The New Asian Dragon [1 ed.] 9788763099967, 9788763002288

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The New Asian Dragon

The New Asian Dragon – Internationalization of Firms in Vietnam

Edited by Henrik Schamumburg-Müller and Pham Hong Chuong

Copenhagen Business School Press

Henrik Schaumburg-Müller, Pham Hong Chuong, eds The New Asian Dragon

” Copenhagen Business School Press, 2010 Printed in Denmark by Narayana Press, Gylling Typeset: SL grafik Cover design by KlahrŇGraphic Design 1st e-book edition 2010 ISBN 978-87-630-9996-7

ISBN Printed Edition: 978-87-630-0228-8

All rights reserved. No part of this publication may be reproduced or used in any form or by any means - graphic, electronic or mechanical including photocopying, recording, taping or information storage or retrieval systems - without permission in writing from Copenhagen Business School Press at www.cbspress.dk

Contents

List of Contributors · 7 Preface · 9 CHAPTER 1

The Dynamics of Firm Internationalization in Vietnam · 13 Henrik Schaumburg-Müller CHAPTER 2

Trade Internationalization Paths of Emerging Market Firms: Evidence from Vietnam · 39 Ha Thi Van Pham, Bent Petersen & Henrik Schaumburg-Müller CHAPTER 3

An Explorative Study on Functional Upgrading and Export · 61 Pham Thi Song Hanh CHAPTER 4

Conversion of Foreign Direct Investment Projects in Vietnam · 89 Bui Huy Nhuong, Nguyen Thi Huong, Nguyen Anh Minh, Ta Van Loi & Michael W. Hansen CHAPTER 5

Culture and Performance of International Joint Ventures in Vietnam · 115 Phan Thi Thuc Anh & Ngo Thi Minh Hang

CHAPTER 6

The Impact of Culture on Business Relationships · 135 Nguyen Hoang Anh & Nguyen Van Thoan CHAPTER 7

Interaction between Expatriates and Local Vietnamese Managers of MNCs in Vietnam: From a Learning Perspective · 157 Dao Thi Thanh Lam & Olav Jull Sørensen CHAPTER 8

Strategies of Vietnamese Firms in the Global Garment Value Chain after the Multi-Fibre Arrangement · 183 Henrik Schaumburg-Müller, Pham Thu Huong & Dao Ngoc Tien CHAPTER 9

Entrepreneurship and Strategic Options in a Development Context: The Case of a Garment Producer in Vietnam · 203 Olav Jull Sørensen & Li Thuy Dao CHAPTER 10

Strategic Options for Vietnamese Tea Processors in the Global Value Chain · 227 Luong Thi Ngoc Oanh, Nguyen Thi Hai Yen & Olav Jull Sørensen

Index · 253

List of contributors

List of Contributors

Mr. Bui Huy Nhuong is PhD and lecturer at Trade and International Economics Faculty, National Economics University, Hanoi, Vietnam. Email: [email protected] Mr. Dao Ngoc Tien is MBA and lecturer at Foreign Trade University, Hanoi, Vietnam. Email: [email protected] Ms. Dao Thi Thanh Lam is PhD fellow at Department of Business Studies, Aalborg University and lecturer at Business School, National Economics University, Hanoi, Vietnam. Email: [email protected] Ms. Ha Thi Van Pham is PhD fellow at Department of Intercultural Communication and Management at the Copenhagen Business School and lecturer at Finance Banking Faculty, National Economics University, Hanoi, Vietnam. Email: [email protected] Mr. Michael W. Hansen is PhD and associated professor at Centre for Business and Development Studies, Department of Intercultural Communication and Management at the Copenhagen Business School, Denmark. Email: [email protected] Ms. Li Thuy Dao is a PhD fellow at Department of Business Studies at Aalborg University, Denmark. Email: [email protected] Ms. Luong Thi Ngoc Oanh is MA and lecturer at Foreign Trade University, Hanoi, Vietnam. Email: [email protected] Ms. Ngo Thi Minh Hang is MBA and lecturer at Business School, National Economics University, Hanoi, Vietnam. Email: [email protected] Mr. Nguyen Anh Minh is PhD and lecturer at Trade and International Economics Faculty, National Economics University, Hanoi, Vietnam. Email: [email protected] Ms. Nguyen Hoang Anh is PhD and lecturer at Foreign Trade University, Hanoi, Vietnam. Email: [email protected] Ms. Nguyen Thi Hai Yen is MA and lecturer at Foreign Trade University, Hanoi, Vietnam. Email: [email protected] Ms. Nguyen Thi Huong is PhD and lecturer at Foreign Trade University, Hanoi, Vietnam. Email: [email protected] Mr. Nguyen Van Thoan is MBA and lecturer at Foreign Trade University, Hanoi, Vietnam. Email: [email protected] Mr. Bent Petersen is PhD in international business and professor with special responsibility at Centre for Strategic Management and Globalisation at the Copenhagen Business School, Denmark. Email: [email protected]

