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

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 reason why Ko

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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

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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

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

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

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 capital-intensive 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 labor-intensive 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

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‟

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

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

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

- 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

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

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

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

(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)

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

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

currencies The sustainers argue that such investments are made in different times, but there are enough cases that contradict these claims

3 The Internalisation Theory

This theory tries to explain the growth of transnational companies and their motivations for achieving foreign direct investment The theory was developed by Buckley and Casson, in 1976 and then by Hennart, in 1982 and Casson, in 1983 Initially, the theory was launched by Coase in 1937 in a national context and Hymer in 1976 in an international context In his Doctoral Dissertation, Hymer identified two major determinants of FDI One was the removal of competition The other was the advantages which some firms possess in a particular activity (Hymer, 1976) Buckley and Casson, who founded the theory demonstrates that transnational companies are organizing their internal activities so as to develop specific advantages, which then to be exploited Internalisation theory is considered very important also

by Dunning, who uses it in the eclectic theory, but also argues that this explains only part of FDI flows Hennart (1982) develops the idea of internalization by developing models between the two types of integration: vertical and horizontal

Hymer is the author of the concept of firm-specific advantages and demonstrates that FDI take place only if the benefits of exploiting firm-specific advantages outweigh the relative costs of the operations abroad According to Hymer (1976) the MNE appears due to the market imperfections that led to a divergence from perfect competition in the final product market Hymer has discussed the problem of information costs for foreign firms respected to local firms, different treatment of governments, currency risk (Eden and Miller, 2004) The result meant the same conclusion: transnational companies face some adjustment costs when the investments are

made abroad Hymer recognized that FDI is a firm-level strategy decision rather than a capital-market financial decision

4 The Eclectic Paradigm of Dunning

The eclectic theory developed by professor Dunning is a mix of three different theories of direct foreign investments (O-L-I):

1) “O” from Ownership advantages: This refer to intangible assets, which are, at least for a while exclusive possesses of the company and may be transferred within transnational companies at low costs, leading either to higher incomes or reduced costs But TNCs operations performed in different countries face some additional costs Thereby to successfully enter a foreign market, a company must have certain characteristics that would triumph over operating costs on a foreign market These advantages are the property competences or the specific benefits of the company The

firm has a monopoly over its own specific advantages and using them abroad leads to higher marginal profitability or lower marginal cost than other competitors (Dunning, 1973, 1980, 1988) There are three types of specific advantages:

a) Monopoly advantages in the form of privileged access to markets through ownership of natural limited resources, patents, trademarks;

b) Technology, knowledge broadly defined so as to contain all forms of innovation activities

c) Economies of large size such as economies of learning, economies of scale and scope, greater access to financial capital;

2) “L” from Location:

When the first condition is fulfilled, it must be more advantageous for the company that owns them to use them itself rather than sell them or rent them to foreign firms Location advantages of different countries are de key factors to determining who will become host countries for the activities of the

transnational corporations The specific advantages of each country can be divided into three categories10:

a) The economic benefits consist of quantitative and qualitative factors

of production, costs of transport, telecommunications, market size etc

b) Political advantages: common and specific government policies that affect FDI flows

c) Social advantages: includes distance between the home and home countries, cultural diversity, attitude towards strangers etc

3) “I” from Internalisation:

Supposing the first two conditions are met, it must be profitable for the company the use of these advantages, in collaboration with at least some factors outside the country of origin (Dunning, 1973, 1980, 1988) This third characteristic of the eclectic paradigm OLI offers a framework for assessing different ways in which the company will exploit its powers from the sale of goods and services to various agreements that might be signed between the companies As cross-border market Internalisation benefits is higher the more the firm will want to engage in foreign production rather than offering this right under license, franchise Eclectic paradigm OLI shows that OLI parameters are different from company to company and depend on context and reflect the economic, political, social characteristics of the host country Therefore, the objectives and strategies of the firms, the magnitude and pattern of production will depend on the challenges and opportunities offered

by different types of countries

1.1.2 Legal Framework of FDI in Vietnam

The legal framework of Vietnam is largely favorable to both foreign and local investors after Vietnam‟s accession to the World Trade Organization (WTO) on 11th January 2007 Both the Investment Law and the Law on

Enterprises create a more favorable and clearer legal framework for doing business in Vietnam

Since 1st January 2009, Vietnam has relaxed the initial restriction on foreign investment wherein the proportion of the foreign capital could not exceed 49% Now 100% foreign invested company can be established in Vietnam

A company in Vietnam is only permitted to conduct business activities that are narrowly defined and mostly codified into a published list of business activities called “Business Lines” The foreign Invested Company should strictly adhere to the permitted business lines and in consistent to what is considered necessary for its particular investment project in Vietnam

