Strategies to strengthen the competitiveness of korean banks in vietnam

This study analyzed the Korean banks that entered Vietnam by using EFE, IFE, and TOWS analysis methods to derive the competitiveness of Korean banks in the Vietnamese financial market. After that, the author insisted on the localization and differentiation strategy, which is the main competitive strategy, for Korean banks entering the Vietnamese market, and proposed strategies to strengthen competitiveness by dividing the implementation measures into internal and external. the originality and significance of this thesis is that it has completed a strategy to strengthen the competitiveness of Korean banks, such as expanding their business netwwork and enhancing profitability in Vietnam. Practical applicability, if any: Banking is an industry that is subject to various regulations and standards. As a result, Korean banks in Vietnam need to be flexible in dealing with Vietnamese government policies. In this paper, it is practically applicable to prepare for crisis based on their experienced credit management ability and risk management system. Further research directions, if any: If there is a chance in the future, the author would like to set the number of branch offices and total assets of Korean banks in Vietnam as relevant variables to verify their advancement. Such research is

ĐẠI HỌC QUỐC GIA HÀ NỘI KHOA QUẢN TRỊ VÀ KINH DOANH

-

KO CHANGSEOK

STRATEGIES TO STRENGTHEN THE COMPETITIVENESS

OF KOREAN BANKS IN VIETNAM

CHIẾN LƯỢC TĂNG CƯỜNG NĂNG LỰC CẠNH TRANH CỦA CÁC NGÂN HÀNG HÀN QUỐC TẠI VIỆT NAM

LUẬN VĂN THẠC SĨ QUẢN TRỊ KINH DOANH

HÀ NỘI - 2020

ĐẠI HỌC QUỐC GIA HÀ NỘI KHOA QUẢN TRỊ VÀ KINH DOANH

-

KO CHANGSEOK

STRATEGIES TO STRENGTHEN THE COMPETITIVENESS

OF KOREAN BANKS IN VIETNAM

CHIẾN LƯỢC TĂNG CƯỜNG NĂNG LỰC CẠNH TRANH CỦA CÁC NGÂN HÀNG HÀN QUỐC TẠI VIỆT NAM

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 - 2020

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

First of all, I would like to express my deepest gratitude and special thanks to Assoc Prof Dr Hoang Dinh Phi for his valuable advice and guidance on every developmental stage of this thesis I especially enjoyed his strategic and interesting classes which inspired

me to choose this research topic In the end, his endless support and great kindness and understanding made it much easier for me to complete the research and writing process

I would like to send my sincere appreciation to my company, IBK Because they gave me a chance to study for a year and a half In Vietnam, a country I have never been to before, especially in HSB As I live my life, I will never forget their sincere support

And I would like to thanks to my friends for helping me a lot during my life in Vietnam The faculty and staff of HSB, the teacher of the Vietnamese language institute, the staff of IBK Hanoi branch and his family, and my MBA class friends were all good enough to inspire me a new inspiration about Vietnam and make me grow more

Last but not least, I consider myself as the luckiest person in the world as I have always been given strength and motivation by my wife, Hyun Yunyoung, and my children,

Ko Haein and Ko Youngwoo to keep going on my path I would also like to deliver my gratefulness and love to my family who provided so many spiritual supports to help me complete this paper within the given time

TABLE OF CONTENTS

LIST OF ABBREVIATIONS i

LIST OF FIGURES iii

LIST OF TABLES ii

TITLE CHAPTER 1

1 Rationale 1

2 Review of Previous Researches 3

3 Aims of Research 5

4 Objects of Research 6

5 Scope of Research 6

6 Research Methodology 7

7 Thesis Structure 7

CHAPTER 1 Basic Theory on Bank's Competitiveness 9

1.1 Bank's Competitiveness 9

1.2 Business Environment in Vietnam 12

1.2.1 Market Characteristics and Strategic Values 12

1.2.2 Macroeconomic Indicators and Economic Outlook 14

1.2.3 Current Status of Trade and Investment 16

1.3 Vietnamese Government's Policy on Banking Sector 21

1.3.1 Vietnamese Government's Regulatory Policy 21

1.3.2 Vietnamese Government's Foreign Open Policy 23

1.4 Implications for Foreign Banks in Vietnam 27

CHAPTER 2 Analysis of Korean Banks’ Competitiveness in Vietnam 31

2.1 Analysis of the Banking Industry in Vietnam 31

2.1.1 Growth Process of Vietnamese Banking Industry 31

2.1.2 Current Status and Characteristics of the Banking Industry in Vietnam 33

2.1.3 Challenges of Banking Industry in Vietnam 36

2.2 Analysis of the Current Status of Korean Banks‟ Competitiveness in Vietnam 38

2.2.1 Size and Financial Status of Korean Banks 38

2.2.2 Process of Korean Banks‟ entry into Vietnam 40

2.3 EFE for Korean Banks for 2020-2025 46

2.3.1 Opportunities 47

2.3.2 Threats 48

2.4 IFE for Korean Banks for 2020-2025 48

2.4.1 Strengths 49

2.4.2 Weaknesses 50

CHAPTER 3 Proposal of Strategies and Solutions to Strengthen the Competitiveness of Korean Banks in Vietnam for 2020-2025 Period 51

