Country Analysis (Vietnam) Report Sample
I Political, Legal, Economical, Ethical Environments
Vietnam is quickly emerging as a new economic growth center in the South-East Asia. International investors look for business perspectives in both the local market that includes 80 million of consumers, and in sites of low cost manufacturing. European and North American investors are interested in the domestic markets while neighboring countries investors like Taiwan are interested in using this country as an export base (Meyer, Thi Thu Tran & Nguyen, 2005).
Vietnam was ranked by the World Economic Forum 65th out of 142 states in 2011, with a remark that corruption is pervasive and frequent (ranked 104th). The International Index of Transparency ranks the country 116th out of 178, the lowest of countries of ASEAN, but higher than the Philippines (134th). The Report of ‘Ease of Doing Business’ puts Vietnam at 78th out of 183 countries, emphasizing that bureaucratic procedures remain the most significant barriers for investments. For instance, it still averages 44 days and 9 procedures to get licenses for starting a business in this country, compared to 39 days and 7.8 procedures in Pacific and East Asian countries and 13.8 days and 5.6 procedures in OECD countries (Truong, 2013).
Vietnam remains a state system of one-party under the Communist Party of Vietnam (CPV) leadership. Socialists’ principles and party’s dominance, channeled by its mass organizations controlled network, including trade unions, makes impact on all spheres of business. It provides monopolies and privileges to CPV controlled organizations, particularly SOEs (State Owned Enterprises). ‘Collective leadership and responsibility and socialist tenets in the ‘resolutions’ form are common decision-making practices. The leadership of CPV has an absolute power in country’s strategic issues and it provides little room for grass-roots contributions and bottom-up participation of enterprises (Truong, 2013).
Prior to 1986 the country used the Soviet model, using forced agricultural collectivization, centralized planning, and industry’s nationalization. The performance of economy was disastrous after the unification (1976).
The program of economic reform in 1986 was an action to save the country from bankruptcy in the wake of the Soviet Union’s collapse and the cessation abrupt of all the communist bloc aid, followed by a West’s imminent embargo. It made a dramatic shift to becoming a more welfare/developmental country, with the targets in welfare and economic growth.
Following its membership in World Trade Organization (WTO) in 2007, Vietnam continued integration into the global economy and established the ambitious goal of becoming an industrialized state by 2020. Government’s efforts focused on the reducing the state’s role and encouraging the development of private-sector; however, SOEs were still ‘flagships’ of the country’s economy. Due to this mixture, Vietnam looks more like a neo-capitalist or neo-liberalist state than a free-market economy (Truong, 2013).
During 1990s the country launched a program of comprehensive reform to make itself a development administration, changing emphasis from bureaucracy-oriented to market- and citizen-oriented public services provider. The Public Administration Reform (PAR) of 2001- 2010 campaign made emphasis on developing a regulatory framework using the program of decentralization to delegate the authority of decision-making from central to locally based government. The authorities also tried to decrease state subsidies by promoting the POEs’ development and engaging related stakeholders (communities and businesses) in social services providing (especially in health, education, and culture) via a ‘socialization’ process.
Such efforts to build an accountable and effective state apparatus, however, have not materialized. The explanation is that while the monolithic system of party-state-business may be an effective mechanism in pushing policy quickly, that does not ensure successful and smooth implementation (Truong, 2013).
