Tài liệu South korean firms’ operation in vietnam and some implications for expansion strategy

ĐẠI HỌC QUỐC GIA HÀ NỘI KHOA QUẢN TRỊ VÀ KINH DOANH --------------------- KIM WOOSEOK SOUTH KOREAN FIRMS’ OPERATION IN VIETNAM AND SOME IMPLICATIONS FOR EXPANSION STRATEGY HOẠT ĐỘNG CỦA CÁC CÔNG TY HÀN QUỐC TẠI VIỆT NAM VÀ MỘT SỐ GỢI Ý CHO CHIẾN LƯỢC MỞ RỘNG LUẬN VĂN THẠC SĨ QUẢN TRỊ KINH DOANH HÀ NỘI - 2019 ĐẠI HỌC QUỐC GIA HÀ NỘI KHOA QUẢN TRỊ VÀ KINH DOANH --------------------- KIM WOOSEOK SOUTH KOREAN FIRMS’ OPERATION IN VIETNAM AND SOME IMPLICATIONS FOR EXPANSION STRATEGY HOẠT ĐỘNG CỦA CÁC CÔNG TY HÀN QUỐC TẠI VIỆT NAM VÀ MỘT SỐ GỢI Ý CHO CHIẾN LƯỢC MỞ RỘNG Chuyên ngành: Quản trị kinh doanh Mã số: 60 34 01 02 LUẬN VĂN THẠC SĨ QUẢN TRỊ KINH DOANH NGƯỜI HƯỚNG DẪN KHOA HỌC: PGS.TS. HOÀNG ĐÌNH PHI HÀ NỘI - 2019 DECLARATION The author confirms that the research outcome in the thesis is the result of author‟s independent work during study and research period and it is not yet published in other‟s research and article. The other‟s research result and documentation (extraction, table, figure, formula, and other document) used in the thesis are cited properly and the permission (if required) is given. The author is responsible in front of the Thesis Assessment Committee, Hanoi School of Business and Management, and the laws for above-mentioned declaration. ACKNOWLEDGEMENT Firstly, I would like to make the most of this opportunity to thank my company, IBK which has given me a lucky chance to study at HSB. In addition, they have also reassured me all the time through their knowledge and experiences in order to accomplish this project. Secondly, I would like to thank my wife who always supports me and takes care of children without my help in South Korea. Thirdly, I would like to show my sincere gratitude to Assoc. Prof. Dr. Hoang Dinh Phi for his enthusiastic support throughout the process of composing this project. Without his valuable advices, I would not be able to accomplish the project with a clear orientation. Lastly, big thanks to all my colleagues at work, all my friends at HSB, especially all HSB MBA15 classmates, who have supported me with laughter and joy, and comforted me when I was depressed. Owing to the fact that limited time and ability so it can not avoid some mistakes in my research topic. I look forward to receiving comments from lecturers and colleagues in order have more accomplished and better achieved of research result and application in my career. Thank you again for those who have supported me, and best wishes to all. TABLES OF CONTENTS LIST OF TABLES ............................................................................................. i LIST OF FIGURES........................................................................................... ii ABSTRACT ...................................................................................................... 1 INTRODUCTION ............................................................................................. 1 CHAPTER 1: FDI AND ANALYTICAL FRAMEWORK ............................. 5 1.1. Foreign Direct Investment.......................................................................... 5 1.1.1 Concept of Foreign Direct Investment.................................................. 5 1.1.2. Legal Framework of FDI in Vietnam ................................................ 12 1.2. Analysis of FDI Firm‟s Operation .......................................................... 14 CHAPTER 2: CURRENT SITUATION OF SOUTH KOREAN FDI FIRMS‟ OPERATION .................................................................................................. 17 2.1. Vietnam‟s Economic Growth, FDI, Import and Export .......................... 17 2.2. Basic incentives for FDI in Vietnam........................................................ 24 2.3 SWOT Aalysis of Vietnam‟s Investment Environment ........................... 30 2.4. Situation on Operation of Major industrial Investment from South Korea, USA and Japan ................................................................................................ 33 2.4.1. Situation of South Korea Investment in Vietnam .............................. 33 2.4.2. Situation of Japanese Investment in Vietnam .................................... 42 2.4.3. Situation of the United States Investment in Vietnam....................... 48 2.5 Current operation of South Korea‟s FDI firms in Some Industries of Vietnam ........................................................................................................... 52 2.5.1. Current operation of South Korea‟s FDI Firms in Electronic industry of Vietnam.................................................................................................... 53 2.5.2. Current operation of South Korea‟s FDI Firms in Textile & Garment Industry in Vietnam ..................................................................................... 55 2.5.3. Current operation of South Korea‟s FDI Firms in Automobile industry in Vietnam...................................................................................... 57 2.6. The Response of Vietnamese Government .............................................. 58 CHAPTER 3: IMPLICATIONS OF EXPANSION STRATEGY FOR SOUTH KOREA FIRMS IN VIETNAM ....................................................... 61 3.1. Lesson from other FDI from other countries ........................................... 61 3.2. Lesson from South Korea FDI Firms‟ Operation in Vietnam ................. 62 3.3. Some Forecast on Vietnam‟s Investment Environment during 2019-2025... 