regulations require permission for each case. BCCs suit large-scale projects and big construction projects, and there are many such examples in the areas of construction and civil engineering.

(2) Creating articles of association and employment regulations for local firms
Company law stipulates the creation of articles of association for local firms. In the case of wholly-owned firms, the parent firm’s articles are usually used as a base and then tailored to reflect local circumstances. Articles of association for joint ventures are created in agreement with the partner company, but details that often cause complications, such as the extent of the majority required in decision-making on issues critical to the company, how cash-flow shortfalls will be covered, and how profits will be handled, should be determined beforehand. The next key issue is employment regulations, which should clearly stipulate employment conditions, wages and bonuses to be paid to local staff, incentive schemes to motivate employees, penalties for contravening regulations, penalties for illegal strikes, dismissal conditions, and conditions pertaining where employees are sent to Japan for training. These are vital in avoiding future problems.

(3) Personnel and labor policies for local companies
(a) When personnel are employed locally, problems often arise because these personnel are not used to the way Japanese-style firms operate. Immediately after local personnel are hired, they should receive adequate training in their work duties. Training in relation to basic issues can be particularly effective, such as the practice of reporting directly to one’s superior when a problem arises, and other reporting, liaising and consulting duties.

(b) Major differences should be established in the wages of competent and incompetent employees. In Japan, the disparity is only 10-15 percent in the interests of workplace harmony, but offshore that disparity should be 30-50 percent. A smaller disparity will see competent staff going elsewhere.

(c) Managing a local company requires the cooperation of talented local staff. Companies often set up operations in countries such as Vietnam, Laos and Cambodia in search of cheap labor and consequently keep wages as low as they can, but to reduce job-hopping and resignations among talented employees, steps need to be taken to incentivize them.

(original article : Japanese)
(For the Japanese version of this article)

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