II Social and Cultural Aspects
Vietnamese society is relationship-based, where the key role in business culture belongs to trust. The interpersonal trust level is fairly high. For instance, 41% of local individuals admit that they trust other citizens of their country. Toward foreigners there is a rather conservative attitude, as Vietnamese people may see individual directness and assertiveness of Westerners' as tactless and arrogant. In business an approach of trust-testing is followed to measure the amount of trust to the person, particularly foreigners. In comparison with their ASEAN colleagues, managers in Vietnam give equal importance to personal characteristics (trustworthy, dependable, responsible, honest) and to managerial qualities (logical problem-solving, strategic vision, consistent decision-making) with a more significant stress in business relationships on being ‘honest’. In business, such networks are a ‘social security’ and even survival matter, as ‘sponsorship’ is important in the point of entry opening up and creation of a business partnership. Yet, it might work positively, particularly considering mutual long-term benefits and cultivating personal relationship and trust, but it may also develop into corruption (due to the cronyism and nepotism) in the absence of effective social control norms and legal system. Also absence of institutionalized trust can cause ‘collective responsibility’, in which people feel safer and are not preoccupied with the personal responsibility. Business relationships in Vietnam should be institutionalized, as business is still not formal and usually it takes much time to build a long-lasting trust. Vietnamese business people prefer arranging business on the basis of personal relationships and mainly through informal talks (Truong, 2013).
Organizations are usually patriarchal, hierarchical and have a task specialization. As they are deeply-rooted for many decades in the centrally planned economy, companies are still characterized as ‘mechanistic’ complex structures with many departments and layers, centralized decision-making process, cumbersome procedures and task duplication. The management and governance structures of SOEs are less effective and more bulky than those of POEs of the same business coverage and size. Functions that are strategically sensitive, such as human resources management (HRM) and finance, are centralized and managed by top management directly. Decisions are usually taken at the top level and are communicated one-way down via the levels of organization. Status is very important in the community of business, and respect is given to senior colleagues and superiors. In Vietnam status is received with education and age and very often due to connections and relationships. Titles are very important and are used as a way of ‘distribution of favor’ among ‘followers’. The abuse of such practice may make companies complicated to manage (Truong, 2013).
Taking into account a high expectations for the future and Confucian heritage, there is a significant commitment to human resource development (HRD) and education. Vietnam is rich in people, having a young and large population of 87 million (2009), 47% of which is between 15-34 years old and a literacy rate in adults is 90.3%. Education accounted for around 20% in 2008 of the state’s total expenditure of budget and 5.5% of GDP. The output quality, however, is doubtful and the lack of skilled workers remains high, despite national budget on professional and vocational training expenditure of around 6% (2006) (Truong, 2013).
Business Culture. Vietnamese culture is very similar to the culture of China, and foreign individuals may as a first act the same way as they would act in China. But Vietnamese culture has a certain number of differences in comparison with Chinese culture, thus, frequent visitors should learn to understand the Vietnamese culture specific traits.
The same as other countries of Asia, there is a ‘high context’ culture in Vietnam, that means that spoken words may be different in their meaning in various contexts, and individuals maintain good relationships for a long time. Many behavioral aspects are not made explicit as most participants know what to think and what to do from long time of interaction. Therefore, place, situation, non-verbal behavior, attitude, and gestures moderate the spoken words’ meaning (Meyer, Thi Thu Tran & Nguyen, 2005).
IIa How to Conduct Formal and Informal meetings
Business people in Vietnam prefer to meet face to face with their business partners, thus, meetings are a very significant business process part. People in Vietnam do not write emails as often as their Western colleagues. It is not typical for business persons or officials in Vietnam to commit to a meeting in advance. Officials of high level may commit to an appointment only one day beforehand, or even at the same day. One needs to plan a lot of time for meetings. It is recommended to spend some time on small talk and introduction, especially for speaking about sport and family. Excessive hand gestures or loud voices can be considered to be rude ('Vietnam Business Guide', 2011).
Negotiations. Negotiations with Vietnamese business persons may be protracted, as usually there is a lot to go through. It is recommended not to be put off in case there are long silence periods during the course of negotiations as Vietnamese individuals usually wait a little before responding. Sometimes, in case there is a disagreement, the Vietnamese colleagues may keep silence with the goal to save face. It is necessary to immediately in writing follow up any agreement that is reached, in order to ensure that there are no misunderstandings.
It is recommended to avoid standing with the arms crossed or with the hands on ones hips or using the finger to point something; instead it is necessary to use the whole hand ('Vietnam Business Guide', 2011).
