Background Information
History
Vietnam is a communist state with descendants from China and Indonesia. Notable historical experiences include the Vietnam War and the involvement of the US. Vietnam has engaged in several wars with its neighbors over border disputes. Over the years, the country’s relationship with the US has improved because of its focus on reforms, which resulted in the lifting of the trade embargo in 1994.
Vietnam has focused on economic and political reforms by eliminating inefficient, corrupt bureaucrats. The country has streamlined its approval processes and eliminated several red tapes to facilitate direct foreign investments.
Although there are ongoing reforms, notable achievements and changes have been slow. Nevertheless, the national assembly has continued to push for trade agreement with the US by opening borders. In addition, there are notable efforts to eliminate crime and corruption in the public sector. Consequently, many of its corrupt leaders have resigned. The country joined the World Trade Organization in 2007 after over a decade of waiting.
Today, the major tension between Vietnam and China exists about islands.
Geography
Vietnam lies on the eastern and southern section of Indonesia and China peninsula in Southeast Asia. The South China Sea forms the coastal line of the country.
On the north, the country borders China, and Laos and Cambodia on its western border. The country has Mekong River in the south and its size is nearly twice Arizona (Vietnam, 2014).
Demographics
Vietnam has over 90.4 million people with gross domestic product (PPP) of $320.7 billion. It has recorded 5.0% growth with an annual five-year compound growth of 5.9%. Its per capita is $3,548 with unemployment rate of 4.5%. Vietnam’s inflation (CPI) stands at 9.1%. The country’s foreign direct investment (FDI) flow is $8.4 billion (The Heritage Foundation, 2014).
Key Facts about Culture
The majority ethnic group is Vietnamese, Buddhists with a section of Christians and indigenous belief systems. They observe teachings of Confucius, which recognizes the importance of an individual in a society with a greater sense of obligations to other based on relationships. Face is critical, and one may lose face, save face or give face to another person through congratulatory messages. However, public rebukes lead to a loss of a face. Therefore, it is imperative for foreigners to observe the concept of a face.
The country adheres to collectivism and social interactions aim to protect a group rather than an individual. One must observe public etiquette, table manners and business etiquette.
Business etiquette requires people to arrange for appointments in advance, maintain punctuality, observe hierarchy and maintain good relations for business success. In addition, negotiations are slow, never argue in meetings to save face, keep promises, dress conservatively and observe handshakes (Vietnam – Language, Culture, Customs and Etiquette, 2014).
Political System and Associated Risks
Vietnam is a Communist republic controlled by dictators often engaged in political suppression and limited respect for basic human rights. The country started to reform its political and economic systems after engagement with the US. These reforms started in 1986 and further strengthened in 1994 when the US lifted its trade embargoes. In the year 2007, the country joined the WTO as the 150th member.
Although the country’s political leaders have expressed their desires to fight crime, corruption and eliminate bureaucracy, not much progress has been realized. In the year 2012, the Prime Minister, Nguyen Dung admitted the poor state and widespread mismanagement of the economy. Consequently, the Prime Minister expressed his pledge to review and transform the country’s economic system, but not much has been noted except delays (Vietnam, 2014).
Major economic drivers of the country’s economy are mainly exports and tourism. The government’s inability to control corruption has become a critical challenge. In addition, Vietnam’s ability to attract foreign investors has been slow. Failures in the legal system, corruption, regulatory frameworks and crime have deterred potential investors.
Economic System and Associated Risks
Currently, the Heritage Foundation ranks Vietnam’s economic freedom score as “50.8, making its economy the 147th freest in the 2014 Index” (The Heritage Foundation, 2014). This is a poor score relative to the previous year’s score. It shows that Vietnam dropped 0.2 points.
This implies that the country’s economic reforms have started to deteriorate with notable “declines in freedom from corruption, monetary freedom, and business freedom that outweigh improvements in labor freedom and fiscal freedom” (The Heritage Foundation, 2014). In the Asia-Pacific region, the country is “ranked 33rd out of 42 countries and its overall score is lower than the world and regional averages” (The Heritage Foundation, 2014).
Nevertheless, the country has recorded an improvement in economic freedom with nine points over the last 20 years of the Index ranking. In economic freedom indicators, the country’s seven areas of economic freedom among ten have registered a score of ten points or more.
Notable improvements have been noted in achievements in “trade freedom, business freedom, and freedom from corruption” (The Heritage Foundation, 2014). Major economic reforms have covered partial privatization of national corporation and enhanced respect for private property and property rights.
The current mean tariff rate is about 5.7%. Import technicalities and high tariff rates have hinder significant growth of imports. Although the roles of state-owned organizations have declined, they still play critical roles in the national economy. The financial sector is vibrant. It is mainly dominated by banks, but the country’s capital market has registered a modest growth. In fact, only four big state-owned financial institutions control the market, but they have recorded declines in market shares (The Heritage Foundation, 2014).
