Analysis of toyota’s foreign direct investment in vietnam

Toyota, as one of the world’s leading automotive manufacturers, has made significant investments in various countries, including Vietnam, to tap into emerging markets and capitalize on their growth potential. This research paper is conducted with a view to examing the motivations behind Toyota’s FDI in Vietnam, assessing the impacts and achievements of this investment on Toyota’s growth. Moreover, the paper also analyzes the drawbacks of Toyota in Vietnam. Using the qualitative method, this study reveals several insights. Firstly, Toyota’s decision to invest in Vietnam is driven by such factors as market potential, political stability, and its location advantage, which will be digged further under OLI paradigm. In addition, Toyota’s FDI has played a crucial role in the development of Vietnamese automotive industry, contributing to technological transfer, job creation, and so on. The paper also identifies challenges and potential risks associated with Toyota’s FDI in Vietnam, such as intense market competition with SWOT analysis. Overall, the findings contribute to the existing literature on FDI in emerging economies and offer practical implications for other multinational companies considering investments in Vietnam’s automotive sector. Keywords: FDI, Toyota, Vietnam

FACULTY OF ENGLISH FOR INTERNATIONAL BUSINESS

School of Economics and International Business, Foreign Trade University

Faculty of International Economics, Foreign Trade University

ESP231: English for Specific Purposes 3

M.A Phan Kim Thoa

Ha Noi, May 2023

Toyota, as one of the world’s leading automotive manufacturers, has made significantinvestments in various countries, including Vietnam, to tap into emerging markets andcapitalize on their growth potential This research paper is conducted with a view toexaming the motivations behind Toyota’s FDI in Vietnam, assessing the impacts andachievements of this investment on Toyota’s growth Moreover, the paper alsoanalyzes the drawbacks of Toyota in Vietnam

Using the qualitative method, this study reveals several insights Firstly, Toyota’sdecision to invest in Vietnam is driven by such factors as market potential, politicalstability, and its location advantage, which will be digged further under OLI paradigm

In addition, Toyota’s FDI has played a crucial role in the development of Vietnameseautomotive industry, contributing to technological transfer, job creation, and so on.The paper also identifies challenges and potential risks associated with Toyota’s FDI

in Vietnam, such as intense market competition with SWOT analysis

Overall, the findings contribute to the existing literature on FDI in emergingeconomies and offer practical implications for other multinational companiesconsidering investments in Vietnam’s automotive sector

Keywords: FDI, Toyota, Vietnam

Currently, the key to success for developing and least developed countries is toattract foreign direct investment (FDI) FDI is a form of exchange and combination ofthe comparative advantages of the parties involved In recent years, Vietnam isincreasingly proving that this is a potential market that international investors seek,because of its political stability as well as its high growth rate and high remunerationbeing lower than other countries in the region

The automotive industry is a new industry among industries in Vietnam.Although new, this industry has been playing an important role in the development ofthe industry in general and the economic development of Vietnam in particular This isalso one of the major FDI attraction industries in Vietnam

One of the first foreign-invested enterprises present in the auto industry in thecountry is Toyota (TMV) Toyota has been presented in Vietnam since the automotiveindustry in the country was still young Since then, Toyota has achieved manyremarkable achievements, contributing to the development of Vietnam's automotiveindustry Today, in Vietnam, although there are many foreign-invested automotiveenterprises present, Toyota still asserts its No 1 position in the Vietnamese market

In this report, we used qualitative methods to analyze the topic “Analysis of Toyota’s Foreign Direct Investment in Vietnam”.

The research paper is organized as follows:

SECTION 1: LITERATURE REVIEW

SECTION 2: THEORETICAL FRAMEWORK

SECTION 3: ANALYSIS AND FINDINGS

SECTION 4: EVALUATIONS

During the process of making this research paper, due to some certain limits inunderstanding and data collecting, despite all the efforts, the report may hardly avoidmistakes We are more than willing to receive your comments so that our group canimprove and complete this paper