64 3.4. Implications for Expansion Strategy for South Korea firms ................... 67 CONCLUSION ............................................................................................... 70 REFERENCES ................................................................................................ 72 LIST OF TABLES Table 2.1. Major macroeconomic indicators in Vietnam (2008 - 15) ............ 18 Table 2.2. Trend of FDI inducement by year (2009 - 15) in Vietnam ........... 19 Table 2.3. Number and amount of investment by industry in major countries .... 20 Table 2.4. Vietnam‟s Export index, 2000~2015)............................................ 21 Table 2.5. Vietnam‟s import index, 2000~2015) ............................................ 22 Table 2.6. World Bank‟s Doing Business ranking 2018 ................................ 26 Table 2.7. Incentives in Vietnam example ...................................................... 28 Table 2.8. Taxation Policy across Asia compared .......................................... 30 Table 2.9. SWOT Analysis of Vietnam investment enviornment ................. 32 Table 2.10. Korean FDI in asia by countries, invested amount ..................... 39 Table 2.11. Japan industrial complex in Vietnam example ........................... 45 Table 2.12. Korea's Report on Investment in China and Vietnam ................. 53 Table 2.13. Korean Electronics Company in Vietnam ................................... 54 Table 2.14. The annual auto sales trend in Vietnam ...................................... 57 i LIST OF FIGURES Figure 2.1. USA Trends in Direct Investment in Southeast Asian Countries (2005-14) ......................................................................................................... 23 Figure 2.2. Trends of FDI in Vietnam ........................................................... 33 Figure 2.3. South Korea FDI in Vietnam ...................................................... 35 Figure 2.4. Japan FDI in Vietnam ................................................................... 43 Figure 2.5. Strategy Flowchart of Japan‟s Anchor firms in Vietnam, Ⅰ ...... 46 Figure 2.6. Strategy flowchart of Japan‟s Anchor firms in Vietnam, Ⅱ....... 47 Figure 2.7. Example of Japan‟s Anchor firms in Vietnam ............................ 47 Figure 2.8. U.S.A FDI in Vietnam ............................................................... 49 ii ABSTRACT During the global financial crisis, Vietnam experienced slowing growth. Vietnam's growth potential is drawing attention as the external economic environment is becoming favorable, such as the recent increase in FDI inflows, the signing of bilateral and multilateral FTAs, and the establishment of the ASEAN Economic Community (AEC). Also, positive improvements in domestic conditions, such as political stability, abundant low-income labor, and a population of nearly 100 million, increased interest among major investors in Vietnam, and increased FDI inflows. In particular, the FDI was introduced in 2015, the largest amount ever, and the economic growth rate was 6.68 percent, the level before the global financial crisis. On the other hand, Vietnam's business environment is not only positive, considering that negative factors persist, such as corruption, lack of skilled manpower and inefficiency in state-run companies. The Doing Business Assessment, which provides a comparative analysis of each country's business environment It ranked Vietnam‟s business environment at the top 90 out of 189 countries. It should be noted, however, that Vietnam's investment environment has changed positively in recent years by improving the convenience of investment procedures and employment through the revision of the Investment and Labor Act. Therefore, Korean companies also adopted Vietnam as a strategic production base and invested more than 40 percent of their investment in South East Asia. It is time to review Korea's investment strategy in Vietnam as competition between major investment countries and Korean companies is expected to intensify in Vietnam. The U.S. and Japan, which are major investment countries, need to review their investment strategies in Vietnam and re-establish their investment strategies for Korean companies. The economic growth and industrialization of Vietnam began in 1 1986 with the adoption of reform and opening routes. After the U.S. lifted economic sanctions in 1994, large-scale FDI was introduced to Vietnam. Based on this, Vietnam was able to achieve industrialization and rapid economic growth. In the 1990s, the FDI in Vietnam was largely invested in labor-intensive manufacturing in major Asian countries such as Japan, Korea and Taiwan. Since the 2000s, however, the investment sector has changed from the current labor-intensive industries to the technology and capitalintensive industries such as machinery and electronics, and the industry structure has also gradually changed to the center of high value-added industries. Korea's investment in Vietnam was largely dominated by laborintensive industries before the global financial crisis However, since the global financial crisis, investments by multinational corporations have been increasing with electricity and electronics. Although Korea's investment in Vietnam has been high in initial investment, the share of additional investment has gradually increased since 2014. This study presents the following implications for our company through analysis of investment strategies by U.S. and Japanese companies entering the Vietnam market. First, the government should pay attention to the construction of industrial complexes so that Korean companies can advance into the cluster