3.1 TOWS Matrix for Korean Banks‟ Strategies for 2020-2025 51

3.2 Main Competitiveness Strategies 52

3.2.1 Localization strategy 52

3.2.2 Differentiation Strategy 54

3.3 Proposal of Solutions to Implement Competitiveness Strategies 55

3.3.1 Internal Competitiveness Strategy 55

3.3.2 External Competitiveness Strategy 58

CONCLUSION, LIMITATION AND IMPLICATION 63

1 Conclusions 63

2 Limitations 64

3 Implications 65

REFERENCES 67

i

LIST OF ABBREVIATIONS

Trans-Pacific Partnership

Development PESTLE Political, Economic, Social, Technological analysis,

Legal and Environmental

ii

LIST OF TABLES

<Table 1.1> Population Outlook by Age Group, 2015 ~ 2030 14

<Table 1.2> Vietnam's Trade Volume Trends, 2014~2018 17

<Table 1.3> Korea-Vietnam Trade Trends, 2014~2018 18

<Table 1.4> Vietnam's FDI (New and Increased) Trends, 2014~2018 19

<Table 1.5> Vietnam government's regulatory policy on the banking industry 22

<Table 1.6> Key Contents of the Five- ear Economic and Social Development Plan 27

<Table 2.1> Overseas Branches of Korean Banks by Region 39

<Table 2.2> Current status of Korean banks in Vietnam 40

<Table 2.3> Entry of Korean banks into Vietnam, Year 1992~1999 42

<Table 2.4> A data of Korean banks into Vietnamese market accumulated on 2008 43

<Table 2.5> Status of Korean banks‟ entry into Vietnamese market, Year 2018 E 45 <Table 2.6> Summarized EFE for Korean banks 47

<Table 2.7> Summarized IFE for Korean banks 49

<Table 3.1> Summarized TOWS Matrix for Korean banks 51

iii

LIST OF FIGURES

<Figure 1.1 > Firm‟s Competitiveness Pyramid 10

<Figure 1.2> Vietnam GDP Growth, 2011~2018 16

<Figure 1.3> Trends in Vietnam's Annual Exports, 2013~2018 19

<Figure 1.4> Trend in No of Newly Established Companies in Vietnam, 2013~2018 20

<Figure 1.5> Vietnam's Free Trade Agreement, as of 2016 26

<Figure 2.1> Major Changes in Vietnam's Banking IndustryError! Bookmark not defined

<Figure 2.2> Status of Banks in Vietnam, as of 2017Error! Bookmark not defined

<Figure 2.3> Asset Status of Banks in Vietnam, as of 2017Error! Bookmark not defined

In particular, Vietnam was able to overcome the collapse of the Asian financial crisis in the late 1990s without much influence by actively pushing for the opening of the country In 2001, the Normal Trade Relation (NTR) with the United States attracted foreign investors Since then, the economy has grown at an annual rate of over 7.5% And at the end of 2006, Vietnam joined the WTO, which had been the desire of the Vietnamese government The Permanent Normal Trade Relation (PNTR) with the U.S was signed immediately to declare its entry into the market economy system Therefore, foreign direct investment has exploded, and it has been evaluated by the world as a successful model of open policy As a result, Vietnam not only recorded an average annual economic growth rate of 7.3% between 1990 and 2010, but also increased per capita income by five times during this period

The banking industry in Vietnam has changed a lot due to the rapid improvement in the internal and external environment of the Vietnamese economy Vietnam had to comply with the financial and services market opening schedule by joining the WTO The Vietnamese government also rushed to open the Vietnamese banking industry through restructuring of the banking industry as it hopes to bring

in foreign investment for the development of its capital market In addition, the Vietnamese government agreed to open the financial markets through bilateral talks with the U.S government at the APEC summit in Vietnam in November 2006 Its main content is to allow the establishment of a 100% foreign investment local corporation within five years of joining the WTO and to treat domestic banks

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equally by removing the restrictions on foreign banks by 2012 And the Vietnamese government is implementing many measures such as the handling of bad debts caused by state-owned commercial banks' loans to state-owned companies at policy rates, the merger and acquisition of small joint-stock commercial banks in Vietnam and the expansion of minimum capital to strengthen the soundness of the banking industry, etc of the banking industry As a result, the gateway to Vietnam as a foreign bank has become extremely wide

Meanwhile, since South Korea and Vietnam began diplomatic relations in

1992, Vietnam has become Korea's most important trade partner in Southeast Asia, and Korea has a sustained trade surplus against Vietnam The relationship between Korea and Vietnam is being promoted as a strategic partnership In addition, for Vietnam, Korea has been the most important direct investment country in the last decade As a result, many Korean companies and financial institutions are making inroads into Vietnam The Korean bank could achieve satisfactory results if it has a strong will and all the capacity to target niche markets in a short time, although it does not have much number of branches or experience compared to other foreign banks in Vietnam

This paper first examines the business environment in the Vietnamese market, and then analyzes how to enter the Vietnamese market and the competitive environment Based on this, establish a strategy to strengthen the competitiveness of Korean banks to expand their presence in Vietnam

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2 Review of Previous Researches

There are many literatures, researches and papers on general economic growth

in Vietnam, but there are only few researches on the Vietnamese financial industry

or Korean banks operating in Vietnam In particular, the study of Vietnam's financial industry in Korea is the only comprehensive study by the Korea Financial Investment Association (2011) in South Korea In addition, there is a report on the trend and prospects of the Vietnamese financial industry by the Korea International Trade Association (2019) Research in Vietnam includes the study of Tran Thanh Thuan (2017) on the current state and customer satisfaction of Korean banks in Vietnam Previous studies on Korean banks' entry into Vietnam can be divided into the preceding research of Korea and Vietnam as follows

There are few previous studies on the competitiveness and strategies for Korean financial institutions to enter the Vietnamese market, as their strategies for overseas markets are concentrated in other countries, such as China However, there

is a prior study on the overseas expansion strategy of financial companies by Seo Byung-ho (2018) This is a study of strategies for overseas expansion of financial institutions in general, and there are many differences in time, and it is considered that there are limitations in accurately reflecting the current status of domestic financial companies and deriving a plan to enter Vietnam