In collectivist cultures food has a significant social function. Having food at home and providing food for any guest who comes by is a social value. This goes also for business relations in Vietnam. Drinking tea was one of the few rituals in Vietnam observed by foreigners at business meetings. But, as the main idea of inviting the guests to refreshments is in force, firms now invite their business partners to have a dinner in the restaurants. The change happened around the century turn and is connected with a significant influence of Japanese and Korean business culture (having meals in fancy restaurants) and business habits in China (drinking tea). The basic orientation of collectivist culture that is focused on relationship that encourages people from Vietnam to nourish the relationship with business partners and customers by sharing with them a table still exists, but the types of refreshments has been adjusted to the new social circumstances (e.g. more economic possibilities) and more relations with international firms. A Confucian approach towards relationship and connections building is important for successful business deals in Vietnam (Syppli Kohl, 2007).
Vietnam is undergoing a quick change. Just about 30% of its citizens is older than 30 years old and the economic development of the country during the last 15 years means that the new generation of Vietnamese have very different lives compared with those of their grandparents and parents. Any culture concept forming the base of the research on business conducting in Vietnam should be flexible to grasp the cultural continuity and change dual reality (Syppli Kohl, 2007).
Written and oral communication. Meetings in Vietnam are usually held in the relaxed atmospheres, but some talk is also used to create a familiarity between the participants. As this country is a highly hierarchical society, people in Vietnam may feel uncomfortable in case they are not aware of the status of the other individuals at the meeting.
Vietnamese do not like doing business on the telephone. The relationship based on oral communication is used in Vietnam much more frequently than in the U.S. For example, if a manager in the U.S. were to inform his staff to have sandwiches for lunch that left over after the meeting, it would be acceptable for him to do it by e-mail. The Vietnamese manager would walk through the office inviting each person individually, thus improving the relationship between each employee and himself (Syppli Kohl, 2007).
Nonverbal communication. There are several differences in the habits of nonverbal communication that can cause trouble between Vietnamese business partners or employees and American managers. Foreigners are discouraged from touching their Vietnamese business partners (only handshakes), gestures and facial expressions are key differences between Vietnamese and Western cultures. In Vietnam it is not typical to practice body language. Moreover, people try not to look at the eyes of other people while speaking (Syppli Kohl, 2007).
III Economic Growth and Tendency in Last Years
Vietnam achieved a steady growth of annual gross domestic product (GDP) of 7.7% during 1991–2010 that gradually improved its average income per capita from US$98 to US$1,174 and decreased the level of poverty from around 58% to 10%. Such a result was achieved by a stimulants’ combination, such as foreign direct investments (FDI) inflow, private-sector’s development and low-value-added products’ exports. Taking into account a GDP of US$890 per capita (2008), Vietnam became a country with middle-income level (Truong, 2013).
GDP growth in Vietnam (annual %)
The significant obstacle to the development of Vietnamese economy was the VCP’s socialist ideology and its contradicting commitment to a market economy. Such contradiction looked irreconcilable, particularly for the VCP leadership’s conservative group. While its economy’s liberalizing, the VCP was connected to the one party rule. Further economic reform hindered such commitment (Un, n.d.). The conservatives stated that in 1986, after Vietnam’s opening to foreign investments, the society of Vietnam has faced crime increases, drug use, corruption, and prostitution. Moreover, such fact has also caused the rise of unemployment and economic inequality. Official estimates put the urban unemployment figure at 9%; however, the factual rate was significantly higher. The conservatives also employed Asian economic crisis in order to warn those who opened the country to the global market too rapidly that it might expose the country to the capitalism’s negative effects. According to Vietnamese officials, such economic liberalization’s negative aspects could create political and social instability (Un, n.d.).