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The New Asian Dragon

Mr. Pham Hong Chuong is PhD and associated professor at National Economics University, Hanoi, Vietnam. Email: [email protected] Ms. Pham Thi Song Hanh is PhD fellow at Department of Intercultural Communication and Management at the Copenhagen Business School and lecturer at Foreign Trade University, Hanoi, Vietnam. Email: [email protected] Ms. Pham Thu Huong is PhD in Economics and lecturer of Graduate School, Foreign Trade University, Vietnam. Email: [email protected] Ms. Phan Thi Thuc Anh MBA and lecture at Business School of National Economics University, Hanoi, Vietnam. Email: [email protected] Mr. Henrik Schaumburg-Müller is an economist and professor at the Centre for Business and Development Studies, Department of Intercultural Communication and Management at the Copenhagen Business School, Denmark. E-mail: [email protected] Mr. Olav Jull Sørensen is professor at Department of Business Studies at Aalborg University, Denmark. Email: [email protected] Mr. Ta Van Loi is PhD and lecturer at Trade and International Economics Faculty, National Economics University, Hanoi, Vietnam. Email: [email protected]

8

Preface

Preface

Vietnam appears well-positioned to become a new East Asian dragon. —George Irwin, Vietnam: Assessing the Achievements of Doi Moi1

By 1995, nearly a decade after the introduction of Vietnam’s economic Doi Moi reform policies, the country had already made significant progress in following the footsteps of other economies in the region by becoming successfully integrated into the global economy. The economy had been liberalized and was becoming increasingly market driven. Even factoring in the Asian financial crisis that hit the region in 1997, the Vietnamese economy was able to recover quickly, achieving double-digit growth rates in income and exports after 2000 and continuously reducing poverty rates. Much is known about the policies that were applied to help this transformation and build the institutions in which markets and companies could operate. There have been however, far fewer studies that tell us how the firms formed their internationalization strategies and gained international competitiveness. In Vietnam, the discipline of international business has not been a main component in the business and management curricula at universities and business schools, yet managers in domestic and foreign firms have been competing and collaborating, based on their more or less deliberately formulated business models and internationalization strategies. In this sense, Vietnam has truly been an emerging market economy, and a rather successful one. However, success also transforms the business community, as well as the national economy. This transformation has occurred during a time when the regional and global economies have also been changing. Consequently, Vietnamese firms are now facing a new global environment of economic recession and financial turmoil. This book is a contribution to understanding the internationalization processes and strategies of firms in Vietnam. By assessing the legacy and path during the reform era, important questions are addressed: How robust is the business sector? How will it face these new global challenges? The aim is to stimulate managerial debate and research regarding how Vietnamese companies have become change agents in a region that has seen waves of latecomer firms transform economies into small dragons (Vogel 1991), if not into dragon multinationals (Mathews 2002) driving former agrarian economies into 1 George Irwin (1995). ”Vietnam: Assessing the Achievements of Doi Moi “, The Journal of Development Studies, 31:5, pp. 725-750.