First, according to the Korea Financial Investment Association (2011), financial investment companies set up an emerging market support center as a measure to systematically support their entry into emerging markets And they have continued to do activities such as compiling data and holding seminars to support their entry The analysis included detailed technical details on the status of local and financial industries, foreign investment policies and taxation, in hopes of supporting domestic companies' advance into Vietnam After all, Vietnam was included with the publication of a new survey report from five countries when the data was published in 2011, a time that can be seen as giving Vietnam great significance as a new revenue-generating market

According to Ko Ki-yun (2018), the Korean bank's entry into the Vietnamese market is an essential business strategy for securing profitability and durability To

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this end, the paper emphasized that the marketing channel strategy using the Internet platform should be differentiated, and the accessibility with customers should be maximized through specialization of asset management services It is also important to cope with the rapidly changing investment environment It stressed the importance of risk management and the need for changes in the overall operational management system However, the paper deals with the analysis of the vast amount

of the financial industry as a whole, and presents the strategy of advancing only to asset management companies and fails to draw up its complementary points

Next, a look at Vietnam's preceding research, Doan Manh Cuong (2019), who recently completed a study, said that foreign investment contributed greatly to the achievement of Vietnam's innovation process The paper stated that one cannot deny that investment from South Korea is huge and impressive However, the text stresses that the current situation, which relies heavily on preferential tax rates and import tax exemptions, is not appropriate to encourage FDI attraction and should not be alerted In addition, the fact that many Korean conglomerates with high-tech products have invested in Vietnam is a favorable condition for Vietnamese to acquire and develop technology This is an good opportunity to achieve Vietnam's goal of developing technology and improving the quality of human resources in Vietnam, so it should be approached in terms of ripple effects and the value chain of businesses It was also emphasized that the two countries need to make mutual efforts in various ways, including sustainable development and socio-economic integration

The study of Ha Thu Huong (2010) defined that financial internationalization not only means expanding international financial affairs through overseas expansion

of banks, but also the integration of national financial systems with international financial markets or international financial institutions In this regard, South Korea has a strong competitive edge, with specialized experience and economies of scale

in the financial sector The paper also stressed that a thorough localization strategy

is the most essential and effective strategy To this end, it emphasized that the strategies for building image through customer-centered customer satisfaction (CS) and social contribution activities are important, and efforts should be made to

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spread Korea's financial techniques in addition to hiring local employees However, the paper focuses on analyzing only Shinhan Bank among Korean banks in Vietnam, and there is a regret that it cannot realistically present various problems and responses to actual entry

According to Tran Thanh Thuan (2017), a comparative analysis was conducted between Shinhan Bank and Vietcombank in Vietnam It presents barriers

to expanding operations and local legal issues, and explains how the results were achieved Since then, the customer satisfaction level comparison between Shinhan Vietnam Bank and Vietcombank confirmed that there are differences in customer satisfaction In this paper, the strength of Shinhan Vietnam Bank is to apply cutting-edge technology from South Korea to service and to improve service quality At the same time, the bank was constantly improving and developing new banking products to increase customer convenience Also, since the Vietnamese financial market still has many risks, each foreign bank should take advantage of its available resources and benefits On the one hand, it is necessary to expand the network more nationwide to increase operating efficiency in high potential markets such as Vietnam However, this paper was also limited to performance analysis, which was limited to some banks, and to comparison of customer satisfaction

Therefore, in this thesis, the author will examine the strategy to strengthen the competitiveness of South Korea banks in Vietnam, which is not covered by the Korea Financial Investment Association's research The analysis will then expand the Korean bank's entry into Vietnam in a more realistic, diversified and phased manner And this study will supplement the shortcomings of the preceding research and carry out a detailed analysis of Korean banks operating in Vietnam using different tools and methods Thus, the paper is meaningful in that it is a research that analyzes and suggests the strategies to strengthen the competitiveness of Korean banks, including expanding their business network and enhancing profitability in Vietnam

3 Aims of Research

South Korea and Vietnam signed various economic exchange agreements and expanded exchanges in trade, investment, and taxation after diplomatic relations

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With the rise of Korean companies in Vietnam in recent years, more and more Korean banks are entering Vietnam for their financial support Therefore, this paper examines the problems and improvement measures of Korean banks entering the Vietnamese market In other words, this paper aims to establish an efficient entry strategy and a strategy to strengthen competitiveness of Korean banks in Vietnam

So the following is the main aims of this paper:

- Review of basic theories on bank‟s competitiveness and strategies to strengthen the bank‟s competitiveness

- An in-depth analysis of South Korean banks' business in the Vietnamese market and their competitiveness

- Suggests several strategies to strengthen the competitiveness of Korean banks in the Vietnamese market

4 Objects of Research

This paper obtains the key implications and draw out the present task based on various reviews and analyses to achieve the main aims In addition, it should be organically connected to present a strategy for Korean banks to strengthen their competitiveness in the Vietnamese market Accordingly, in order to reach the above aims, this study focuses on the following main objects:

- An in-depth analysis of South Korean banks' business in the Vietnamese market and their competitiveness

- Current status and characteristics of Vietnam's banking industry

- The factors that form the competitiveness of South Korea banks in Vietnam

- Vietnam's business environment factors affecting the management of Korean banks competitiveness and strategies in Vietnam

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- Time: This paper utilizes research papers, research reports, statistical data, cases, etc that were prepared and produced from 2014 to 2019, the last five years

6 Research Methodology

This paper utilizes research papers and research reports on the overseas advancement of financial institutions, entry into Vietnam, and the political and economic environment of Vietnam as literature materials In addition, the report focused on securing objective data of the study by analyzing internal reports and various statistical data from the institutions related to overseas expansion of Korean banks The data were supplemented by data from each bank's overseas expansion, media press releases on these topics, and contents analysis of Web site contents Also, the author also collected data and examples of the activities of Korean banks

in Vietnam to obtain practical information and knowledge The author gathered cases in which Korean banks actually worked in Vietnam, and the analysis included interviews with staff of Korean banks