LITERATURE REVIEW Previous Research

The influence of foreign direct investment (FDI) on host countries has beenextensively studied in many literature reviews In terms of job creation, economicefficiency, and access to foreign markets, many academics think that FDI hasenormously favorable effects for the host countries (Sachs & Bajpai 2000) FDIcreates technology transfer for developing countries, assists human capital formation,contributes to international trade integration and particularly exports, helps create amore competitive business environment, and improves the efficiency of resource use(OECD 2002) The Japanese are among the most well-known investors in the world.According to Kanungo, A K., and Mahajan (2013), Japanese FDI has been biasedtoward high technology industries like automotive, electronics, electrical equipment,and industrial machinery The Japanese investment market has found the automotiveindustry to be the most appealing The outcomes of two major automakers like Toyotaand Suzuki engaging in India's automotive sector are crucial for the Asian nation(SHRESTHA, S 2014) The FDI not only establishes a foundation for the domesticindustry, but it also accelerates its rate of growth Another example is Toyota'sinvestment in Mississippi, which also benefits the local economy (Cardamone, C.2017) Over a six-year period, the investment generated thousands of jobs for thepeople, stimulating the economy Because of how simple it is to penetrate the market,Vietnam is also a desirable location for Japanese automakers like Toyota to make FDI(Dang Viet Dung) The government views this sector as a pillar, which is why thereare incentives for international investors

Research gap

The previous studies illustrate FDI in automotive industry in host countries, butthey lack of specific FDI method to analyze as well as consideration for the advantagesfrom the investors

THEORETICAL FRAMEWORK Overview of Foreign Direct Investment (FDI)

Definition of Foreign Direct Investment (FDI)

Foreign Direct Investment (FDI) is an ownership stake in a foreign company orproject made by an investor, company, or government from another country.Generally, the term is used to describe a business decision to acquire a substantialstake in a foreign business or to buy it outright to expand operations to a new region

It involves the acquisition or establishment of long-term assets, such as physicalinfrastructure, productive facilities, or equity ownership, with the intention of gaininginfluence or control over the management and operations of a company or enterprise inthe host country FDI goes beyond passive investment, as it typically requires activeparticipation, technology transfer, knowledge sharing, and strategic decision-making

by the foreign investor in the host country

In the context of Foreign Direct Investment (FDI), the term ‘home country’ and

‘host country’ refer to the countries involved in the investment process

Home country is defined as the country from which the foreign investororiginates or where the investing company is headquartered It is the country where theinvesting entity has its primary operations, management, and legal jurisdiction Thehome country is the source of FDI and is typically the country that provides thecapital, technology, and expertise for the investment

Host country is defined as the country that receives the foreign investment orwhere the investment is made It is the country where the foreign investor establishes

or acquires assets, such as physical infrastructure, facilities, or equity ownership inlocal companies The host country provides the platform and environment for theforeign investors to conduct business operations and realize the benefits of theinvestment

Home country and host country have distinct roles in the FDI process Whilethe home country is responsible for providing the capital, technology, and resourcesnecessary for the investment, the host country offers the market opportunities,resources, infrastructure, and regulatory framework to attract and accommodate theforeign investment

Sources of control

Foreign Direct Investment (FDI) control through ownership refers to the level

of ownership and control that foreign entities have over businesses or assets in aparticular country The ownership of at least 10% of the voting power, representing theinfluence by the investors, is the basic criterion used Hence, control by the foreigninvestor (ownership of more than 50% of the voting power) is not required

Different countries have different approaches to FDI control Some nations mayhave restrictions on foreign ownership in certain industries, such astelecommunication, or critical infrastructure, to maintain control and protect nationalsecurity In such cases, governments often require local ownership or limit thepercentage of foreign ownership

On the other hand, some countries adopt more open policies, allowing investors

to have significant ownership and control over businesses These nations see FDI as anopportunity for economic growth, job creation, and technology transfer.Foreign Direct Investment (FDI) control through agreements refers to the mechanismsand agreements that host countries establish to regulate and control FDI Theseagreements are typically bilateral or multilateral treaties, investment promotion andprotection agreements, or international trade agreements

Characteristics of FDI

Management control

Foreign direct investment involves a long-term relationship between an investorand a business Therefore, under FDI, the investors hold a certain degree of controlover managing the enterprise where the investment is being made For an investment

to be regarded as an FDI, the parent firm needs to have at least 10% of the ordinaryshares of its foreign affiliates, but the investing firm may also qualify for an FDI if itholds the voting power in a business enterprise operating in a foreign country (Sharmaand Gani, 2004) Vietnam Investment Law (2020) does not have a specific regulationregarding the proportion of equity stake that foreign investors have to contribute