9

The New Asian Dragon

newly industrialized market economies. The dragon is in the region the symbol of power. These changes might have been part of regional processes, described by Akamatsu Kanabe as a Japanese-led “flying geese formation,” or driven by internationalizing processes stemming from the enormous buying power of the global and in particularly the American markets. Although Vietnam’s path to economic development may resemble the rise of other East Asian economies it is nevertheless framed by both its specific sequences and different opportunities provided by the global economy, and the particular institutional context of its national economy. Moreover, the emergence and evolution of a private sector (thousands of private firms, joint ventures, and foreign corporations) in addition to the traditional state-owned enterprises have taken place in a dynamic way and under conditions that have only sporadically been researched and described, and are still poorly understood. Given this context, the contributors to this volume address a range of questions: Has Vietnam become a new Asian dragon? In what ways did firms play a role in the process? Have firms in Vietnam followed the same path as their counterparts elsewhere in Asia, or did they innovate new business models and organizations of competition and collaboration? How did they compete on the domestic market and overcome obstacles to export and access to foreign markets? The chapters of this book are the result of a collaborative research effort by researchers from Vietnamese and Danish universities coming together for the study of international business in Vietnam. The researchers are from four cooperating universities: the National Economics University and the Foreign Trade University in Hanoi in Vietnam, and Aalborg University and Copenhagen Business School in Denmark. The aim has been to use contemporary international business theories to study strategic business issues and challenges in Vietnam, and to critically discuss their applicability and explanatory power. The ten chapters of this book cover essential aspects of the internationalization processes of firms in Vietnam. The key findings are that private firms in a few industries have been particularly successful and been able to expand their exports; however, their success has largely been due to expansion in volume while embedded in global value chains where the possibilities for upgrading have been limited. At the same time, the importance of foreign companies in the Vietnamese economy has grown significantly. While the studies of national and organizational cultures in the foreign affiliates and joint ventures show that differences exist and have been overcome, there has been a clear tendency for foreign direct investors to move away from the joint-venture mode to wholly-owned subsidiaries. A significant part of the export industry and many large import substitution companies are now wholly-owned foreign companies. An important strength of the domestic private sector firms, as shown in this

10

Preface

book, is the entrepreneurial drive that allows managers to overcome the challenges they face in developing flexible strategies and dynamic capabilities based more on softer aspects of technology than on hardcore technical innovations. Chapter one contextualizes the main drivers of the processes by which Vietnamese firms are internationalizing. Chapters two and three present two detailed studies of how Vietnamese firms have entered and developed their export internationalization strategies. Chapter four analyzes the important shift that has taken place in the entry mode and conversion of foreign direct investment projects in recent years. The following three chapters are studies of management issues related to the cultural and human resource management traditions of Vietnamese and foreign managers when operating and interacting in companies in Vietnam. The last three chapters study how Vietnamese firms are integrating into global value chains. Using this framework as an analytical tool, these chapters analyze the upgrading and development challenges and options for the Vietnamese firms participating in the chains. Specifically, chapter eight is a study of how changes in the international garment trade affected how local garment suppliers who were integrated into global garment value chains. Chapter nine presents a longitudinal case study of the strategic development of a single firm in the garment industry. Chapter ten analyzes the tea industry focusing on its industrial organization and the strategic options for the Vietnamese tea processors in the global value chain. The research cooperation between the four universities, which took place over a five-year period ending in 2009, was supported by a grant from the development research funds of the Danish Ministry of Foreign Affairs. The publication of the book was kindly supported by a grant from the EAC Foundation (ØK’s Almennyttige Fond) in Copenhagen. Copenhagen, October 2009 Henrik Schaumburg-Müller

References Mathews, John A. (2002). Dragon Multinational: A New Model for Global Growth. New York: Oxford University Press. Vogel, E. (1991). The Four Little Dragons: The Spread of Industrialization in East Asia. Cambridge, Mass.: Harvard University Press.

11

The Dynamics of Firm Internationalization in Vietnam

CHAPTER 1

The Dynamics of Firm Internationalization in Vietnam Henrik Schaumburg-Müller

Introduction Vietnam has, in recent years, been one of the most successful countries at integrating into the global economy. Since the country effectively opened its economy in the early 1990s, it has experienced continued high economic growth and significantly reduced poverty. Except for China, it is hard to think of another country that has been similarly successful in economic development and integration in the global economy. There have been other examples of successful outward industrialization, particularly in East and Southeast Asia, with China being a more recent example. The question remains whether there is still space for more emerging economies to become successful global competitors. Have the competitive entry barriers become so high that it would be hard for another latecomer to compete in the global economy? One possible answer is, of course, that if firms from the early industrializing developing countries—including China—are able to produce more cheaply and with higher quality than other firms around the world, the theory of comparative advantage still holds, making room for new players. China will indeed rely on comparative advantages and demand import of goods and services even if it can produce them cheaper and better than others. However, while one perspective is to consider comparative advantages, another aspect of this discussion is how to improve national policies and firms’ strategies in order to internationalize and compete successfully. Many other countries have opened their economies, and firms strive to compete internationally without much success in the long run. Have Vietnam and its firms just copied policies and strategies from other successful open economies? This leads to the following questions: What are the factors that have led Vietnam to successfully integrate into the global economy? What kind of internationalization strategies have the firms pursued, and are their strategies sustainable?