7 Thesis Structure

This paper mainly referred to academic papers related to this topic And the study was conducted through the collection, compilation and analysis of related reports and various statistical data on major Web sites in South Korea and Vietnam This paper is composed of three chapters

Chapter 1 examines the business environment of Vietnam In particular, looked at trends in Vietnam's market, economy, trade and investment status and established the characteristics of the economy recently In addition, after reviewing the Vietnamese government's regulatory and foreign open policy, the overall implications for the business environment were drawn

Chapter 2 analyzed the entry and competitive environment of Korean banks into the Vietnamese market First, the current status and characteristics of the banking industry in Vietnam were analyzed, and drew up the current tasks Next, by looking at the status and advancement process of Korean banks, various problems arising in the development process were identified In addition, Korean banks could compare their strengths and weaknesses with those of Vietnamese banks and other

It also sought to find a strategy for Korean banks to grow more efficiently despite changes in the real situation ahead

In the study of competitiveness, there are different levels of it to be examined: nation, industry, firm and product To be in line with the scope of this thesis, only the research on firm-level competitiveness is reviewed A well-known definition of competitiveness is the ability of a firm to produce goods and services (productivity), sell and supply them in the market in relation to the ability of other firms in the same market (Mehra 1998; Porter 1990)

According to Hoang Dinh Phi (2015-2019), to explain about the competiveness, it is necessary to start the common understanding from the concept and definition of competitiveness at different degrees 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 <Figure

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1> can be used to explain why the management of technology and innovation is so important and decisive to build firm‟s sustainable competitiveness As is often found in business, the management of firm‟s business strategy is put at the center of interaction with all other functional strategies from technology to finance, human resources, logistics, production, marketing, sales, and cultures… The successful business management process depends on the success of each functional department

in building its needed capabilities to fulfill the duties and reach the set-out targets

In general, the level of firm‟s success or the degree of firm‟s competitiveness varies

by size and by field and by time, and it depends on all factors as stated in <Figure 1> Therefore in the context of fierce competition, firms must pay more attention and invest more in building technological capabilities This also explains why the management of technology and innovation is so important that impacts strongly on firms sustainable competitiveness And thus it is needed for firms to study and apply management processes of technology and innovation in alignment with the formulation and implementation of other main and functional strategies and plans

<Figure 1.1 > Firm’s Competitiveness Pyramid

(Source: Hoang Dinh Phi, 2015-2019)

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From another point of view, competition forces firms to promote innovation and advance current technology to offer a wider range of products and services at lower costs (OECD) This is also the way of thinking of many researchers when they define competitiveness as the ability of a firm to gain higher profit compared to its competitors through cost effectiveness and product differentiation (Buckley et al 1991; Porter & Millar 1985) A wider and more comprehensive concept of competitiveness is that the competitive success of a firm depends mainly on its competitive advantages which indicates unique values owned by the firm to perform better than its competitors (Porter 1985) There are a number of key theories that were developed to help explain the firm‟s choice of competitive strategy, in which market-based view (MBV) and resource-based view (RBV) are best-known

The MBV argues that the success of a company depends on its market-driven business strategy This strategy should be designed based on careful analysis of business environment Aguilar (1967) was credited as a pioneer in developing PESTLE analysis which discussed external factors (political, economic, social, technological, legal and environmental factors) affecting a business Also, economic characteristics of the industry and the market position of the company relative to its competitors are considered as important determinants of its performance (Porter 1980; Bain 1968) A well-known model under this market-based view is the five forces framework which was initiated by Porter (1979) In contrast of macro environmental factors described in the PESTLE analysis, Porter (1985) referred the five forces which consisted of industry rivalry, bargaining power of suppliers, bargaining power of buyers, threat of new entrants and threat of substitutes as micro environmental factors Accordingly, assessing these forces help banks better understand the attractiveness and competitive features of the banking industry as well as realize their market position

However, a limitation of the MBV is that it ignores internal factors that could affect a firm‟s performance such as resources and capabilities (Prahalad & Hamel 1994) This approach is introduced as the resource-based view (RBV) which orients towards firm-specific rather than industry-specific factors The firm will be successful if it is equipped with resources including “financial, physical, human and

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organizational assets” (Barney 1995) that best suited for its business and corporate strategy According to Barney (1991), resources that could generate competitive advantages for firms should satisfy the requirements of being valuable, rare and inimitable However, Sanchez & Heene (1997) argues that the competition among firms is not only about differentiation in resources but also about the ability to coordinate and use them effectively to achieve the firm‟s strategic goals

While the MBV was criticized to have ignored the internal forces that could affect a firm‟s productivity, RBV was argued to only focus on analyzing the internal resources but not be able to link the inner capacity with the external environment (Hooley et al 1998) SWOT analysis, which involves the identification of both internal and external factors affecting the business goal is a model that can realize a balance between industry-specific MBV and firm-specific RBV (Learned et al 1969) In Chapter III, TOWS (Threats , Opportunities, Weaknesses and Strengths,) matrix is adopted to evaluate the current competitive level of local commercial banks A model that can perform environmental scanning and internal firm‟s attributes investigation at the same time is essential for analyzing and developing competitive advantages (Barney 1995) By matching the strengths to opportunities or by converting weaknesses and threats into strengths and opportunities, SWOT analysis is helpful to figure out competitive advantages for the firm (Piercy & Giles 1989)

1.2 Business Environment in Vietnam

1.2.1 Market Characteristics and Strategic Values

Vietnam is seen as a „Post China‟ for its high economic growth potential In addition to participating in the multilateral FTA, South Korean manufacturing companies are also working as a bridgehead to advance into overseas markets to take advantage of their young and abundant workforce Along with the favorable investment environment and positive economic growth in Vietnam, the export market is also in positive shape due to the entry of global manufacturing companies into Vietnam However, Vietnam's import regulations and non-tariff measures require attention from the companies that enter the country