IV SWOT Analysis
Vietnam has a strategic location and it is possible to penetrate South-East Asia, China and beyond from it. Vietnam has achieved the growth of GDP of about 5-6% annually recently, even though there was the global economic crisis. The country has a young, relatively cheap and educated workforce in comparison with the other Asian countries. Vietnam is a safe and relatively stable environment ('Vietnam Business Guide', 2011).
There is a high level of corruption in the country among government officials and it creates an obstacle for coming into market and operating in it. There is a significant public dissatisfaction regarding the tight control of leadership.
The local government recognizes the corruption threat that is bad for the economic development, and is taking actions to reduce it.
The country has permitted legislators to criticize government policies to some extent. It opens up opportunities for more control and improvements in the conditions of the one-party system.
Vietnam has many opportunities for investors in different sectors of its economy.
There is a lot of population that is not satisfied with the one-party system, and protest demonstrations may easily develop into a real challenge to undemocratic rule.
Strong local control will contribute to little change to the political scene of Vietnam in the next several years, but in the longer-term perspective, the condition of one-party rule may become unsustainable.
V Market Opportunities
Investment sectors. The Law on Investment foresees four sectors types: encouraged sectors; prohibited sectors; conditional sectors available to both domestic and foreign investors; and conditional sectors available only for foreign investors.
The sectors with prohibited foreign investment include situations when the investment may be “detrimental to national security, health, defense and public interest, or cultural and historical values ('Vietnam Business Guide', 2011).
The sectors where investments are encouraged include agriculture, high-technology, labor-intensive sectors (with over 5000 workers), development of infrastructure, and projects situated in mountainous and remote areas.
The sectors where investments are conditional for domestic and foreign investors includes the industries influencing security, national defense, social safety and order; information, culture, publishing and press; public health; financial and banking; real estate; entertainment services; prospecting, survey, natural resources’ exploration and exploitation; environment and ecology; and training and education.
The sectors in which certain conditions to foreign investors are applicable include postal networks, telecommunications, airports and ports, etc.
International investors possess the right to market, sell, and distribute products that they manufacture inside the country, and to import products required for their investment projects and related to their manufacturing directly, in case this right is available in their license for investment ('Vietnam Business Guide', 2011).
Visual communication: cross-cultural marketing and advertising. Individuals from different cultures may interpret the messages included in ads and imagery and commercials in various ways. Some perceptions are the consequences of basic cultural orientations and thus they are well known, due to the fact that they are stable. However, others are based on the social representations that are more fluctuating, and it is recommended for the U.S. companies advertising their product in Vietnam to consult a local partner. Nevertheless, several facts to remember when advertising the products in Vietnam are still available (Syppli Kohl, 2007).
Two most important advertising rules in Vietnam are that local individuals tend to be convinced that high prices stand for high quality, and that imagery of sexual character is a taboo. Although the Vietnamese young people dress more like Western teenagers, no tolerance can be expected to sexual imagery in the advertisements (Syppli Kohl, 2007).
VI Business Prospects
Vietnam is considered to be an excellent economic prospect as it is one of the most promising countries with emerging economy of the CIVETS (Indonesia, Colombia, Egypt, Vietnam, South Africa, and Turkey) club, and MIT (Indonesia, Malaysia, and Thailand) group benchmarked for its development during the post-2008 time of the financial crisis. Vietnam was ranked among the ten economies that are most improved in terms of doing business ease (78th of 183) in 2010. However, the gap with surrounding countries remains significant. The Competitiveness Index Report of WEF 2010-12 ranked the country 65th of 142, a significantly lower place among the MIT countries, especially in the ‘Innovation and Business Sophistication’ areas (Truong, 2013).
The Vietnam state capitalism’s future will significantly depend on its possibility to build human capital and good governance and to respond to various challenges. Thus, Vietnam has to focus on ‘institutional development’ and not only ‘organizational development’, particularly in adjusting and adding laws, fighting corruption, restructuring SOEs, etc. The strategy towards the sustainable development will need a clearer ideological stand on the ‘socialism-capitalism’ cohabitation, a long-term, realizable and clear-cut vision and a consistent roadmap’s implementation (Truong, 2013).