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The New Asian Dragon

The analysis and discussion in this chapter is based on an investigation that is mainly empirical in nature, utilizing secondary data and information. The quantitative data are mainly sourced from official Vietnamese and international organizations. In addition to the secondary data, this research also relies on interviews and visits to enterprises in Vietnam made over the past six years. The literature on the strategies that latecomers use to catch up frames and guides the analysis and discussion. The main latecomer studies have primarily been used to analyze the strategies of countries in Asia—countries that are now both Vietnam’s partners and competitors (Hobday 1995; Mathews 2002, 2006; Altenburg 2007). The following section discusses the principal policies that opened up the Vietnamese economy. Following this, the development of the two main drivers in Vietnam’s internationalization process—international trade and foreign direct investments—is explored. The next section presents and analyzes the internationalization strategies followed by local firms and foreign firms entering into Vietnam. This leads to the section where the sustainability of the pursued latecomer strategies are discussed before the chapter closes with a concluding section.

Opening the economy Vietnam is a latecomer industrializing economy. After the end of Vietnam’s war with the United States, and the unification of the country in 1976, it remained within the communist bloc, keeping close economic relations to the Soviet Union and the countries of Eastern Europe, while remaining relatively closed from the rest of the world. When the economic situation deteriorated in the beginning of the 1980s, evidenced by low economic growth, high inflation, and almost no currency reserves, the communist government was forced to change its planned economy model. The principal economic reforms (the Doi Moi) introduced in 1986 allowed private ownership of productive enterprises and allowed farmers and entrepreneurs to sell without price control to the market (van Arkadie and Mallon 2003). This resulted in the quick growth of production, particularly seen in a steep rise in agricultural production and exports. At the same time, a more efficient exploitation of the country’s offshore oil resources resulted in a further increase in foreign currency revenue to cover the demand for imports. However, the reform process was, and continues to be, gradual. At the time of the introduction of the Doi Moi, challenges for institutional change were numerous. With the communist party still firmly in control, there was by no means any intention of experimenting with a radical “shock therapy”. On the contrary, the initial reforms resulted effectively in continued import substitution and protection of the state-owned enterprises (SOEs) through the implementation of both quantitative import restrictions and tariff measures. The large SOEs were

14

The Dynamics of Firm Internationalization in Vietnam

highly ineffective, with redundant technology and equipment, and a management structure that made them unable to compete in an open economy. Although the domestic market was protected, the level of imports continued to increase because of the demands for inputs and machinery from the protected enterprises. The balance of the current account deteriorated further at the time, and it became evident that the state sector, including the SOEs, would not be able to absorb the fast growing number of young people entering into the labor force. The communist government was, therefore, pressed to continue the reforms and open up the economy even more for the private sector to develop. Through the 1990s, the macroeconomic management also changed from direct policy interventions and restrictions to more indirect instruments to manage an open market economy (Kokko et al. 2007). The laws that gave the legal basis for different forms of private enterprise ownership were made in 1990, but it was not until the middle of the 1990s that additional new policies were introduced, which effectively started to open the economy. In 1989, the first law on foreign investment was introduced. It was changed and amended over the following years, gradually giving foreign firms access to more industries and more freedom to choose their entry mode (van Arkadie and Mallon 2003). Although it did not constitute the final stage of the development of appropriate institutions, this wave of reforms provided both domestic and foreign enterprises with sufficient incentives to invest and engage in foreign trade. As already indicated, the reform process to open the economy has continued in gradual steps. This process has involved establishing market institutions where is has been important 1) to create a level playing field for the different types of companies in Vietnam (SOEs, private domestic enterprises, and foreign-owned enterprises)1, and 2) to relax the restrictions made on foreign direct investors. With respect to liberalizing foreign trade, the first important step was to allow private firms to trade directly rather than through state-controlled organizations. Secondly, free access to foreign currency markets was secured. Thirdly, Vietnam gradually entered into international trade agreements that opened the economy to foreign markets and competition in its home market. Vietnam joined the ASEAN Free Trade Area (AFTA), the free trade agreement of the Association of Southeast Asian Nations (ASEAN), in 1995. By the end of 2000, it had also signed a bilateral trade agreement with the United States, which effectively opened the American market, where Vietnamese exporters had earlier been restricted by high export barriers. Finally, after long negotiations, Vietnam acceded to the World Trade Organization (WTO) in 2007. There is no doubt that export has been the key driver in the country’s interna1 In this category, official Vietnamese statistics normally include all firms with full and joint foreign ownership.