A foreign invested company also enjoys the same privileges as to that of

a local Company in the eyes of law in Vietnam and therefore the same corporate governance rules are applicable The failure to comply with these corporate rules will lead to personal liability for directors or officers of a company, regardless of whether the company is foreign-owned, Vietnamese-owned or State-owned

The Investment Law also applies to both local and foreign investors The investment, both local and foreign, is strictly prohibited in the sectors which may be detrimental to the national defence and policy of the State There are certain sectors in which foreign investment is conditional requiring detailed analysis of the application for investment approval

The two principal forms of foreign investment in Vietnam are Direct Investment and Indirect investment

Direct investment– where the investor invests capital and participates in the management of the investment, including (i) establishment of foreign invested companies (FIC); (ii) Investing pursuant to a contract such as Business Co-operation Contract (BCC), Build-Operate (BO), Build-Transfer-

Operate (BTO) or Build-Operate-Transfer (BOT) or Build-Transfer (BT) Contract; (iii) Purchasing shares or contributing capital to existed companies

in Vietnam to participate in management; (iv) merger or acquisition of a company or branch

Most foreign investors generally incorporate either a Wholly Foreign Invested Company or Joint Venture Company in Vietnam, which are both Vietnamese corporate legal entities

Indirect investment– where the investor invests through the purchase of securities or through intermediary financial institutions where the investor does not participate directly in the management of the investment activity, including (i) Purchasing of shares, bonds and other valuable papers; (ii) Investing through securities investment funds and (iii) Investing through other intermediary financial institutions

1.2 Analysis of FDI Firm’s Operation

An FDI firm is a corporate that can invests and operates in one or more countries Therefore, the analysis of any FDI firm‟s operation will focus

mainly on its investment profile and its competitiveness for a period of time

Or in other way, the success of any FDI firm in any term (short-term, term, long-term) depends on the level of its competitiveness

CAPABILITIES (Governance, Techno, Finance, Humans, Culture…)

MARKET SHARES (Domestic, Exp., Brand)

PRODUCTS & VALUES (Productivity, Quality, Price)

PROFIT

FIGURE 1: FIRM’S COMPETITIVENESS PYRAMID

Source: Hoang Dinh Phi, 2007

As quoted by Hoang Dinh Phi [2], firm‟s competitiveness is a degree to which a firm can, under normal market conditions, develop its capabilities to produce goods or services that can be marketed with profit Firm‟s sustainable competitiveness is understood as the firm‟s competitiveness to be maintained for firm‟s profit and growth for a long and desired period of time despite the market challenges

The ups and downs of the World economies and enterprises during economic crises have supported the view point that it is not sustainable for countries and firms to develop and compete solely based on: natural resources (making money mainly from exploiting raw natural resources); financial economy (making money from money); and exploiting extensive labors in

poor and developing countries (making money from cheap labor) By educating, training and enhancing learning and innovation of organizations and individuals, countries and firms can innovate new knowledge, skills and technologies to compete sustainably Besides the factors of financial and human resources, most scholars of economics and business have emphasized the importance of technology and technological innovation as the main source and main factor for business development and nation‟s wealth creation

The main factors in figure 1 can be used to analyse the competitiveness

of FDI firm‟s operation in a country for a period of time

In this thesis, the author uses some main factors within firm‟s competitiveness to combine with other factors to analyze the FDI operation, including:

CHAPTER 2: CURRENT SITUATION OF SOUTH KOREAN FDI

FIRMS’ OPERATION

2.1 Vietnam’s Economic Growth, FDI, Import and Export

Vietnam, which has been considered one of Southeast Asia's leading emerging economies, began to slow down after the outbreak of the global financial crisis as it achieved high annual growth of more than 7 percent in the early 2000s After the global financial crisis, Vietnam's debt defaulted to below 6 percent as domestic real estate and stock market bubble burst as well

as the slowdown in exports and FDI caused by the economic slowdown in major developed countries During the global financial crisis, the Vietnamese government focused on improving economic structure and structure, such as price stabilization, industrial sophistication through FDI inducement, and liberalization through FTAs Since then, the economic conditions at home and abroad, including prices, trade, investment and industrial structure, have continuously improved, achieving a 6.68 percent economic growth rate in Vietnam in 2015 In addition, an increase in FDI inflows increases the chances that Vietnam will return to high growth

Table 2.1 Major macroeconomic indicators in Vietnam (2008 - 15)

Index Unit 2008 2009 2010 2011 2012 2013 2014 2015 GDP Billion 99.1 106 115.3 135.7 155.8 171.2 186.2 200.2

rate % 23.1 7.1 8.9 18.7 9.1 6.6 4.1 0.6

Date : IHS Global Insight (2006.03)