and draw the cooperation of the Vietnamese government as well as Korea's financial support. Second, a 'compensation system for co-prosperity between new and emerging companies' should be developed to utilize the experiences of the newly developed entity and to compensate the newly developed entity for its support. Third, it is required to support capacity enhancement of small and medium-sized enterprises that wish to enter Vietnam. In particular, it is urgent to provide capacity support for the analysis of the local institutional and business environment in Vietnam. Fourth, it is necessary to introduce a measure to share production facilities between companies in advance like a 2 Japanese company. This support will greatly help companies deal with the burden of fixed investment costs and the lack of information at the beginning of their entry into the market. Fifth, a consultation channel should be prepared with the Vietnamese government to demand improvements in the local business environment. Sixth, rather than focusing on investing in Vietnam, we should consider Southeast Asia as our production base and come up with a strategy to utilize Vietnam as the core base of 'East Asian management'. South Korea needs to prepare for external shocks by linking Vietnam with neighboring countries in the form of „Vietnam + 1‟. 3 INTRODUCTION 1. Background Information and Rationale Vietnam, which has been widely regarded as an investment destination for low-income labor, is receiving spotlight as a new production base as it signed a multilateral trade agreement as well as a bilateral one. Reflecting this, FDI(Foreign Direct Investment), which is entering Vietnam, recorded $15.6 billion in new investment and $7.2 billion in additional investment during 2015. In January 2016 alone, 127 new investment permits, $10.1 billion new investment permits, and an additional $3.2 billion investment were already introduced. Number of new investment permits and amount of investment permits increased by 188.6% and 157.9% respectively compared to January 2015. FDI inflows to Vietnam are expected to continue as the Vietnamese government is working to further improve the business environment. The reason why FDI is introduced to Vietnam is that it has relatively cheap, high-quality labor and political stability. In addition, it is superior to other Southeast Asian countries as it has already signed bilateral or multilateral FTAs such as the Korea-Vietnam FTA, Vietnam-EU FTA, and TPP. Besides these local advantages, we cannot overlook the Vietnamese government's will to attract FDI Meanwhile, with the Communist Party leadership being replaced in January 2016, the Vietnamese economy is experiencing a dynamic economic turnaround. According to data from the Vietnamese National Statistical Office, Vietnam's GDP growth in 2015 was estimated to be 6.68 percent, while industrial production rose to 9.64 percent. On the other hand, falling global oil prices pushed up prices in Vietnam by only 0.6 percent in 2015. As 1 the country recorded high growth rate in stable prices, the macroeconomic system in Vietnam is expected to grow steadily. The current macroeconomic situation in Vietnam is very stable in the early 2010s, considering that the Vietnamese economy was driven from austerity policy stance due to high inflation to the brink of a financial crisis. The increase in FDI is one of the highest economic growth rates in Asia and the Pacific region in 2015. The influx of FDI expanded the export of electrical and electronic products, resulting in rapid changes in the structure of the Vietnamese export sector. Samsung's mobile phone factory was the starting point that brought about this change in 2009. Since then, Samsung has actively expanded its investment in Vietnam to expand production, which accounts for about 20 percent of its total exports to Vietnam. After Samsung's advance to Vietnam, many multinational electronics companies leaving China are relocating production facilities to Vietnam. The reason why Korea is expanding its investment into Vietnam is probably because of its internal strategy of using Vietnam as a production base in Southeast Asia while evaluating Vietnam's human resources in a favorable manner. However, investment into Vietnam has been re-interested in recent years among Southeast Asian countries. With the 2008 financial crisis and diversification of investment sites in terms of risk distribution, which accounted for 20% of the investment in 2011 and 2012, more than 40% of Southeast Asian investment has focused on Vietnam since 2014 and 2015. At the same time as the focus on investment, the nature of investment is also changing, requiring a review of the direction of Korea's investment strategy in Vietnam. Also, given Vietnam's geopolitical tensions with China, political risks, banking risks, and low global competitiveness index, we should think about that Vietnam is the best place to invest in Southeast Asia to match the second Chinese or not. Based on the analysis results, South Korean companies that want to invest in Vietnam will be able 2 to plan for a more stable strategy. Therefore, the purpose of this study is to look at Vietnam's entry strategies and examples from major Vietnam investors and to find out if our approach to entry to Vietnam has been appropriate. If there is a risk factor in our approach compared to the entry into other major investment countries, we must correct it to avoid risk. 2. Aims of Research The topic relating to South Korea firms invest Vietnam market, which is regard as one of the important business relationship between South Korea and Vietnam. Therefore, the followings are the main aims of this thesis: - Review and select the Basic Analytical Framework for FDI firms‟ operation in Vietnam; - Analyze the Current Situation of South Korean FDI firms‟ operation in Vietnam; - Address some Implications for Expansion Strategy for South Korean firms. 