Technology transfer

One of the superior advantages of FDI, when compared to other types ofinternational investment, is technology transfer from a home country into a hostcountry

Technology transfer refers to any process by which a party in one country gains access

to the technical information of a foreign party and successfully absorbs it into itsproduction process

FDI investors are either transnational corporations (TNCs) or multinationalcorporations (MNCs) with advanced levels of management, production, and technology.When making FDI investments, they introduce to the host countries superior expertiseand know-how Both the affiliates and the domestic firms competing with them try toadopt the new technologies, leading to an improvement in the technological level ofthe whole economy

However, in some cases, FDI investors transfer either outdated technology ortoo sophisticated one which the domestic workforce is unable to absorb yet Inboth scenarios, the host country barely gains benefits from technology transfer It isconcluded that technology transfer can not be expected to happen automatically but isalso determined by factors such as quality of labor, the set-up of the FDI project, andthe type of technology introduced It is undeniable that technological advancementplays an important role in achieving sustainable development Therefore, governments

of developing countries, including Vietnam, tend to put efforts into attracting FDIinflows as a means of promoting technology transfer

Transfer pricing

According to Garrison, Noreen, and Brewer (2010, 558), “a transfer price is theprice charged when one segment of a company provides goods and services to anothersegment of the same company” So, in the context of international investment, transferpricing is the pricing by TNCs of intra-firm transactions across national boundaries.Transfer pricing has two main objectives: measuring the division’s performance anddetermining the optimal tax burden However, it is mainly used for tax planningpurposes rather than for measuring performance purposes Price transferring allowsTNCs to shift their profits from nations with high to low corporate income taxes tominimize tax obligations or escape other restrictions on repatriating profits Thisaffects the amount of profit reported in host countries by corporations, which in turnaffects the tax revenues of both host and home countries In Vietnam, inspections bythe Vietnamese tax authorities found that “the most common trick played by theFDI

enterprises to evade taxes was hiking up prices of input materials and lowering exportprices to make losses or reduce profits in books” If violating the regulations, transferpricing has detrimental effects on the host country’s market such as fluctuations incapital flows and national budget deficit.

Types of FDI

By linkages

Theoretically, there are 3 types of FDI categorized by linkages First, horizontalFDI arises when a firm duplicates its home country-based activities at the same valuechain stage in a host country through FDI Second, vertical FDI takes place when afirm through FDI moves upstream or downstream in different value chains Third,conglomerate FDI is when a firm invests in a business that is unrelated to their presentcompany

By perspective of host country

There are 2 types of FDI categorized by perspective of host country First,import- substituting FDI is based on the premise that a country should attempt toreduce its foreign dependency through the local production of industrialized products

A kind of alternative method with import is FDI Second, export-substituting FDIarises when a country has trade and economic policies aiming to speed up theindustrialization process of the country by exporting goods

OLI paradigm – John Dunning’s Theory

OLI theory is known as the ownership advantage, location, and internalization

It is a three-tiered evaluation framework that companies can follow when attempting todetermine if it is beneficial to pursue foreign direct investment (FDI) The diagramprovides a strategy for operation expansion through FDI which exhibits potential

OLI paradigm suggests that O and I advantages are possessed by firms andfirms exploit the merits of L in home country

Ownership advantages – the first consideration, includes information and

various ownership rights of a company It may consist of technology, brand name,managerial and marketing expertise, firm size, economies of scale, and market power.These advantages are typically considered to be intangible which gives a competitive

advantage against potential foreign competitors, such as reputation for reliability Thisvalue can be replicated among different countries and transferred within firms withouttransaction costs.