The market characteristics and strategic values of Vietnam are as follows: First, Vietnam is in the spotlight as a Post China Vietnam is seen as a post China to

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replace China due to its cheap and abundant labor force, geographical advantage, political stability, aggressive investment attraction policy and potential for the domestic market It seeks export-oriented economic growth, and among them, the export dependency on foreign-invested companies is very high In addition, it is actively expanding foreign investment by enhancing access to overseas markets By actively participating in FTAs with large economies such as the EU and EAEU, and mega FTAs such as CPTPP and RCEP, the FTA network covering the world's major economies has been established in a short period of time, and its value is emerging as a key point for entry into overseas markets

Second, it has a huge consumer market of 100 million people and the middle class is growing Vietnam is the world's 15th-largest population with 96 million people, with the largest population among ASEAN member countries after Indonesia (260 million, fourth in the world) and the Philippines (104 million, 13th

in the world) In addition, the number of people expected to reach 100 million by

2023 and 105 million by 2030 It also has an excellent consumer market with rising incomes and a growing middle class The population accounts for half of the population from the age of 20 to 49, the main consumer, and by 2020 the share of the middle class is expected to reach 40% of the population Young people between the ages of 15-34, which make up about 34% of the population, are emerging as a key consumer of the Vietnam‟s domestic market They are the ages of adolescence, marriage and childcare, and the market for IT, household appliances and baby products, which are their main consumption items, is growing rapidly

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<Table 1.1> Population Outlook by Age Group, 2015 ~ 2030

(Unit: Thousands of people, %)

Age group 2015 2020f 2030f

2015/20 Increase

2015/30 Increase

0 9Y 14,962.0

(16.0)

15,299.9 (15.6)

13,693.9 (13.0)

10 19Y 13,587.6

(14.5)

13,771.3 (14.0)

15,164.3 (14.4)

20 29Y 17,467.5

(18.7)

15,614.3 (15.9)

13,536.3 (12.9)

30 39Y 15,079.0

(16.1)

16,423.6 (16.7)

15,283.9 (14.5)

40 49Y 12,644.8

(13.5)

13,609.6 (13.9)

16,068.3 (15.3)

50 59Y 10,093.3

(10.8)

11,151.9 (11.4)

13,048.8 (12.4)

60 69Y 5,208.5

(5.6)

7,458.9 (7.6)

10,113.9 (9.6)

70 79Y 2,528.2

(2.7)

2,833.2 (2.9)

6,002.6 (5.7)

80Y Over 1,876.6

(2.0)

1,993.8 (2.0)

2,308.4 (2.2)

Total 93,447.5 98,156.5 105,220.4 5.0 12.6

* ( ) is the proportion of the total population

(Source: Euromonitor)

1.2.2 Macroeconomic Indicators and Economic Outlook

In 2015, Vietnam's economy continued to recover following in 2014 GDP growth in the third quarter of 2015 was 6.5% higher than the same period last year This is the highest figure for the past 4 years and exceeded the government's 2015 growth rate target of 6.2% On November 10, 2015, Vietnam's National Assembly

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approved the 2016 Vietnam Resolution on Social-Economic Development Plan (Resolution No.98/2015/QH13) The resolution aims to stabilize macroeconomics, achieve higher economic growth than the previous year, improve the quality of economic growth and ensure sustainable development In addition, the government aims to make and implement strategic breakthroughs related to reforming growth models, improving labor productivity and quality, efficiency, competitiveness improvement, improving difficulties for companies, promoting production and management, improving people's lives and welfare, strengthening administrative reform, enhancing the efficiency of the government's management functions, fight corruption and strengthening national security

At the end of 2017, the Vietnamese government announced a resolution for the 'Economic and Social Development Plan 2018' Three key agenda items were presented: stabilizing the macro economy, controlling inflation and promoting economic growth In addition, the economic growth target of 6.5-6.7% was set

At the time of the first half of 2018, Vietnam's economic growth rate was 7.08%, the highest since 2011, and expected to meet the government's annual target

of 6.5-6.7% without any difficulty Agriculture and forestry, fishery, services, industry and construction sectors led the overall economic recovery In addition, the World Bank raised Vietnam's 2018 growth from 6.5% to 6.8%, with the EIU and IMF also forecasting 6.5% and 6.6% respectively, Such positive economic growth was observed, which supported the continued economic recovery The factors that led to encouraging economic growth at the first half of 2018 were increasing foreign direct investment and boosting private investment This is because the Vietnamese government was continuously pursued system reform, internal restructuring and revision of related laws in order to create a more favorable business environment for foreign investors In the future, foreign investment capital is expected to drive Vietnam's economic growth in the mid to long term

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<Figure 1.2> Vietnam GDP Growth, 2011~2018

(Source: General Statistics Office (GSO) of Vietnam)

In 2019, Vietnam's economic growth is expected to remain at 6.5-6.6% The IMF forecasts Vietnam's 2019 economic growth at 6.5%, the same as 2018, while the WB and EIU forecasts 6.6% and 6.5%, slightly lower than 2018 Vietnam's position in the ASEAN countries is expected to be in the mid-range However, considering the economic growth rate of Vietnam in the first half of 2018, which has been the highest growth rate since 2011, it is likely that Vietnam will join the top ranks

In order to maintain a positive economic growth trend in the future, the Vietnamese government's risk management capabilities will be important In particular, the stable inflation, exchange rates, and interest rates are seen as a positive sign for the economic outlook despite the unstable trade environment of the US-China trade war However, the Vietnamese government's securing of crisis management frames will be the key to economic stability as risks such as deepening protectionism in the U.S., Vietnam's major exporter, The collapse of the Vietnamese stock markets, high public debt levels and inflation risks

1.2.3 Current Status of Trade and Investment

Vietnam's investment environment is still attractive to foreign investors due to factors such as lower wages and cost savings from cheaper raw material supply