Although no minimum capital is required to launch a business in Vietnam, it would take of over ten procedures to complete the process. In addition, the applicant must wait for over 100 days to conclude all license requirements.
Vietnam’s labor regulations are extremely rigid. However, “the non-salary cost of employing a worker is moderate” (The Heritage Foundation, 2014).
The government influences prices through “state-owned and state-subsidized companies and imposes administrative controls on interest rates” (The Heritage Foundation, 2014). Generally, top income earners have a tax rate of 35 percent. On the other hand, top companies are subjected to a tax rate of 25 percent in Vietnam.
Besides, there are other “taxes such as value-added tax and property tax” (The Heritage Foundation, 2014). As a result, the country’s average tax burden stands at “21.1% against the gross domestic income” (The Heritage Foundation, 2014). The country spends 31% of the GDP on public activities while the current debt is over 50 percent relative to the domestic economy.
Legal System and Associated Risks
The country’s legal system is a serious source of concern for investors. Corruption is rampant. Abuse of office and bureaucracy are common. These factors have hinder transparency, property rights, human rights and media freedom. For instance, many firms have reported several cases of bribery at the port and custom clearances.
The judiciary is submissive to the ruling government. The government controls all legal mechanisms in the country. As previously mentioned, there is limited respect for property rights and any legal disputes normally take several years to resolve. In addition, it is common to infringe on intellectual property rights without any legal consequences.
The country has declined with regard to “mostly not free” ranking of free economies within the last two decades. These declines have been occasioned by slow reform in key areas of the economy. Although Vietnam has recorded some favorable progresses in advancing the rule of law, the “subservient judicial system continues to slow down reforms because of its vulnerability to the ruling Communist party’s influences, bureaucracy and widespread corruption” (The Heritage Foundation, 2014).
While there are ongoing reforms in the regulatory, political and economic areas, these areas have continued to be inefficient and lack transparency. Many investors have avoided the country because of unclear laws and the unreliable judicial system.
Summary and Recommendations
Vietnam’s position is good for economic prosperity and its relations with the US, membership at the WTO and large population have set it for economic growth. However, the dictatorial tendencies of the Communist party and delays to reform both political and economic areas have affected the country’s growth. It is therefore important for Vietnam to focus on the following areas.
- Respect for private property rights
- Review the current legal system, opaque laws and tackle corruption to gain investors confidence
- Review the current tax regimes for both individuals and corporate
- Introduce new laws on labor to substitute the existing rigid ones
Introduction
Globalization has led to new business opportunities for company around the world. Company must understand different aspects of a given country for successful operations.
Purpose/Reason for the presentation
The purpose of this case study is to show how effective global strategy could result into a successful business overseas.
When formulating effective global strategies, organizations must consider both advantages and challenges into consideration. An international firm must align its global business strategies with the other practices at headquarters.
A global strategy involves continuous and thorough management approaches formulated to assist an organization to operation and compete well in different countries in the global markets. Although senior executives and consultants may develop global business strategies, they must depend on different levels and business units to execute such strategies effectively. Companies may apply different approaches to execute their global strategies.
For instances, some organizations go for Greenfield ventures, partnerships with local companies and acquisition of stakes in local firms among other strategies. In addition, they must develop specific products and services and marketing and promotional strategies to appeal to specific markets and customers globally.
There are some minor elements of global strategies, which would reflect domestic business strategies. For example, a company must decide on its products, services, markets, methods of deliveries, modes of production and business competitive intelligence in the industry based on the overall strategic goals and objectives.
Formulating effective global business strategies requires a critical approach to details, which rarely influence strategies in the domestic market. Organizations must consider all aspects related to cultures, political, geographical and economic variations.
In most cases, however, companies may only consider known legal requirements and governmental regulations currencies and languages in the domestic. Instead, they should consider multiple currencies, languages, different forms of laws and regulations and cultures found in the global business environment.
Country Summary and Viability of the Business
Vietnam’s position is good for economic prosperity and its relations with the US, membership at the WTO and large population have set it for economic growth. However, the dictatorial tendencies of the Communist party and delays to reform both political and economic areas have affected the country’s growth.
It is therefore important for Vietnam to focus on the following areas. Vietnam has over 90.4 million people with gross domestic product (PPP) of $320.7 billion. It has recorded 5.0% growth with an annual five-year compound growth of 5.9%. Its per capita is $3,548 with unemployment rate of 4.5%. Vietnam’s inflation (CPI) stands at 9.1%. Its foreign direct investment (FDI) flow is $8.4 billion (The Heritage Foundation, 2014).
Plastic card market (e-wallet) would be a good business to start in Vietnam. According to Maheshwari, Vietnam is “one of the world’s fastest growing card markets” (Maheshwari, 2014). The new venture will have to offer debit, credit and prepaid cards.
Banks have started to adopt e-wallet services to show their modernization strategies. Many banks have started to use gifts and prizes to facilitate adoption of online payments and Internet banking. Customers are encouraged to make payments of utility bills and purchase tickets through e-wallet services.