Location advantage is considered by FDIs when numerous competitive

advantages are being presented It concentrates on the geographic advantages of thehost country in which firms can benefit from the resource-seeking (ocean for seafreight, natural resources, terrain for building factories…) Besides, producing in thehost country also means producing close to final consumers Other location advantagescan labor resources (low-cost and well-trained labor force), market demand, political(trade policy for foreign investors, tariffs…), and social advantages Should thementioned above advantages exist, the companies can consider taking on FDI

Economic determinants

Resource-seeking: exploiting natural resources by bringing projects to raw

materials endowments and on world commodity prices

- Availability of raw materials and natural resources:

- Cost of raw materials

- Physical infrastructure (ports, roads, railways, power, telecom)

- Availability and cost of skilled labor

Market-seeking: the size of the market and potential growth is very important.

- Market size and per capita income

- Market growth

- Access to regional and global markets

- Country-specific consumer preferences

- Structure of markets

Efficiency seeking:

- Low-cost unskilled labor or skilled labor force

- Cost of resources and labor adjusted for productivity

- Other input costs, e.g transport and communication costs to and from andwithin host economy

- Regional integration agreements

National policy framework

Policy that can decide indirectly the activities of FDI in one country is the outerring It is the trade policy, privatization policy, monetary and tax policy, exchange ratepolicy, regional policy, labor policy, and educational and health care policy Forexample, monetary policies affect inflation rate and interest rates, which afterward willchange the rate of borrowing, lending, and investing in that country

The core FDI policies are the inner ring, which determines directly whether aproject can be implemented or not It is entry and establishment (M&A or greenfield),standard of treatment, and protection

International policy framework

A policy framework is a document that sets out a set of procedures or goals,which might be used in negotiation or decision-making to guide a more detailed set ofpolicies, or to guide ongoing maintenance of an organization's policies

Business facilitation

FDI promotion is meant to attract potential investors that have not yet selected

an investment destination, whereas four core functions are:

Image building consists of fostering the image of the host country and branding

it as a profitable destination

Investment generation deals with techniques to target specific sectors,

projectors, investors… in line with national priorities

Investment facilitation, retention and aftercare is about providing support to

investors to facilitate the new as well as retaining existing ones and encouragingreinvestment by responding to their needs and challenges

Policy advocacy includes identifying difficulties and providing recommendations to

address them

Incentives and other measures are financial, fiscal, and other incentives.

Internalization advantage must be analyzed to determine which investment

pathway is best suited for their needs The companies must consider whether it would

be more sensible to outsource the value chain to a foreign country The advantages ofoutsourcing from different countries can include lower costs, better skills, moreadvanced technology, and better knowledge of local markets to perform the valuechain activities The companies should also be careful of revealing proprietaryinformation (e.g how to use the technology or the patent)

Components of FDI

Foreign direct investment has three basic components:

● Equity capital: It is the overseas investor’s purchase of shares of abusiness located in another country rather than its own An equity capital of 10% ormore, is normally considered a threshold for the control of assets

● Reinvested earnings: it is the oversea investor’s share (in proportion todirect equity participation) of earnings not distributed as dividends by subsidiaries orassociates, and earnings of branches not remitted to the direct investor

● Other direct investment capitals or intra-company debt transactions: thisrefers to short or long-term borrowings and lending of funds between direct investors(parent corporations) and foreign affiliates

ANALYSIS AND FINDINGS Overview of Toyota

The process of formation and development

Company name: Toyota Motor Corporation (Abbreviation: TMC)

Main business activities: Motor vehicle production and sales

Date founded: August 28, 1937

Founder: Kiichiro Toyota

Operating Officer and President: Koji Sato

Headquarter: Toyota City, Aichi, Japan

Capital (as March 31, 2022): 635 billion yen

Scale: 63 factories (12 factories in Japan, and 51 factories in other nations),operating in 26 nations worldwide in total.)

Number of employees (as of March 31, 2022): 70,710 (consolidated 372,817)Vision: Toyota aims to lead the future mobility society, enriching lives aroundthe world with the safest and most responsible ways of moving people Through theircommitment to quality, ceaseless innovation, and respect for the planet, Toyota strives

to exceed expectations and be rewarded with a smile

Logo:

Brief history and business activities of Toyota

Today, Toyota is one of the world's largest automotive manufacturers anddealers in terms of revenue and market share