3. Objects of Research In order to reach the above-mentioned aims, the research focuses on the following main objects: - Vietnam legal system for FDI and FDI firms; - Operational factors of FDI firms and South Korean firms in Vietnam; - Factors of Vietnam business environments that impact the operation of FDI firms from South Korea. 4. Scope of Research - Focus on the main aims and main objects. - Country: Focus on the South Korea‟s FDI firms‟ operation in Vietnam, while making some comparisons with investment strategy and operation of firms from Japan, U.S.A. - Time: The author uses the last 5 years‟ data and records for this thesis. 3 5. Research Methodology Besides the Vietnam General Statistics Office website and reports, the secondary data or hard data was also collected from other websites and reports. The author mostly used description analysis method to process these data. Besides that, public information was also gathered to make the analysis more convincing. Based on public information on FDI firms‟ operation in Vietnam through Internet, via newspapers, magazines. For primary data or soft data, the in-depth interview method was applied in this research and played an important role in helping the author get more factual and reliable required information. 6. Thesis Structure Besides the Introduction Chapter, the thesis as 3 main chapters: Chapter 1: FDI and Analytical Framework Chapter 2: Current Situation of South Korean FDI Firms‟ Operation Chapter 3: Implications for Expansion Strategy for South Korea Firms in Vietnam Reference 4 CHAPTER 1: FDI AND ANALYTICAL FRAMEWORK 1.1. Foreign Direct Investment 1.1.1 Concept of Foreign Direct Investment Nowadays the issue of foreign direct investments is being paid more attention, both at national and international level. There are many theoretical papers that examine foreign direct investments (FDI)‟s issues, and main research on the motivations underlying FDI were developed by J. Dunning, S. Hymer or R.Vernon. Economists believe that FDI is an important element of economic development in all countries, especially in the developing ones. The conclusion reached after several empirical studies on the relationship between FDI and economic development is that the effects of FDI are complex. From a macro perspective, they are often regarded as generators of employment, high productivity, competiveness, and technology spillovers. Especially for the least developed countries, FDI means higher exports, access to international markets and international currencies, being an important source of financing, substituting bank loans. There is some evidence to support the idea that FDI promote the competitiveness of local firms. Blomstrom (1994) finds positive evidence in Mexico and indonesia, while Smarzynska (2002) found that local suppliers in Lithuania benefited spill over from supplying foreign customers. Caves (1996) considers that the efforts made by various countries in attracting foreign direct investments are due to the potential positive effects that this would have on economy. FDI would increase productivity, technology transfer, managerial skills, knowhow, international production networks, reducing unemployment, and access to external markets. Borensztein (1998) supports these ideas, considering FDI as ways of achieving technology spillovers, with greater contribution to the economic 5 growth than would have national investments. The importance of technology transfer is highlighted also by Findlay who believes that FDI leads to a spillover of advanced technologies to local firms (Findlay, 1978). On the other hand, FDI may crowd out local enterprises and have a negative impact on economic development. Hanson (2001) considers that positive effects are very few, and Greenwood (2002) argues that most effects would be negative. Lipsey (2002) concludes that there are positive effects, but there is not a consistent relationship between FDI stock and economic growth. The potential positive or negative effects on the economy may also depend on the nature of the sector in which investment takes place, according to Hirschman (1958) that stated the positive effects of agriculture and mining are limited. When multinational corporations enter different foreign markets, FDI firms consider that their superior technology and knowledge will give them the opportunity to obtain market share. Despite the fact that many researchers have tried to explain the phenomenon of FDI, we cannot say there is a general theory accepted. But, according to Kindleberger (1969) everyone agrees on one point, in a world characterized by perfect competition, foreign direct investment would no longer exist. Thus, if markets work effectively and there are no barriers in terms of trade or competition, international trade is the only way to participate to the international market. There must be a form of distortion that determines the realization of direct investment, and Hymer was the first who noticed this. He believes that always local firms will be better informed about local economic environment, and for foreign direct investments to take place, two conditions are necessary: foreign firms must possess certain advantages that allow them that such an investment to be viable; the market of these benefits has to be imperfect 6 (Kindleberger, 1969). From