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compared to neighboring countries such as China and Indonesia As a result, many foreign investors, including multinational corporations, are moving production bases from China to Vietnam Various business opportunities exist due to the expansion of market opening through such agreements as the TPP and ATIGA/AEC, the Vietnam-EU FTA and the South Korea-Vietnam FTA In addition, the Vietnamese government is focusing on promoting investment in Vietnam by lowering interest rates and facilitating investment by local investors and businessmen

In 2018, Vietnam's total exports were USD 243.5 billion and imports were USD 236.7 billion, achieving a total trade surplus of USD 6.8 billion, marking the largest foreign reserves ever It is analyzed that the driving force for Vietnam's economic growth in 2018 was the expansion of exports by FDI companies based on manufacturing, which contributed greatly to export growth of electronic and textile labor-intensive industries In order to create a more favorable business environment for foreign investors, the Vietnamese government continues to promote system reform, internal restructuring and revision of related laws Therefore, foreign investment capital is expected to drive Vietnam's economic growth in medium to long term

<Table 1.2> Vietnam's Trade Volume Trends, 2014~2018

(Unit: Bil USD)

(Source: General Department of Vietnam Customs)

In addition, trade volume between South Korea and Vietnam hit USD 68.3 billion in 2018 For Korea, Vietnam is the third-largest exporter and seventh-largest importer, while for Vietnam, Korea is the fourth-largest exporter and the second-largest importer In 2014-2015, Korea's foreign trade continued to grow negatively,

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while Korea-Vietnam trade continued to expand, maintaining double-digit growth rates This means that Korea-Vietnam's status has increased, and it simply shows that the relationship between them is a strategic partnership

<Table 1.3> Korea-Vietnam Trade Trends, 2014~2018

(Unit: Mil USD, %)

22,771 (24.2)

32,630 (17.5)

47,749 (46.3)

48,629 (1.8)

Import

(VNM K

OR)

7,990 (11.4)

9,805 (22.7)

12,495 (27.4)

16,176 (29.5)

19,632 (21.4)

(Source: Korea International Trade Association (KITA) &

Korea Trade-Investment Promotion Agency (KOTRA))

Of Vietnam's exports in 2018, FDI companies accounted for 70% of its total exports, with its FDI business group recording USD 171.5 billion, overwhelming the portion that FDI companies contribute to boosting Vietnam's exports On the other hand, the total exports of Vietnamese domestic companies stood at USD 71.9 billion (30%) Exports of electronics, phones and parts needed for smartphones showed steady growth Electronics such as telephones and computers accounted for about 32% of the total exports, while textiles, clothing and footwear products accounted for 19% of the total exports

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(Unit: Bil USD, %)

<Figure 1.3> Trends in Vietnam's Annual Exports, 2013~2018

(Source: General Department of Vietnam Customs)

In 2018, Vietnam attracted a total of USD 25.6 billion in FDI (down 16% year-on-year), with USD 17.9 billion (3,046 cases) and USD 7.6 billion (1,169 cases) The amount of investment and stock purchases (USD 9.9 billion) add up to about USD 35.5 billion

<Table 1.4> Vietnam's FDI (New and Increased) Trends, 2014~2018

(Unit: Mil USD, Number)

(Source: General Statistics Office (GSO) of Vietnam &

Ministry of Planning and Investment (MPI) of Vietnam)

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In addition, the number of new companies established in Vietnam last year is 13,275 (up 3% year-on-year), surpassing the record (126,859) achieved in 2017 This is a clear indication of Vietnam's investment environment, which is attractive

to foreign investors

<Figure 1.4> Trend in No of Newly Established Companies in Vietnam,

2013~2018

(Unit: Number)

(Source: Ministry of Planning and Investment (MPI) of Vietnam)

As discussed above, crisis management skills are the key for the dependent Vietnamese economy to sustain growth The domestic market is expanding due to the population of 100 million, the young generation, and the growth of the middle class And as part of the Vietnamese government's privatization policy, local companies are strengthening their capabilities However, 70% of Vietnam's exports come from FDI companies including South Korea and Japan, and the Vietnamese economy is highly dependent on foreign capital

FDI-In addition, internal risk factors such as high public debt, bad debts, slow state-owned corporate restructuring, and low labor productivity, along with high external variables such as US interest rate hikes, deepening protectionism, and the US-China trade war Therefore, the Vietnamese government's risk management is expected to be an important factor for economic growth

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1.3 Vietnamese Government's Policy on Banking Sector

1.3.1 Vietnamese Government's Regulatory Policy

The Vietnamese government is pushing for a policy to open up the financial sector by enforcing a law allowing the establishment of 100% foreign banks in 2006

As a result, foreign financial institutions, including Korea, are accelerating their advance into Vietnam Subject to the application of the Act are Foreign Bank Branches, Joint-ventured Bank, 100% Foreign-owned Banks, and representative offices set up in Vietnam by foreign credit agencies

However, the financial industry is a major regulatory industry where government regulations are common due to many market failures due to various causes Bankruptcy or paralysis of financial systems has a huge negative impact not only on the financial industry but also on the real economy, which requires regulation in terms of the overall economy Just as financial regulators exist in any country to regulate the financial industry, in Vietnam, the financial industry has a strict regulatory system unlike other industries Usually, regulations in the financial industry include regulations on entry and exit, ownership and governance, business areas or activities, soundness and credit allocation, market and consumer protection

In this paper, the author will focus on foreign investment regulations, the minimum legal capital requirement, and overall regulations in the area of work, which are the aspects of entry regulations that have the greatest influence on Korean banks operating in Vietnam