During the Pacific War, Toyota was selected as the truck manufacturer for theRoyal Army After the war, Toyota began to produce commercial cars In 1947, withthe SA model, the quality and manufacturing standards were based on a US Armytraining program In 1957, Toyota Crown became the first Japanese car line to export

to the US market After that, Toyota began to expand the market with research anddevelopment centers and representative offices established in Thailand And by thelate 1960s, Toyota established representative offices around the world and exported 1million vehicles

The company won the Japanese quality management award in the early 70's andstarted to enter the sports car market In 1989, Toyota launched the luxury car lineLexus And in the 90s, Toyota began to diversify its car line with large and luxuriouscars in addition to the economy cars With the success in the US and Europeanmarkets, Toyota became a famous brand Therefore, in 1999, Toyota decided to listprices on the New York and London stock exchanges

In 2002, Toyota linked up with Citroen and Peugoet, a French car manufacturer,and the following year Toyota started making cars in France In 2007, Toyotaintroduced a large truck, the Toyorata Tundra, which was manufactured at two plants

in the US Therefore, Motor Trend chose the Toyota Camry as the "car of the year2007" and in the same year, Toyota also started building a factory in Mississippi In

2006, Toyota overtook Ford, capturing a large market share in the US, Europe, Africaand leading the Australian market Toyota's important market share in South Asiancountries also increased rapidly

Currently, Toyota is a highly appreciated brand in the market According toKMB, Toyota is the most valuable car brand in the world According to VAMA inJune 2019, Toyota is still the best-selling car brand in the market And according to theGlobal Brand Ranking 2018, Toyota is still the No 1 brand in the world

As of 2022, the Toyota Motor Corporation produces vehicles under four brands:Daihatsu, Hino, Lexus and the namesake Toyota The company also holds a 20% stake

in Subaru Corporation, 5.1% stake in Maxda, a 4.9% stake in Suzuki, a 4.6% stake inIsuzu, a 3.8% stake in Yamaha Motor Corporation, and a 2.8% stake in Panasonic, aswell as stakes in vehicle manufacturing joint-ventures in China (FAW Toyota andGAC Toyota), the Czech Republic (TPCA), India (Toyota Kirloskar), and the US(MTMUS).

The above graph indicates that from the year of 2001 to 2022, the revenue of Toyotahas increased more than twofold Although Toyota was somehow inflicted in the event

of the pandemic of Covid-19, which caused a significant drop in its revuene, Toyotasoon recovered and impressively reached the revenue of $267.03B in 2022

Toyota’s investment strategies

To expand the scale of domestic production, Toyota made acquisitions,cooperated with domestic automotive companies, and built many production plants indifferent countries worldwide

In 1966, Toyota established a partnership with Hino Motors In 1967cooperated with Daihatsu By the beginning of January 2016, Toyota acquired all ofDaihatsu's shares worth more than 3 billion USD to realize Toyota's ambition toexpand production scale in the small car field

To meet the demand for sports racing cars, Toyota cooperated with Yamaha todevelop the 200GT model and launched it in 1967 In 2018, Toyota cooperated withSoftBank to establish a joint venture called Monet Technologies to develop self-driving cars to provide transportation services such as ride-hailing, delivery

To reach out to the world, Toyota has also made FDI investments abroad in recentyears, such as acquisitions and mergers, joint ventures, and equity contributions.

Japanese investors have invested in Europe, a market they see as crucial forboth their products and their aspirations to become a major player on the internationalstage Toyota, Daihatsu, and Hino, three brands owned by the Japanese firm, had a4.4% market share in Europe in 2003 In 2004, there were 14 research anddevelopment centers and 17 production units of Japanese automotive facilities in theEuropean Union, which together produce 1.3 million automotives

Because of the expanding domestic market in Russia, Japanese businesses havebegun a series of investments there Toyota started construction on a factory close to

St Petersburg in June 2005, and it will start producing Camry cars in 2007

Japanese automotive and component firms conduct very successful business inthe United States The market share of Japanese brands climbed from 15.3% in 1999 to20.6% in 2004, and the trend is still upward given that they have 23 plants as of 2006.Similar to Europe, Japan has made significant investments in American manufacturingfacilities

Early in 2010, the Toyota Corporation began manufacturing the Toyota CamryHybrid for the Australian market At the Altona factory in southeast Australia, around10.000 units of this dual-fuel variant will be produced annually