15

The New Asian Dragon

tionalization process. Through export to international markets local private firms have been able to establish themselves and gain international competitiveness. They have not yet gone beyond the export internationalization stage and started, to any large extent, to invest abroad in sales and production activities. On the contrary, firms in the main export industries have been embedded as suppliers in global value chains (GVCs), where foreign lead firms control linkages and relations in the chain. Furthermore, Vietnam has been so successful at attracting foreign direct investment that firms with foreign ownership today are the largest exporters. Foreign firms, both as lead firms in GVCs, and as direct investors in export industries have no doubt contributed significantly to the development of the country’s export competitiveness, but they have also grown large and dominant in import-substitution industries, like the automotive industry, assembling imported parts and components. We need therefore to understand why Vietnam has developed to be such an attractive location for foreign investors.

Vietnam’s foreign trade performance Over a twenty year period, from 1986 to 2006, Vietnam’s foreign trade grew rapidly with merchandise exports alone increasing more than fifty times from 789 million USD in 1986 to 39,605 million USD in 2006. Total exports and imports together grew from 5,156.4 million USD to 84,717.3 million USD between 1990 and 2006.2 The liberalization of the foreign trade and currency regime, which reduced both import and export taxes and duties since the late 1980s, led to annual high growth rates for both exports and imports, resulting in double digit figures in most years (van Arkadie and Mallon 2003, 181). Vietnam 35000 30000 25000 20000 15000 10000 5000 0 1997

Scale: Millions

1999

2001

2003

2005

Goods exports (BoP, current US$) Goods imports (BoP, current US$)

Source: World Bank (2008)

Figure 1.1. Goods exports and goods imports, Vietnam, 1996-2005, mill. USD 2

16

See World Bank (2008)

The Dynamics of Firm Internationalization in Vietnam

Export growth was particularly high in the first half of the 1990s, but then plummeted to zero in 1997 and four percent in 1998, when the Asian financial crisis hit the region. However, compared to other Asian economies, such as China, Thailand, and Malaysia, which experienced negative growth in exports for a short period, Vietnam performed relatively well and got through the crisis without severe blows to the economy, partly because of its relatively diverse export base (Arkadie and Mallon, 2003). After the crisis, Vietnam picked up the pace and experienced a return to high growth rate in exports. Right after the economic reform process started, the export of agricultural products (rice and coffee in particular) took off as farmers reacted positively to the new opportunities. Over the years Vietnam has become the third largest rice exporter in the world, after the United States and Thailand, and the second largest coffee producer. Rice production made a particularly significant contribution to the rapid growth in exports (van Arkadie and Mallon 2003, 184–185). Over the following years the product composition of the export trade has, however, shifted drastically from agricultural products, whose level of export is still increasing, towards an increasing share of light industrial and handicraft goods, and crude oil (the main item in the heavy industrial products and minerals trade category). From 1995 to 2007, light industrial and handicraft goods increased their share from twenty-eight percent to more than forty-five percent of total merchandise exports (see table 1.1). The export activity in this category is concentrated on very few items: garments and textiles, footwear, and furniture; however, the figures also include a growing element of non-traditional exports, such as electronic goods, which have grown quickly, amounting to 2.75 billion USD in 2007.3 The increase in crude oil export values includes a significant price rise element. 1995

2000

2005

Prel. 2007

Heavy industrial products and minerals

1378

  5382

11701

16000

Light industrial and handicrafts goods

1550

  4903

13293

21598

Agricultural and forest products

1900

  2719

  4719

  7200

Aquatic products

  621

  1479

  2733

  3763

Total

5449

14483

32447

  48561

(Figures in millions USD) Source: GSO www.gso.gov.vn (2009)

Table 1.1. Export of goods by commodity group 3 See http://www.shtp.hochiminhcity.gov.vn/webshtp/news/content.aspx?cat_id=512

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The New Asian Dragon

The relative size of the different export market destinations has also undergone radical shifts as shown in table 1.2, which includes the main export markets. 1995

2000

2005

Prel. 2007

United States

170

733

5924

10089

Japan

1461

2575

4340

6070

China

362

1536

3228

3357

Singapore

690

886

1917

2202

Germany

218

730

1086

1855

Malaysia

111

414

1028

1390

United Kingdom

75

479

1016

1431

Taiwan

439

757

935

1139

Others

1924

6372

12973

21028

Total

5449

14483

32447

48561

(Figures in millions USD) Source: GSO www.gso.gov.vn (2009)