First, Vietnam restricts foreigners‟ equity investments in its commercial banks and joint-ventured banks However, the State Bank of Vietnam (SBV) has announced that it is considering raising the limit on foreign investment in domestic commercial banks In addition, the minimum legal capital requirement at the time of initial entry to Vietnam is specified in accordance with the regulations Next, the Vietnamese government also clearly defines the requirements for establishment, period of operation, and language in terms of sales regulations Further, The credit limit and the acquisition of shares of affiliates and the same person are regulated in the Banking Corporation Act on Financial Institutions (47/2010 / QH12) In addition, the government strictly controls the credit growth rate and capital

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adequacy ratio, and also sets and operates the upper limit for deposit and loan rates and the reserve ratio for payment separately As such, the Vietnamese government has implemented detailed regulations on foreign banks in various fields, and Korean banks that want to enter Vietnam need to comply with the regulations As mentioned above, the Vietnamese government‟s regulatory policy was integrated and summarized as shown in <Table 5>

<Table 1.5> Vietnam government's regulatory policy on the banking industry

Foreign

Investment

Regulation

Equity investment

Vietnamese Bank

2 subsidiary Foreign-

owned Bank

Joint venture: 50% equity acquisition allowed

New entity: 100% equity acquisition conditions

Branch / Office

Foreign bank branches

One for each province or

VND 3,000 billion

USD 15 million

SBV, 10/2011/ND-

owned Bank / Foreign bank branches

Foreign-More than USD 10 billion

in assets based on headquarters

More than USD 20 billion worth of assets based on

SBV SBV

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headquarters

Operating period

Enact business for up to 99 years

Language used

Basic Vietnamese use, foreign language if required

Credit limit

of the same person

Single Borrower: Less than 15%

Borrowers and Affiliates:

Less than 25%

CGR (Credit Growth Rate)

Target for 2019 is 14%

CAR (Capital Adequacy Ratio)

Maintain at least 8%

(Source: Summarized based on each website)

1.3.2 Vietnamese Government's Foreign Open Policy

„Đổi Mới‟ means 'to refresh' or 'renew' in Vietnamese The Doi-Moi policy, which was announced in 1986 at the 6th Communist Party Congress in Vietnam, was a Vietnamese-style reform and openness policy that embraced a market economy system This opened Vietnam's economy by expanding trade relations with Western countries and promoting a practical and active foreign policy In addition, the change from a centrally planned method to a market-oriented one resulted in great economic results

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Vietnam introduced the socialist market economy system in 1986 when Moi introduced the policy This has led to a shift in emphasis on efficiency in each

Doi-of the industrial policies such as agriculture, manufacturing and service industries

In the early stages of industrial development, it is necessary to secure capital for investment The Vietnamese government has promoted an active policy of attracting FDI to the manufacturing industry through the opening of the foreign sector, while allowing state-owned enterprises to take charge of their country's major industries

In particular, in the early years of reform and opening, the Vietnamese government gave more benefits to foreign investors They have also contributed to the growth of state-owned companies by cooperating with state-owned companies, which have received a lot of preferential benefits

It is not too much to say that Vietnam is currently facing a second Doi-Moi Since the 1997 East Asian financial crisis, the Vietnamese government's economic and industrial policies have focused on further attracting foreign investment Vietnam joined into the WTO in 2007, accelerating the opening of foreign goods, including tariff reductions and the elimination of subsidies for various goods The financial sector has also accelerated its opening, and by 2012, all foreign banks have

to be treated as locals In 2015, corporate taxes were reduced (from 25% to 22%), foreign stock investment limits were lifted, and foreign housing ownership was allowed The general decision-making standards of corporations have been relaxed, making improvements in the foreign investment environment and creating a business-friendly environment smooth

As the ASEAN Economic Community progresses, the possibility of entry into other ASEAN countries also increases Vietnam is a member of ASEAN and participates in programs for the ASEAN Economic Community In particular, by

2013, foreign participation had to be allowed in at least 70% of all service industries, including the financial industry In other words, it is likely that other countries, including Thailand and Malaysia, will participate more actively in Vietnam

Externally, expectations for Vietnam's economic growth are rising This is because economic integration with major economies in various forms, such as the launch of the ASEAN Economic Community (AEC), TPP and FTA settlement with

Vietnam has been raising opinions on the launch of a new economic community since the U.S withdrawal from the TPP in January 2017 On March 8,

2018, the CPTPP was launched in Santiago, Chile, aimed at tariff elimination and economic integration in the Asia-Pacific region, and Vietnam joined the move CPTPP is the world's third largest free trade agreement (1st RCEP, 2nd NAFTA), consisting of Japan, Canada, Australia, Vietnam, Malaysia, Singapore, Mexico, Chile, Peru, Brunei and New Zealand, excluding the United States Currently, Taiwan, South Korea, Thailand, Indonesia and the Philippines are willing to join additional CPTPP members to 16 CPTPP is part of the Vietnamese government's efforts to open foreign countries and to incorporate the international community

We expect to see quantitative and qualitative expansion of foreign trade and foreign investment, before and after the agreement takes effect, and economic growth based

on it

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<Figure 1.5> Vietnam's Free Trade Agreement, as of 2016

(Source: Korea Trade-Investment Promotion Agency (KOTRA))

However, Vietnam has a manufacturing-oriented, export-oriented economic structure that is affected by drafts As of 2014, Vietnam's foreign trade dependence was 161% and foreign-invested companies accounted for 68% of total exports The high dependence on foreign-invested companies and the influence of the global economy can be regarded as a crisis factor for Vietnam's economic growth in the future

Accordingly, recent government policies have tended to strengthen the supervisory, evaluation and control functions of financial markets, and if the market

is stabilized to some extent, they can serve as a big opportunity factor This can be inferred from the government's five-year plan and ten-year strategy in fostering a service industry with strong potential and competitiveness

The five-year (2016-2020) economic and social development plan includes stabilize macroeconomics, achieve high growth above 2011-2015 performance, innovate economic growth model, increase production capacity and efficiency,

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implement strategic and economic structural reforms linked to enhancing competitiveness, improve the quality of life, protect the environment, peace and safety and independence of the nation, strengthen foreign cooperation, improve national status and position, and make an early transition to a modern industrial country

<Table 1.6> Key Contents of the Five-Year Economic and Social Development Plan Indi

Latest Year

Recent Trend (Ave.)