Toyota took another step toward dominating the world vehicle market Themain weapons are inexpensive cars, and it expands on the markets of China andRussia To address the market demand in China and India, Toyota intends to constructthree new facilities with a combined yearly production capacity of more than 450,000units

The second manufacturing facility in India would get investment from ToyotaMotor Corp of 68 billion yen (680 million dollars) The Corolla model will be made atthe new factory Another new model that will debut in 2010 will be manufacturedthere

In 1995, Toyota built an automotive factory in Vinh Phuc, Vietnam To date,Toyota has a total of 63 factories worldwide, including 12 factories in Japan and 51factories in other countries Toyota has a worldwide coverage with 160 branches andrepresentatives of Toyota Motor Corporation

Toyota has established a worldwide strategy to take advantage of global marketopportunities while also taking into account the specifics of the areas it operates in.Toyota's principal approach is to completely control the quality of its products through

"zero defects," ongoing product improvement

Toyota Motor Company conquered the world by implementing a global strategybased on product policy, research, continual quality improvement, and technologicaladvancement, but also respect for consumers around the world

FDI analysis in Vietnam

Toyota Motor Vietnam (TMV) is one of the first automotive joint ventures inthe Vietnamese market, who strives for sustainable development and accompaniesVietnam in “Leading mobility” TMV has always been providing high quality productsand remarkable after-sales services to bring the highest satisfaction to customers,meanwhile contributing positively to the development of the automotive industry andVietnam as a nation

Toyota’s foreign direct investment (FDI) in Vietnam involves both the homecountry, which is Japan in this case, and the host country, Vietnam

Japan serves as the home country for Toyota, meaning it is the origin of thecompany’s FDI Toyota’s decision to invest in Vietnam reflects its strategic expansionplans and the search for new markets outside of Japan Japan plays a significant role inproviding the necessary capital for Toyota’s FDI in Vietnam Japanese investors,including Toyota, bring financial resources, advanced technology, and expertise tosupport the establishment and growth of their operations in the host country Inaddition, the home country contributes knowledge and experience gained fromToyota’s operations and success in the global automotive industry

As a host country, Vietnam provides Toyota with access to a rapidly growingmarket in Southest Asia The country’s economic growth, rising middle class, andincreasing consumer purchasing power make it attractive destinations for Toyota’sFDI Vietnam offers a large consumer base for Toyota to sell its vehicles and capturemarket share Moreover, Vietnam offers relatively lower production and labor costscompared to Japan and other developed countries This cost advantage makes Vietnam

an attractive location for Toyota’s operations Establishing FDI in Vietnam enablesToyota

to develop local partnerships with suppliers and distributors, contributing to the growthand development of the domestic automotive industry.

Sources of control

Toyota’s FDI control in Vietnam involves in both forms of ownership and agreements:

Toyota's FDI in Vietnam involves establishing ownership structures to have a

substantial stake in its operations Toyota Vietnam serves as an example of thisownership model Toyota Motor Vietnam (TMV) is a joint venture between 3 majorpartners:

● Toyota Motor Coporation (Japan) (70%)

● Vietnam Engine and Agricultural Machinery Corporation (VEAM) (20%)

● KUO Singapore Co., Ltd (10%)

Total investment capital in Vietnam is 89.6 million USD The Vietnamese partycontributes land and factories, the Japanese party contributes money and technology.Toyota Vietnam, which is responsible for the production and assembly of vehicles inthe country, has planned annual pre-production to order components from the partssupplier at the parent company The amount of spare parts and machinery will beimported to Vietnam according to the plan, enterprises only process and assemble anduse localization of some simple domestic components As a joint venture, Toyotaholds an ownership interest in the company, giving it a degree of control and influenceover its operations, strategic decisions, and overall management

Through its ownership position, Toyota can actively participate in shaping thedirection and performance of its operations in Vietnam It may have representation onthe company's board of directors and contribute to the formulation of key policies,business strategies, and investment decisions This ownership structure allows Toyota

to have a direct stake in the success and growth of its operations in the Vietnamesemarket

In addition to ownership, Toyota's FDI in Vietnam involves various agreements

that govern its operations and partnerships These agreements serve to establish the