A recent study shows that e-wallet is an emerging opportunity in Vietnam, which is expected to grow significantly in the coming years.
However, this emerging opportunity in the country is considered to develop significantly in the coming years and is foreseen to boost the future plastic card market in Vietnam.
There is a remarkable growth in population of young people, innovative solutions, enhanced customer awareness and government support, which are expected to facilitate the growth of the market. In the recent past, market analysts have predicted further growths in the Vietnam plastic card market after noting a CAGR of around 20.4% during the year 2011-2014 (Maheshwari, 2014).
The boom in e-wallet market in Vietnam was expected in the year 2009, but this did not happen because of slow adoption, poor penetration and competing products and services, specifically cash payment system and bank debit cards.
Vietnamese, for example, had 66 million payment cards by 2013, with a total transaction value of $52 billion relative to 1.84 million e-wallets by the end of 2013, while the total transaction value had reached $1.1 billion (Mai, 2014).
SWOT Analysis
Strengths
- Government efforts to promote FDI
- A large, growing population of young people
- Introduction on innovative online payment solutions
- Different line of products under the e-wallet (online payment, mobile payment, debit card, and credit cards)
- Ongoing reforms may improve the business environment
Weaknesses
- Slow rates of reforms in the country
- Inability to innovate led to slow adoption and failure of the predicted boom in the year 2009
- Customers are slow to adapt to changes in the financial sector
- Slow rates and delays in reform processes
Opportunities
- The market prediction shows rising use of e-wallet solutions
- Innovative solutions will offer alternative
- Significant growths in ATMs, POSs
- Growth in card manufacturers shows potential of the e-wallet market
- A large population of young people will adopt efficient modes of transactions
Threats
- Competition from banks
- Inability of customers to switch to new e-wallet solutions
- Corrupt practices and limited freedom to use the Internet may influence use online services
- Internet safety may derail online solutions
- Poor legal systems, lack of respect for intellectual property rights and individual rights could affect e-wallet usages
- Corruption in Vietnam may not favor new ventures or increase costs of starting new business
- The current tax regime may increase costs of e-wallet transactions
- Political border dispute and tension with China may deter investments
- Dictatorial Communist party could hinder investment
Projected Cash Flow Analysis
It is imperative for an organization to select the best appropriate mode of entry and market. These processes require a company to determine levels of current competitions, anticipated future competitions and the industry environment. The company must establish the extent of competition by identifying rivalries, their strategies, market shares and pricing strategies. The company will also consider the number of competitors, the prevailing market activities, potential growths and barriers to entries, including saturation (Punnett, 2004).
The company must understand the regulatory environment in Vietnam. A tax regime, trade policies, labor laws and other related regulatory requirements are vital for the progress of the global venture (Punnett, 2004). Hence, evaluating barriers to trade and respective tariff quotas is mandatory for a foreign business.
For instance, restrictions on financial activities, the Internet regulations and foreign direct investment requirements may inhibit entries. In this case, the company may rely on a local entity to enter the market. In terms of ownership, the foreign company may not own over 49 percent of the company in addition to restrictive home ownership laws. Therefore, a local company with a majority stake in the company must be found. Vietnam is known to charge higher taxes for foreign firms with minimal incentives for foreign investments.
Finally, the stability of the government is a major source of concern for the company. Vietnam is run by authoritative regime that exercises power over the judicial system. Any political turmoil or tension with China could affect investments in the country and disrupt growth (Gupta & Gorindarajan, 2003).
Cultural factor is critical for the company. Vietnam is a collectivist society and hierarchy is important. The company will have to understand aspects of cultural differences in order to avoid challenges associated with notable differences. Cultural challenges are not easy to assess. Nevertheless, the company must understand the e-wallet market in Vietnam, customer preferences and old practices.
Cultural differences will influence labor force and relations, specifically in hierarchy, compensation and motivating factors among others. Still, it is imperative for the company to understand how Vietnamese culture will influence the business and therefore cultural knowledge must be demonstrated in forms of marketing campaigns and promotional activities, time management, language styles, relations with colleagues, work ethics, attitudes and beliefs about banks and money among others. Cultural knowledge will ensure that the company has realistic business strategy for foreign markets.
References
Gupta, A., & Gorindarajan, V. (2003). Global Strategy and the Organization. New York: John Wiley & Sons.
Maheshwari, S. (2014). E-wallet Services Uplifting Plastic Card Market In Vietnam.
Mai, C. (2014). E-wallet providers chart new path after failure in the market.
Punnett, B. (2004). International Perspectives on Organizational Behavior and Human Resource Management. Armonk, N.Y: MESharpe Inc.
The Heritage Foundation. (2014). Vietnam: 2014 Index of Economic Freedom.
Vietnam – Language, Culture, Customs and Etiquette. (2014).
Vietnam. (2014). Web.