Achiev ability *

1 Average annual growth of GDP 6.5%-7% 6.7% 5.9%

30%-35% Unable to source data

9 Average annual increase in

labour productivity

(past 2 years)

3

* Scale of 1 to 5 where 1 is most achievable

(Source: General Statistics Office Of Vietnam, Markit calculations)

1.4 Implications for Foreign Banks in Vietnam

Vietnam has rapidly emerged as an emerging market based on the brisk inflow

of Foreign Direct Investment (FDI) and the surge in foreign trade

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First of all, the Vietnam's economy has the great features of a transition economy, which is in transition from a planned socialist economy to a market economy since Doi-Moi policy implementation in 1986 Paradoxically, it also means that the Vietnamese economy still has a lot of socialist practices Examples include widespread corruption, unsettled credit societies, and a sudden change in the

leaders' disposition

Second, as with Asian socialist countries such as China and Laos, Vietnam was an agricultural-oriented developing country in the early days of the regime's implementation That is why State-Owned Enterprises (SOEs) did not have a significant share, and more recently, the industrial structure is changing rapidly This usually leads to differences in the way in which Vietnam took a gradualism reform and opening policy different from the radicalism of the former Soviet Union

or Eastern Europe In 1988, agriculture forestry fisheries, manufacturing construction and service industries accounted for 46.3%, 24%, and 29.7% of Gross Domestic product (GDP), but right after the reform and opening of the market in 2006, the ratio changed to 20.4%, 41.6% and 38.1% This shows that the industrial structure is changing rapidly due to the government's push for industrialization and the active inflow of FDI In the job structure, agricultural workers accounted for 70.9% of total employment workers in 1997, but dropped to 52.2% in 2006

Third, Vietnam is quickly entered the global economy, and the market is rapidly opening up By joining ASEAN (1995), APEC (Asia-Pacific Economic Cooperation, 1998), and acquiring PNTR (Permanent Normal Trade Relation, 2006) status from the United States Vietnam, in particular, participated in the GATT as an observer in June 1994 and became the world's 150th member of the world on January 11, 2007, 12 years after applying for membership in January 1995

Fourth, Vietnam is characterized by Official Development Assistance (ODA) coming from abroad, remittances from overseas Vietnamese (Viet-Q), and FDI playing an important role in economic development Before the start of the FDI

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boom, these parts each accounted for one-third of total development resources, but

in recent years, overseas remittances and FDI have gradually increased

Fifth, Vietnam's economy is characterized by its geopolitical advantage as being located in East Asia, the growth center of the world economy Vietnam is neighboring

to Japan, the world's second-largest economy, China, which is rapidly emerging as one

of the world's largest markets, including South Korea, emerging industrial countries as Asia Newly Industrialized Economies (ANIEs), and ASEAN, which has grown rapidly since the 1980s It is also a member of APEC, the world's largest economy These countries are Vietnam's largest trading partners and investment partners, and are the largest partners in Vietnam's economic growth Overseas aid, which plays a big role in Vietnam's economic development, is also supported by East Asia, including Japan, South Korea, which is the largest support country

Lastly, Vietnam is Southeast Asia in terms of location, but it has the colors of Northeast Asian countries Continental peoples, Confucian culture, and Mahayana Buddhism are contrasting factors with the surrounding Southeast Asian countries Higher levels of education, better and diligent workers are similar to those of East Asian countries (South Korea, Japan, Hong Kong, Taiwan, etc.) that have sustained high growth

In addition, the main policies of the Vietnamese government in 2019 are as follows

First, the Vietnamese government issued the '2019 Economic and Social Development Plan Resolution (Resolution No.70/2018/QH14)' Through this, 2019

is an important year to complete the five-year economic and social development plan set by the Vietnamese government at the end of 2015 The Vietnam Government's overall objectives set out in the resolutions in 2019 are: macroeconomic stabilization, inflation control, productivity and quality improvement, investment and business environment improvement, economic growth, active use of the Fourth Industrial Revolution, environmental protection and disaster prevention, administration and Judicial reform and anti-corruption Based on this, it is essential for Korean banks to establish strategies to strengthen their competitiveness to keep up with the sustainable Vietnamese economy

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Second, the government vowed to actively utilize the Fourth Industrial Revolution as the basis for sustainable economic growth The fourth industrial revolution, which has rapidly emerged as a hot topic for the global economy, is emerging as an important issue not only in Vietnam but also in politics Vietnam is currently growing based on labor-intensive industries, but it needs a growth engine due to low labor productivity (6 to 20 times) compared to other countries Thus, the reduction of the development gap in the technological and economic sectors through the fourth industrial revolution is the Vietnamese government's main goal It is necessary for Korean banks to use this as an opportunity to secure competitiveness

in Vietnam by expanding digital infrastructure and strengthening information technology (IT) applications

Finally, it is the nation's financial management efforts According to the Vietnamese Ministry of Finance, the Vietnamese government's efforts to manage public debt have slowed the growth rate of public debt from 18.4% in 2011-2015 to about 10% in 2016-2018 However, Vietnam's fiscal balance is worsening day by day due to increased financial burden caused by reduced ODA support by international institutions, increased corporate foreign debt, excessive fiscal spending, lack of public debt management system, and anti-appealing government bond market attraction due to revitalization of the banking sector There is a need to continuously improve regulations, management methods and organizational structures to efficiently manage debt and minimize the risk of public debt By doing

so, Korean banks should be prepared to overcome the crisis based on their flexible attitude toward Vietnamese government policies, experienced credit management capabilities and risk management systems