Vietnam Market Entry Decisions Case Study Solution Format

 

Vietnam: Market Entry Decisions

 be limited, and tariffs will be managed to balance imports and local production, in line with this policy. Foreign investment commitments worth almost $8 billion were made in 1995, twice the level of the previous year, bringing the total cumulative commitment since the launch of

doi moi

to approximately $20 billion for over 1,300 approved projects. The total GDP of Vietnam in 1995 was $19 billion. FDI projects in Vietnam averaged $14M to $15M of investment, compared with a $1M average in the People's Republic of China. Approximately $8 billion of these commitments had been realized, of which $4 billion had been realized during 1995. The four largest sources of FDI were Taiwan (total cumulative commitment, $3.3 billion), Hong Kong ($2.2 billion), Japan ($2 billion), and Singapore ($1.6 billion), followed in rank order by South Korea, Australia, Malaysia, and France. U.S.-sourced FDI totaled approximately $1 billion since the lifting of the trade embargo in February 1994, making the United States the tenth-largest source of foreign investment, and was increasing sharply. The major investment sectors were oil and gas, hotels and commercial real estate, telecommunications, services, and light manufacturing. In addition, Vietnam was pledged international aid worth $2.3 billion for 1996, a 15% increase on the previous year, although many previous pledges had never materialized. The largest donor of foreign aid, which was intended primarily for infrastructure projects, was Japan. Local private investment was running at approximately the same level as FDI, with some 20,000 private firms registered by the end of 1995. Local entrepreneurs faced a shortage of capital,given the country's low saving rate and underdeveloped banking sector. A significant contributor of both capital and human resources was the Vietnamese diaspora. The majority of the two millionethnic Vietnamese living abroad (the

Viet Kieu)

had fled from the south as the war ended in 1975 andhad found refuge in North America, Western Europe, or Australasia. It was estimated that in 1994,250,000 Vietnamese families had received a total of $500 million from relatives living abroad. In 1994the Vietnamese government reversed its previous policy and instituted preferential terms for

Viet

Kieu

returning to their homeland, including classification as domestic residents for the purposes oftaxation and the establishment of joint ventures. The greatest concentration of repatriated

Viet Kieu

was found in Ho Chi Minh City, where their entrepreneurial activities and taste for Western productscontributed to that city's status as the commercial center of the nation.Vietnam's population of 74 million, growing at 2% per annum, was the world's twelfth largest and one of its most youthful: in 1995, approximately 50% of the population was aged 21 or younger. With a national literacy rate of 90%, the Vietnamese workforce was also one of the best educated among emerging markets in Asia. The recent economic growth had yet to change the living standards of the majority of the population, however. A 1994 World Bank report which praised the country's

impressive economic

progress”

 also pointed out that 51% of the population lived in poverty. GDP per capita was $235 in 1995, compared to $2,000 in neighboring Thailand, with four televisions per 100 population (11 in Thailand) and 0.3 telephones per 100 population (3.1 in Thailand). These averages disguised wide variation between the major cities, where economic growth had been concentrated, and the countryside, still home to 80% of the population. This discrepancy, along with increasing pressure on agricultural land caused by population growth, was leading to significant migration to the cities. About 13% of Vietnamese lived in Ho Chi Minh City and Hanoi. Unemployment was estimated at 12%. Vietnam joined the Association of South East Asia Nations (ASEAN) in July 1995.

1

Membership entailed participation in the ASEAN Free Trade Area (AFTA), one of the targets ofwhich was to reduce tariffs on trade between member countries to a maximum of 5% by 2003, adeadline extended to 2006 for Vietnam. In the same month, Vietnam signed a cooperation agreement

1

The other members of ASEAN were Brunei, Indonesia, Malaysia, Philippines, Singapore, and Thailand.

3

Vietnam Market Entry Decisions Essay

Does Vietnam represent an attractive investment opportunity?

Absolutely; all of the factors are present to allow Vietnam to emerge as an "Asian Tiger":

* Economic Growth. Vietnam has been enjoying robust economic growth due to economic reform, a growing GDP, an increase in private Vietnamese-owned organizations, as well as the momentum from the large number of emerging foreign joint ventures.

* Increasing FDI. It is the consensus of many countries that Vietnam is proving to be an increasingly attractive region to do business. Vietnam is widely considered to be one of the most attractive investment opportunities in Asia, second only to China and India.

* The Government. The government's commitment to economic reform will be the key to opening relationships with foreign firms. The government will have to make improvements across the board in order to ease market entry, but it has been moving in this direction through its entry into the ASEAN and the EU.

* Population. A large (the 12th most populous in the world), youthful (50% 21 or under) population with growing pocketbooks and a taste for Western culture.

* Labor Pool. Generally well-educated, low cost and available workforce.

On the other hand, Vietnam still must overcome some obstacles. First, its transportation infrastructure is still primitive, a result of years of war. Substantial investment in improving roadways and airports is crucial in order to facilitate distribution across the area. Next, the Communist government's tight controls, despite its recent openness to investment, must be loosened. Likewise, corruption continues to be a major concern for investors. Therefore, although Vietnam is an attractive opportunity, investors must be cautious, but willing to assume some risk at the same time. The potential ROI may be worth the risks inherent in investing in the region.

Is it too late for U.S. companies to enter Vietnam?

No; in fact, many firms have wondered if it is still too early, given the problems with dealing with a communist government, wide-scale corruption, lack of infrastructure and a retail market still in its infancy. However, early entry can be advantageous in that it would enable U.S. firms to gain exposure to the market (via exporting or distribution agreements), and the ability to further research future investment opportunities while at the same time avoiding too much exposure.

What recommendations would you make to each of the three U.S. Multi-National Companies regarding whether to enter Vietnam, mode of entry, and...

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