Table 1.2. Export by main country and territory Most of Vietnam’s exports continue to go to countries within the East and Southeast Asian region. Just after the Doi Moi, Japan became the largest market for Vietnam’s exports. Though exports to Japan have continued to grow, other Asian markets have increased more. In the mid-1990s, Singapore was the second largest market for Vietnamese exports in Asia; however, around 2000, Singapore’s position was taken over by China. More recently, exports to China have grown significantly, especially since the creation of the ASEAN-China free trade agreement in 2002. When considering exports to other East Asian countries (e.g., Hong Kong, Taiwan, and Singapore) one should be careful about seeing them as final consumer markets because the goods can be re-exported to other destinations. This is the case with the triangular trade configuration of garment exports, where the first tier suppliers located in these countries forward the goods to buyers in end consumer countries in Europe and North America. The most radical shift has been the increased share of exports going to the American market after the signing of the bilateral trade agreement between the United States and Vietnam. This became a turning point for the light manufacturing industries, which were able to take advantage of lowered trade barriers to the huge American consumer market. From constituting around three percent of the exports in 1995, the United States received more than twenty percent of the

18

The Dynamics of Firm Internationalization in Vietnam

merchandise export in 2007. In Europe, Germany has been the largest market for Vietnamese exports, but Europe’s share of direct export is rather limited and again concentrated on a few export items: garments and furniture. Australia is another market to which exports have been increasing. Imports to Vietnam have developed with almost the same pace as exports. The deficit for the merchandise trade has been relatively small and stable; however, the composition of the imported goods reveals the shallowness of the industrialization process in Vietnam. Most of the equipment and machinery used in the export industries are imported, except for simple agricultural processing machinery. The dependence on technology import in the form of finished capital goods installed and started up by the seller abroad provides only limited spillovers and opportunities for starting up domestic machinery production. For the import substitution automotive, electronic, and electrical goods industries most of the components are also imported. Export industries, such as the garment, furniture, and assembly industries, are similarly dependent on imported input materials.

The inward foreign direct investment The other main driver in the internationalization process has been the inward foreign direct investment (FDI) flows. The development of the two drivers is closely interdependent. In addition to constituting a major share of the origin of export growth seen in the SOEs and among domestic private entrepreneurs, foreign firms form a significant and increasing contribution to the country’s economic growth and export, as well (van Arkadie and Mallon 2003). Foreign firms have frequently offshored production to suppliers in Vietnam’s export industries without equity investments, but organized within GVCs under different forms of governance. Most of the light manufacturing for export production is organized as sourcing relations in GVCs, but there are no consolidated figures on the nonequity inter-firm GVC linkages or export flows. Detailed data are available for the developments in the FDI inflow.4 Figure 1.2 uses the disbursed inflow for FDIs from the World Bank’s World Development Indicators (WDI), which are updated based on figures received from the Ministry of Investment and Planning in Hanoi. Much of the public debate in Vietnam uses figures on registered foreign capital committed in licensed FDI projects, which in almost all years are much higher than the actual disbursed investment amounts. 4 Figures on inward FDI to Vietnam are published by several national and international organisations and the figures differ significantly. Nestor (2007) is a source that thoroughly explains these differences and compares the figures for the period 1988 to 2000.

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The New Asian Dragon Vietnam

2500 2000 1500 1000 500 0 1991 Scale: Millions

1996

2001

2006

Foreign direct investment, net inflows (BoP, currents US$)

Source: World Bank (2008)

Figure 1.2. FDI, net inflows, mill. USD As figure 1.2 shows, FDI inflow to Vietnam, like the country’s exports (as described above), increased significantly in the first half of the 1990s, after the trade liberalizations and new investment laws. FDI inflow then declined sharply as a result of the Asian financial crisis towards the end of the 1990s. Vietnam was not the only economy that suffered in East Asia, in terms of lower FDI inflow: investments in Thailand and Malaysia fell significantly, as well as in other Asian economies (van Arkadie and Mallon 2003). However, since approximately 2000, after the crisis blew over, Vietnam has come out “on top,” reaching a level of FDI inflow above that of Thailand and Malaysia. According to WDI figures, Vietnam has, since 1990, received more FDI inflow as a percentage of GDP than neighboring open economies like Malaysia and Thailand. As can be seen from table 1.3, the industrial sector is the largest for Vietnamese inward FDI, with the majority of investments originating from countries in the Southeast and East Asian regions. More specifically, manufacturing counts for the largest part of FDI investment projects licensed from 1988 to 2007, with 6,323 projects out of a total of 9,810, followed by the real estate sector, with 1,341 projects. Other service sectors (e.g., hotels and restaurants and transport) follow.5 The overall contribution of the foreign invested sector to what General Statistics Office (GSO) calls “investment into material assets” in the economy is twenty-five percent for 2007. The state contributed around forty percent, with the non-state domestic sector providing the remaining thirty-five percent (GSO 2009). These figures have varied considerably from year to year, but the share of the foreign invested sector has tended to fall while that of the non-state (domestic private) has grown. 5 Overall number of licensed projects, but these numbers also vary and need not all be active in 2007; see Nestor 2007:148-172.