Recent economic growth in Vietnam is more likely than growth of domestic companies in Vietnam For example, foreign-invested companies

accounted for about 71 percent of Vietnam's exports in 2015, and mobile

phones and electronics, which have emerged as Vietnam's major export

products in recent years, are also produced by most foreign companies

Vietnam's FDI acquisition rate remained around $3 billion a year until the

early 2000s, but the amount of investment increased significantly to over $10

billion a year after joining the WTO in 2007 Due to the impact of the global

financial crisis, FDI scale was stagnant for several years, but started to

increase again in 2013 and attracted the largest FDI ever in 2015 (Table 2-2)

Table 2.2 Trend of FDI inducement by year (2009 - 15) in Vietnam

Year

Investment number

Investment amout (unit: 100

According to an interview with JETRO's Ho Chi Minh office, Japanese companies dominated the domestic market in various sectors such as motorcycles and food and beverages in the early 1990s, and recently adopted

a strategy to use Vietnam as a strategic export base Therefore, investment in manufacturing is now increasing to about $32 billion Japan is still Vietnam's largest investor, except Samsung

As Korean companies, which have focused on the potential of the Vietnam domestic market, are also seeing an increase in the domestic market,

competition with Japanese companies that dominate the Vietnam market is expected in various areas in the future Japan entered the wholesale and retail business earlier and invested $1 billion, while Korea invested $600 million (Table 2-3)

Table 2.3 Number and amount of investment by industry in major

countries

(Investment No/ USD billion)

1 Manufacturing

(3,034/31.7)

Manufacturing (1,490/31.9)

Hotel (20/5.2)

Manufacturing (916/5.4)

2 Real estate

(93/6.5)

Construction (76/1.1)

Manufacturing (346/2.8)

Energy (4/2)

3 Construction

(663/3.2)

Whole sale (318/1)

Telecommunication (100/0.2)

Mining (10/1.6)

4 Whole sale and

retail

As competition with Japan is expected between domestic market in Vietnam and domestic market, analysis of Japan's strategy to advance to Vietnam is necessary

As of 2015, the U.S is Vietnam's largest exporter and China, Japan and Korea are major exporters (Table 4) Japan was the biggest exporter of Vietnam until 2001, but the trade normalization relationship in 2001 (NTR), Vietnam's Permanent Normalization in 2006 became the largest export destination

Table 2.4 Vietnam’s Export index, 2000~2015)

(Unit: million USD)

Table 2.5 Vietnam’s import index, 2000~2015)

(Unit: million USD)

According to U.S direct investment statistics for key ASEAN countries, the U.S has relatively large investments in Indonesia, Malaysia, Thailand and the Philippines

(Figure 1) On the other hand, while investment in the Asia-Pacific region is weak, investment in Vietnam amounts to around 1.4 billion dollars

as of 2014 In addition, while investment in the leading countries of the United States has continued to fluctuate since the outbreak of the global financial crisis, investment in Vietnam has continued to grow This is because the U.S., which has traditionally focused on trade with ASEAN member countries, has increased the inflow of FDIs into ASEAN after its Asian return policy

Foreign companies that have entered Vietnam make up an absolute part

of Vietnam's trade By moving away from the current labor-intensive manufacturing industry and expanding its scope to high value-added industries and parts and materials industries, Vietnam is playing a crucial role

in boosting its industries In particular, FDI has played a leading role in technology-intensive and value-added industries such as machinery, energy, computers and mobile phones, and its importance has also increased continuously The FDI not only directly contributed to the economic growth

of Vietnam, but also led the industrialization through the "Spillover effect" of technology transfer to Vietnamese domestic companies

As of 2015, foreign companies entering Vietnam have become an important economic player, accounting for an absolute portion of Vietnam's total trade, accounting for about 71 percent of its exports and about 60 percent

of its imports Japan has led the industrialization of Vietnam with manufacturing in the 1990s, and is currently expanding its entry into the parts and materials industries of Vietnam as well as the high value-added IT sector While the U.S has traditionally been Vietnam's largest export market, since Vietnam joined the WTO in 2007, the U.S has been investing in high value-added high-tech industries such as machinery, aviation, IT, and oil, as Vietnam's investment conditions improved and Vietnam's potential is gaining attention Also, as the 2015 TPP agreement will further improve conditions for investment in Vietnam by companies from 12 countries, including Japan and the U.S., the presence of Japanese and American companies in Vietnam is expected to expand greatly

2.2 Basic incentives for FDI in Vietnam

There are a number of reasons why major countries are increasing their

Climate Statement, which analyzes the overall investment environment by country, recently praised Vietnam's improvement in investment conditions as

a global supply base, but also pointed out that chronic problems such as manpower, infrastructure, institutions and corruption have not been improved

