CASE STUDIES ON THE MOTIVATIONS, SELECTION OF ENTRY MODES OF CERTAIN TNCS IN VIETNAM THE CASE OF HONDA MOTOR CORPORATION

GROUP PROJECT Subject: International Investment CASE STUDIES ON THE MOTIVATIONS, SELECTIONOF ENTRY MODES OF CERTAIN TNCS IN VIETNAM THE CASE OF HONDA MOTOR CORPORATION Group: 10 Class: K

GROUP PROJECT Subject: International Investment CASE STUDIES ON THE MOTIVATIONS, SELECTION

OF ENTRY MODES OF CERTAIN TNCS IN VIETNAM THE CASE OF HONDA MOTOR CORPORATION

Group: 10 Class: K53CLC2 Class ID: 07 Supervisor: Pham Thi Mai Khanh

Ho Chi Minh City, April 5, 2016

Trình Thị Thu Trâm Trần Nguyễn Minh Trân Group leader Cái Thùy Trang

TABLE OF CONTENT

LIST OF FIGURES iii

LIST OF ABBREVIATION iv

INTRODUCTION 1

CHAPTER 1: THEORETICAL FRAMEWORK 3

1 The OLI paradigm 3

CHAPTER 2: MOTIVATIONS FOR HONDA FDI .5

IN VIETNAM 5

1 Ownership-specific advantages 5

1 1 1 1 1 1 1 1 Brand 5

.2 High-quality products with reasonable price .5

.3 Honda service and added in activities 6

.4 Diversification of products design 6

.5 Business relations and networking 8

.6 ASIAN market understanding 8

.7 Unique technology 8

2 3 Internalization advantages 9

Location-specific advantage 11

3 1 Economic determinants 11

3 3 3 1.1 Market-seeking: 11

.1.2 Resource-seeking 13

.1.3 Efficiency-seeking 16

3 3 2 Policy framework 17

.3 Business facilitation 19

3 3 3 3.1 Investment Agreement 19

.3.2 Trading and distribution rights 21

.3.3 Inflation and exchange rate 22

3 3.4 Industry specific institution 22

COMMENTS 23

CONCLUSION 25

BIBLIOGRAPHY 26

LIST OF FIGURES

Figure 1: Some of Honda’s products 7Figure 2: Vietnam population by Statical Publishing House 2008 12Figure 3: Population Structure by ages in Vietnam 1979-2007 by Population andHousing Census 2007 15Figure 4: Workers’ average basic salary in some cities thein world 16

CEPT

CIL

Complete Built UpCommon Effective Preferential TariffCustomary International Law

Foreign Direct InvestmentFDI

World Trade Organization

Nowadays, the terms FDI – Foreign Direct Investment and TNCs – TransnationalCorporations are not unfamiliar terms anymore to all of us We can easily find anApple factory in China, Toyota in the United States, Samsung in Russia, and

everywhere all over the world Pick up any newspapers or research papers in thelibrary, it is not hard to find an article telling about the long-history success of theseTNCs, which strategies they chose to win the market, how they contributed to thesociety However, within this research, we do not mention much about that Weconcentrate on providing the reader about what factors lie behind the decision ofFDI of TNCs, or determinants of FDI, and why they choose a country to invest in,not other countries These motivations and selection of entry mode into a certaincountry are of essential decisions as they affect the success of the TNCs in thelong-run

In this research, we choose the case of Honda Motor Company when they enteredVietnam in 1996 to analyze the motives and determinants of entering Vietnam,based on OLI paradigm (Dunning, 1993a) Honda is a Japanese transnational

corporation known as a manufacturer of automobiles, motorcycles and power

equipment Before Vietnam, Honda had assembly plants around the globe: China,the United States, Thailand, Malaysia, Indonesia, Since the 1960s, Honda’s

products in Vietnam came mainly from imports Honda had a good reputation inVietnam market, even when it came to motorcycles, Vietnamese often called them

as “Honda motorcycles” regardless of what motorcycle brands they were In 1995,Honda decided to establish company in Vietnam, with the most important goal is to

seek for market So why did they choose Vietnam? What were their competitiveadvantages then to enter Vietnam? Why didn’t they keep exporting motocycles toVietnam, or licensed to an existing entity in Vietnam instead of establishing asubsidiary there? Let’s go find the answer for these questions, about the

motivations and determinants of FDI of Honda in Vietnam

CHAPTER 1: THEORETICAL FRAMEWORK

1 The OLI paradigm

The OLI paradigm is a widely used theory to explain FDI It states that FDI

happens when these three determining factors exist simultaneously:

Ownership-specific advantages: firm-specific competitive advantages compared

with local firms that can compensate for the additional costs of establishing

production facilities in a foreign environment and help firms overcome their

disadvantages compared with local firms in foreign countries

Location-specific advantages: country-specific advantages that firms can combine

with their firm-specific competitive advantages by establishing production facilities

in foreign countries

Internalization advantages: presence of superior commercial benefits for firms

resulting from the exploitation of ownership-specific and location-specific

advantages by investing in foreign affiliates that they control, rather than throughtransactions with unrelated firms located abroad

For a couple of years, the OLI model has remained the significant framework foranalyzing the activities of transnational corporations (TNCs) and the economicrationale behind their international operations This model also referred to as theeclectic paradigm proposed by J.H Dunning was first postulated in 1976 It

elaborates the decision and growth drivers that enable firms operate in internationalproduction (Stefanovic 2008) The paradigm which has been broadly applied in thepast to explain entry mode decisions and supported by several empirical studies

(Zhao 2005) is also not totally accepted, and described as limited in its accuracy toextrapolate definite methods of international operations.

There is a heightened consciousness that FDI operations are also determined byother factors beyond the economic advantages of the OLI framework The gravity-model is one of the models which attempt to modify the limitations of the eclecticparadigm; it explores the process of international production and trade, inclusive ofthe OLI variables (Mateev 2008) Also in view is the fact that the underlying

motives for production vary between regions which Dunning’s theory failed toconsider A typical case to illustrate this is the fact that factors which influenceforeign investment in a coal or Iron ore abundant region in Africa is likely to differfrom those influencing investment by a car manufacturing company in Asia

However, the OLI framework has proven to be helpful in determining the basicmotives that guide the international operations of TNCs and has set a well-informedground work for studies in international investment, business and economics It is ahelpful framework for classifying a good number of recent FDI researches Withthe limited time to do this case study, we found that OLI is an appropriate paradigmfor us to achieve our research’s goal: analyze the motivations and determinants ofFDI of Honda in Vietnam

CHAPTER 2: MOTIVATIONS FOR HONDA FDI

1.2 High-quality products with reasonable price

Honda motorcycle is famous for its high quality for long time use and reasonableprice Compared with products of some others famous brands such as Vespa fromItaly, only rich people can afford a Vespa in Vietnam Also, some Chinese

motorcycle have low prices and Vietnamese can easily buy one However, thequality is not high and the machine often breaks down Compared to these

motorcycles about quality and price, Honda is acceptable for Vietnamese people toconsider about the quality and service they can receive from a motorcycle and alsothe price they have to pay.

In fact, when Honda Vietnam introduced its low-price Wave Alpha, it caused asensation among consumers for whom a Honda had previously been out of reach.Priced at just VND 11m (Dollars 720) - less than half the price of the more up-market Super Dream model - Wave Alphas sold as fast as Honda could make them

1.3 Honda service and added in activities

Honda focuses strongly on the customer experiences, there are a lot of service teamaround the country to repair Honda products With qualified and enthusiastic

employees, Honda rapidly become the best scooter brand in Vietnam

Honda’s slogan is: “The power of dream”, which means everyone has a dream, athing makes them happy and gives them motivations in their life, and Honda want

to bring that dream to all people in the world Honda focuses on society activities.Not only product introduction but also training about traveling laws, how to be safewhen traveling… With many campaigns such as “Tôi yêu Việt Nam” later whichcan prove the variable aspect of Honda In comparison with local Vietnamese

enterprises with poor experiences in customer services and marketing strategies, theaforementioned advantages are most-striking strengths of Honda

1.4 Diversification of products design

The experience in designing its products suitable and fitting the taste of consumers

in different cultures that Honda gained from running business Asia, Europe, SouthAmerica was also a competitive advantage of Honda Choosing a motorcycle

design model is never easy to satisfy the majority of Vietnamese They judge the

the Honda’s experiences in varying the product designs would help Honda satisfythese difficult customers.