20

The Dynamics of Firm Internationalization in Vietnam

Registered capitala    

Of which: Charter capital Number of projects

Of which

Total Total

Foreign Vietnamese side side

Total

9810

99596.2

43129.0

36413.7

6715.3

Agriculture and forestry

  518

  3397.5

  1512.2

  1322.4

  189.8

Fishery

  156

   515.1

   249.3

   188.4

   60.9

Mining and quarrying

  119

  3742.8

  2892.3

  2525.9

  366.4

Manufacturing

6323

52345.4

21328.6

18598.4

2730.2

Electricity, gas, and water supply

   30

  1937.7

   612.3

  594.6

   17.7

Construction

  254

  6808.0

  2171.3

1600.9

  570.4

Wholesale and retail trade; Repair of motor vehicles, motor cycles, and personal and household goods

  108

   641.9

   292.2

   192.9

   99.3

Hotels and restaurants

  291

  7620.6

  3144.9

  2474.0

  670.9

Transport; storage and communications

  272

  5072.3

  3788.4

  2918.7

  869.7

Financial intermediation

   65

  862.7

   791.1

   730.6

   60.5

Real estate, renting business activities

1341

14191.8

  5252.3

  4391.9

  860.4

Education and training

  101

   146.8

    72.7

    60.3

   12.4

Health and social work

   54

   591.4

   224.8

   188.5

   36.3

Recreational, cultural and sporting activities

  112

  1683.5

   769.4

   603.1

  166.3

Community, social, and personal service activities

  66

    38.7

    27.2

    23.1

   4.1

(Figures in millions USD) Source: GSO www.gso.gov.vn (2009) a Including supplementary capital to lincesed projects in previous years.

Table 1.3. Foreign direct investment projects licensed from 1988 to 2007, by kind of economic activity

The inflow of FDI is dominated by investors from Asia. As of 2007, the four largest Asian investors (in descending order: Taiwan, South Korea, Japan, and Singapore) had 5,492 projects out of the total of 9,810. These countries also have a comparable share of the registered capital. Only investments from the tax haven

21

The New Asian Dragon

of the British Virgin Islands reaches the same amount as Japan. Other neighboring countries like Hong Kong, Thailand, Malaysia, and now also China, have a substantial number of FDI projects at the same level as the main investors from Europe: France, the United Kingdom, and Germany. The American FDIs are at the same level, and as such are modest compared to the country’s very large share of exports from Vietnam.

Internationalization strategies of firms in Vietnam For a discussion of how firms in Vietnam have contributed to the internationalization of the economy, it is appropriate first to look at the operational characteristics and internationalization processes of the three different firm ownership categories in the economy: the SOEs, the private domestic enterprises, and firms in the foreign investment sector.

State-owned enterprises The SOEs still constitute a significant share of the Vietnamese economy. Some privatization has taken place in the form of what the Vietnamese call “equitization”, which means that the SOE is transformed into a shareholding company where the state often maintains a controlling number of shares. Still, out of Vietnam’s 200 largest companies, 122 are SOEs. They dominate the financial, public utility, logistics, and mineral and oil sectors, where only the companies in the mineral and oil sector are directly involved in exports (UNDP 2007). Many of the largest SOEs operating almost exclusively on the domestic market remain isolated from international competition. However, with more and more service sectors being opened to private investors, including foreign ones, the SOEs—particularly in the financial sector—will increasingly be exposed to international competition. Although they are not dominant to the same extent, there are also large SOEs in manufacturing industries, particularly in the heavy industries and the agroindustries, providing inputs and processing products. SOEs are also present in some of the light manufacturing export industries like textile and garments and seafood processing. When the SOEs started engaging in foreign trade, it was with other socialist countries and characterized by barter trade. Many SOEs are still not profitable, and some have had prolonged losses. However, during the late 1990s, the economic reforms meant that their losses were not any longer financed over the state budget, but had to be covered by the financial sector (Kokko et al. 2007). The largest ones are organized as horizontally and/or vertically integrated corporations (van Arkadie and Mallon 2003). Often they are characterized by having a bureaucratic (hierarchical) organisational structure and culture, with limited strategic flexibility to react to changes in the environment and to new