A positive change in Vietnam's investment environment recently included expanding accessibility to the global value chain, political and economic stability, aggressive liberalization through FTAs, TPP effects, and strategic value as Post-China The report also predicted that the Vietnamese government's institutional reform, including the recent revision of major laws such as corporate law, investment law, housing law, and real estate law, the steady exchange rate management efforts of Vietnamese foreign exchange authorities, and privatization of state-owned companies, will also play a positive role in improving Vietnam's investment environment in the future

On the other hand, negative factors such as lack of skilled manpower, lack of physical and institutional infrastructure, weakness in the domestic market, corruption and sluggish reform of state-run companies remain

There are a number of reasons why major countries are increasing their interest in investing in Vietnam The U.S Department of State's Investment Climate Statement, which analyzes the overall investment environment by country, recently praised Vietnam's improvement in investment conditions as

a global supply base, but also pointed out that chronic problems such as manpower, infrastructure, institutions and corruption have not been improved

A positive change in Vietnam's investment environment recently included expanding accessibility to the global value chain, political and economic stability, aggressive liberalization through FTAs, TPP effects, and strategic value as Post-China The report also predicted that the Vietnamese government's institutional reform, including the recent revision of major laws such as corporate law, investment law, housing law, and real estate law, the

steady exchange rate management efforts of Vietnamese foreign exchange

authorities, and privatization of state-owned companies, will also play a

positive role in improving Vietnam's investment environment in the future

On the other hand, negative factors such as lack of skilled manpower, lack of

physical and institutional infrastructure, weakness in the domestic market,

corruption and sluggish reform of state-run companies remain

According to the World Bank's Doing Business, which analyzes the

global business environment, Vietnam ranked 70th among 189 countries in

the world in 2018 (Table 2-7) The figure is up from 90th in 2016, which is

lower than Malaysia (15th) and Thailand (27th) but higher than Indonesia

(73rd) and the Philippines (124th)

Table 2.6 World Bank’s Doing Business ranking 2018

Rank Economy

Starting

a Business

Dealing with Construction Permits

Getting Electricity

Getting Credit

Protecting Minority Investors

Paying Taxes

Enforcing Contracts

(Data : Doing Business (www.doingbusiness.org) 2018)

Investment incentives are granted to investment projects based on the

following criteria:

Location: investment projects located in areas with difficult or especially

difficult socio-economic conditions or special purpose zones;

Business industry: investment projects engaged in encouraged business

activities such as high-tech businesses, socialised businesses (e.g education,

medical), infrastructure development businesses, etc.;

Others: investment projects with large investment capital or engaging in

the manufacture of support industry products

Investment incentives granted to qualified investment projects include:

Corporate income tax (CIT) incentives: Preferential CIT rate (i.e lower

CIT rate in comparison with the standard CIT rate of 20%) for a definite

period or for the entire duration of the investment project; exemption from

CIT and reduction of CIT for a definite period (see table below);

Import duty incentives: Exemption from import duty in respect of goods imported to form fixed assets, raw materials and components for implementation of an investment project; and

Incentive relating to land rental and land use tax: Exemption or reduction

of land rental and land use tax

Table 2.7 Incentives in Vietnam example

1 Investment projects engaging in

socialised businesses and located in

areas with difficult or specially difficult

socio-economic conditions

Tax rate of 10% for the whole project lifeExemption:

4 yearsReduction: 9 years

2 Investment projects engaging in

socialised businesses and located in areas

with normal socio-economic conditions

Tax rate of 10% for the whole project lifeExemption: 4 yearsReduction: 5 years

3 Investment projects located in areas

with specially difficult locations,

economic zones and high-tech zones;

agricultural products in areas with

difficult socio-economic conditions;

Investment projects engaged in

manufacturing supporting industry

products of prioritised development

Tax rate of 10% for 15 yearsExemption: 4 yearsReduction: 9 years

4 Investment projects of manufacturing

or processing agricultural products

located in areas with normal

socio-economic conditions

Tax rate of 15% for whole life

5

Investment projects located in areas

with normal socio-economic conditions

Investment projects in steel industry,

energy, machinery for agriculture

Tax rate of 20% (17% from 2016) for 10 yearsExemption: 2 yearsReduction: 4 years

6 Investment projects located in industrial

zones/ export processing zones (except

for those in with favorable socio

economy conditions)

Exemption: 2 yearsReduction:

4 yearsNo preferential tax rate

is given

Incentives in disadvantaged locations

The Vietnamese government provides location-based incentives for regions based on the levels of development and investment The government provides these incentives as a means of attracting capital and improving development in these areas The areas that the government selects for incentives are consistently located near Vietnam‟s borders with China and Laos as well as the southern Mekong region

Vietnam provides two tiers of incentives to investment projects depending

on the level of development and needs in the area Foreign investors can currently choose between locations that are “disadvantaged” and those that are

“extremely disadvantaged.” Investments in both locations benefit from preferential corporate income tax as well as tax holidays with the level of incentive directly tied to the level of disadvantage within these regions