Figure 1: Some of Honda’s products

1.5 Business relations and networking

Business relations are also vital for the new venture The operation of Honda reliesheavily on the Honda procurement-network in the region With the wide networkall over the world, ranging from America to Asia, the transportation of the

accessories has been made easier for Honda This helps Honda save transportationcost as well as R&D cost, since people in nearby regions often share the sametastes

1.6 ASIAN market understanding

Being an Asian company, Honda have good understandings about Asian region’shabit and interest, so they easily understand Vietnamese ‘Asian culture is based on

a community spirit and obligation Our cultural affinity to the Vietnamese was areason for our confidence in making our investment into Vietnam a success’

(Satoshi Toshida, 2008)

1.7 Unique technology

With the pushrod overhead valve (OHV) air-cooled four stroke single cylinderengine, Honda motorcycle uses less gas and less exhausted fume to environment,enabling people to save fuel cost, and also meeting emission standards of mostcountries Compared with the two stroke engine of other brands such as Yamaha,Suzuki, and other European and Chinese ones, the four stroke engine is morefavorable in Vietnam market They told that the air-cooled four stroke single

cylinder engine makes them feel comfortable when riding and look more elegant.These advantages make Honda overcome all the disadvantages when approachingVietnam market, so which kind of entry mode did Honda choose to approach

Vietnam market?

According to the previous advantages, Honda Motor Corporation can considerleveraging these advantages abroad There are two main different options for them

to expand their operation: export, licensing, franchising; or FDI forms such asassociate and subsidiaries Each option has its own advantages and barriers forevery TNC, which depend on both the host-country and home-country regulations,potential partners, product markets, government or non-government trade

barriers, However, Honda Motor Co., Ltd chose internalizing FDI via venture with Vietnam Engine and Agricultural Machinery Corperation (VEAM).Which Honda Group contributes 70 percent of the legal capital (Honda Motor Co.,Ltd contributes 42 percent and Asian Honda Motor Co., Ltd contributes 28 percent)and VEAM contribute 30 percent of the legal captital So why did they make suchdecision? This is mainly because the imperfection of the markets

joint-First, Honda cannot choose to export a large number of motorcycles into Vietnamdue to the regulatory barrier from the government Vietnamese government applied

a 60 percent tariff rate on imported complete motorcycles in order to protect thelocal market The industry has been protected by a high tariff on motorcycle

imports that, until 2000, the domestic price had been at about 1.5 times higher thanthe price of similar models in Thailand, the price that Vietnamese people can hardlyafford as most of them are in the middle-income class In fact, before and even afterestablishing a company in Vietnam, Honda had exported motorcycles to Vietnammarket, but only in a small number due to the barrier Therefore, choosing export as

a main approach to the Vietnam market is proved to be an inappropriate solution

Second, if Honda chose licensing or franchising, the corporation could find it hard

to look for a Vietnamese company to corporate with due to some factors like thelow-level of technology, the manufacturing capabilities, meanwhile Honda wanted

to maintain the production quality to keep their reputation Technology helps toattain product quality, as well as cost control Even though there is nothing

advanced in the technology to make standard motorcycle models, technologicalknow-how, managerial know-how, and practical experience are needed to obtain aconsistent level of high quality and reliability

Therefore, Honda decided to internalize their operation, that is, investing in foreignaffiliates that they control, rather than through transactions with unrelated firmslocated abroad This internalization practice helps the firm to exploit ownership-specific advantages and also location-specific advantages that will be discussed inthe next sections

Honda chose to establish a joint-venture with Vietnam Engine and AgriculturalMachinery Corporation (VEAM), while with the experiences and skills, they

actually could open a 100 percent wholly own subsidiary and operate it on theirown in Vietnam In fact, instead of contributing to the technology, the primary role

of this VEAM is merely to support Honda in land ownership and building

headquarters for the joint venture This is clear from the fact of the 15 subsidiaries

of VEAM are failed to become suppliers of components for the joint venture withHonda

The reason is that as many communist conservatives feared that domestic

companies would not be able to compete and would quickly go out of business, sothe attraction of foreign investors and companies was a risk In the early 1990s,

and motorcycle industry, few FDIs were allowed to take the form of 100 per centforeign-owned Later on, joint venture with Vietnamese enterprises was effectivelythe only choice for Honda in this sector.

As soon as Honda Motor Co., Ltd gained the ownership and internalization

advantages, it had to choose the country to invest in So at that time, why did

Honda invest in Vietnam?

3 Location-specific advantage

The location-specific advantage, also known as unique advantages of host country,

is extremely important factor to determine which country is the destination ofTNCs

3.1 Economic determinants

Economic determinants play a vital and basic role when TNCs make the decision.Honda has lots of targets when entering Vietnam market such as market-seeking,resource-seeking, efficiency-seeking Among these factors, as mentioned in

introduction part, the most important motivation as well as the target of Honda ismarket-seeking

3.1.1 Market-seeking:

The entry of Honda into Vietnam might be seen as a result of several forces, one ofwhich is the size of the Vietnamese market

+ The booming Vietnam economy, which was matched by the rising incomes

of a vast section of Vietnamese residents and the new ability to purchase luxuryitems with excess income, meant the demand for motorbikes consistently increased