The experience received during the last several decades has created a maturity and greater economic resilience and new realism that could help the country. The CPV is aware of the political restructuring need to ensure sustainable growth of the economy (e.g. to combat increasing corruption and inequality), but tend not to ‘waver’ from the socialist system (Truong, 2013).
Vietnam is successful in foreign direct investments’ attracting, sustaining the levels of FDI at about USD 10-11 billion per year during the last several years, up from almost zero around 10 years ago. The attractiveness of Vietnam to foreign investors resulted significantly from open government policies of the country that encourage FDI, beneficial geographical position in the vicinity to the global supply chains, abundant labor resources and economic and political stability. However, recently the investors from different countries have expressed concerns that the climate for investment has deteriorated. Issues include weak legal infrastructure and corruption, inadequate education and training systems, financial instability, and detrimental bureaucratic and conflicting decision-making. International investors asked for the corresponding reforms and the sound economic policies’ development in order for the country to be able to attract foreign investments in the future.
Officially Vietnam encourages FDI as part of its strategy for development and the government has proclaimed its intention to improve the country’s investment climate and business ('Vietnam Business Guide', 2011).
On January 11, 2007 Vietnam became the WTO’s member. Vietnam’s obligations according to the WTO improve market access for U.S. goods and services exports and provide better transparency in trade and regulatory practices.
VII Business Recommendations
Vietnam is a state of compromises and contradictions, with the complexities of its economic and political system. Several complementarities that need to be institutionalized and potential investors need to pay attention for it:
The state (government), party and alliance of business (SOEs), characterized by the dominance of CPV, collective responsibility and concentration at the top, are connected with the quick decision making, but also affect negatively the implementation quality, such as with cronyism, favoritism, corruption, and red tape;
The ‘underground’ and informal economy has played a role as a substitution for capital resources, particularly to POEs;
Effective business models have been provided by FOEs, with some transference to local enterprises (POEs and SOEs alike) of state-of-the art operations;
The skilled workforce demand problem has been partially resolved by a policy of ‘brain gain’ to exploit the overseas Vietnamese capital resources;
The foreign institutions involvement into delivery and development has contributed to overall quality of training and education improving and the demand for professionals and managers (Truong, 2013).
It is recommended to consider the following sectors for starting business in Vietnam, as such investments are encouraged by the government: agriculture, labor-intensive sectors, high-technology, development of infrastructure, and firms situated in mountainous and remote districts of the country.
Doing Business 2015: Vietnam. (2014). The International Bank For Reconstruction And Development / The World Bank, 18. Retrieved from http://www.doingbusiness.org/data/exploreeconomies/vietnam/~/media/giawb/doing%20business/documen
Meyer, K., Thi Thu Tran, Y., & Nguyen, H. (2005). Doing Business in Vietnam. Copenhagen Business School, 2-22. Retrieved from http://openarchive.cbs.dk/bitstream/handle/10398/7101/wp58%20doing%20business%20in%20vietnam.pdf?sequence=1
Syppli Kohl, S. (2007). AMERICANS DOING BUSINESS IN VIETNAM: COMMUNICATION DIFFERENCES. International Business Communication, 2-5. Retrieved from http://www.baruch.cuny.edu/wsas/student_work/documents/Kohl.pdf
Truong, Q. (2013). Vietnam: An Emerging Economy at a CrossRoads. Maastricht School Of Management. Retrieved from http://www.msm.nl/resources/uploads/2014/02/MSM-WP2013-09.pdf
Un, K. Vietnam at the Crossroads: the Modern Political Economy. Northern Illinois University, 2. Retrieved from http://www.niu.edu/cseas/outreach/pdfs/vietnamxroads.pdf
Vietnam Business Guide. (2011). UK Trade & Investment, 13-45. Retrieved from http://www.globalnegotiator.com/files/Vietnam-Doing-Business-Guide-UKTI.pdf
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