a macroeconomic point of view, FDI is a particular form of capital flows across borders, from countries of origin to host countries, which are found in the balance of payments. The variable of interest is: capital flows and stocks, revenues obtained from investments. The microeconomic point of view, tries to explain the motivations for investment across national boundaries from the point of view of the investor. It also examines the consequences to investors, to the country of origin and to the host country, of the operations of the multinationals rather than investment flows and stock. (Lipsey, 2001) In the period immediately following the Second World War, international production was a small part of international affairs, while the attention was directed towards those components which had an important share (e.g. international trade). Since the 1960s, the phenomenon of transnational corporations and FDI has begun to gain importance. The first attempt to explain the FDI was considered Ricardo's theory of comparative advantage. However, FDI cannot be explained by this theory, which is based on two countries, two products and a perfect mobility of factors at local level. Such model could not even allow FDI. Thus, as Ricardo's comparative advantage theory fail to explain the rising share of FDI, other models were used, such as portfolio theory. This attempt was designed to fail, because the theory explains the achievement of foreign investments in a portfolio, but could not explain the direct investments. According to the theory, as long as there is no risk or barriers in the way of capital movement, the capital will go from countries with low interest rates to countries with high interest rates. But these allegations have no basis in reality, and the introduction of risk and barriers to capital movement erodes the veracity of the theory, and capital can move freely in any direction (Hosseini 2005). 7 Although more realistic, the new theories of international trade still cannot capture the entire complexity of FDI and other forms of international production. The new theories of international trade, still cannot explain foreign direct and other forms of international investment (Hosseini 2005). Robert Mundell has tried to explain the FDI through a model of international trade, involving two countries, two goods, two production factors and two identical production functions in both countries, where production of a good requires a higher proportion of a factor than the other. Neither Mundell‟s model could explain international production through FDI, because foreign investment incorporated were portfolio investment or shortterm investment (Mundell, 1957). Japanese researchers Kojima and Ozawa have tried to create a model to explain both international trade and foreign direct investment. They started from the model developed by Mundell and tried to develop it and improve it. Thus, in the model developed by the two Japanese FDI takes place if a country has comparative disadvantage in producing a product, while international trade is based on comparative advantage. (Kojima and Ozawa, 1984). Internalisation theory provides an explanation of the growth of the multinational enterprise (MNE) and gives insights into the reasons for foreign direct investment. Theories of FDI may be classified under the following headings: 1. Production Cycle Theory of Vernon Production cycle theory developed by Vernon in 1966 was used to explain certain types of foreign direct investment made by U.S. companies in Western Europe after the Second World War in the manufacturing industry. Vernon believes that there are four stages of production cycle: innovation, growth, maturity and decline. According to Vernon, in the first stage the U.S. transnational companies 8 create new innovative products for local consumption and export the surplus in order to serve also the foreign markets. According to the theory of the production cycle, after the Second World War in Europe has increased demand for manufactured products like those produced in USA. Thus, American firms began to export, having the advantage of technology on international competitors. If in the first stage of the production cycle, manufacturers have an advantage by possessing new technologies, as the product develops also the technology becomes known. Manufacturers will standardize the product, but there will be companies that you will copy it. Thereby, European firms have started imitating American products that U.S. firms were exporting to these countries. US companies were forced to perform production facilities on the local markets to maintain their market shares in those areas. This theory managed to explain certain types of investments in Europe Western made by U.S. companies between 1950-1970. Although there are areas where Americans have not possessed the technological advantage and foreign direct investments were made during that period. 2. The Theory of Exchange Rates on Imperfect Capital Markets This is another theory which tried to explain FDI. Initially the foreign exchange risk has been analyzed from the perspective of international trade. Itagaki (1981) and Cushman (1985)analyzed the influence of uncertainty as a factor of FDI. In the only empirical analysis made so far, Cushman shows that real exchange rate increase stimulated FDI made by USD, while a foreign currency appreciation has reduced American FDI. Cushman concludes that the dollar appreciation has led to a reduction in U.S. FDI by 25%. However, currency risk rate theory cannot explain simultaneous foreign direct investment between countries with different 9