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The Dynamics of Firm Internationalization in Vietnam

business opportunities. Internally, they are also exposed to conflicting interests between the main stakeholders represented by the owners in the state hierarchy, the company management, and the employees (Deshpandé et al. 2004; Nguyen and Meyer 2004; van Arkedie and Mallon 2003). Most often SOEs became local joint-venture partners when the economy opened for FDI.

The private domestic enterprise sector This sector has only developed out of the informal and household sector after the Doi Moi, but it now accounts for more than ninety percent of registered enterprises. Being relatively new, the private sector is still dominated by small- or medium-sized enterprises (SMEs). Only twenty-two of Vietnam’s 200 largest firms are private domestic companies (UNDP 2007). The SME sector is large and heterogeneous, and often inadequately defined. In some cases it will include small household enterprises together with formal registered firms under various forms of ownership. However, the market orientation and growth opportunities appear significantly different depending on the size of the firm and its location (i.e., whether in an urban or rural area) (Kokko 2006). In other words, urban medium-sized private firms are internationalized to a much higher degree.

Foreign-owned enterprises The number of foreign-owned enterprises has grown steeply since the mid1990s. In 2005, fifty-six of them were among Vietnam’s largest 200 firms (UNDP 2007). Large foreign firms almost totally dominate the import substitution industries within agro-processing, electronic and electrical household goods and office equipment, machinery, motors and engines, and the automotive industries (UNDP 2007). These industries are almost entirely oriented towards the domestic market and many of the enterprises are assembly-based plants using imported components with limited linkages to domestic suppliers. However, foreign firms have also made direct investments in the export-oriented industries, not only within minerals and crude oil, but also in the light manufacturing export industries, especially within garments, footwear, furniture, and seafood processing. Many of these foreign subsidiaries are medium-sized companies, but there are also some very large ones like the wholly foreign-owned Pouyen Viet Nam footwear company, which employs over thirteen percent of the workers in the top 200 manufacturing companies in Vietnam (UNDP 2007). The owners of the FDI enterprises are from other Asian countries and it could be tempting to characterize their organizational culture as either hierarchical, because they are subsidiaries of multinational corporations, or as consensual in the same way as their Asian mother companies, but in the Vietnamese context they very much appear to have a competitive (market) organizational culture

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The New Asian Dragon

with a sharp focus on efficiency and competition, at least for those in the export industries (Deshpandé et al. 2004). The export contribution of the foreign-owned enterprises compared to the domestic economic sector (SOEs and private domestic enterprises) has developed from twenty-seven percent in 1995 to a stage where the foreign sector contributes more than half—nearly fifty-five percent—of the export production. Perhaps more surprisingly, the foreign enterprises also contributed around forty percent to the overall industrial output value in 2007, thereby rendering it the largest sector with the non-state domestic sector following at thirty-five percent and the industrial SOEs contributing around twenty-five percent. This represents a radical shift from just twelve years earlier, when the SOEs’ share was around half of the industrial output and the non-state domestic sector’s just a quarter (GSO www.gso.gov.vn (2009)). In addition to these differences between the three ownership groups, there are also important geographical and ethnic differences in the way in which the enterprises have internationalized. The export economy is concentrated primarily around Ho Chi Minh City and secondarily in the north along the Hanoi-Haiphong axis, with most of the remaining internationalized firms located in other harbor cities along the coast. The remaining and more interior areas have few exporting or foreign firms. In the domestic private sector, ethnic Chinese operate particularly in the south where Northern Vietnamese private businessmen also operate, often with closer relations to the public organizations than local private businesspeople from the south (Thomsen 2007). The main point is to be aware of the diversity of management and governance styles, linkages and organizational cultures that exist in Vietnam’s business sector.

Firm internationalization strategies When one combines information on export, direct foreign investment, and types of ownership, a rather complex matrix for analyzing the internationalization strategies of firms in Vietnam emerges. The focus here will only be on two interconnected aspects: firm export strategies and the strategies followed by foreign firms in Vietnam’s manufacturing industries. This is not to say that the internationalization of the mineral and oil industries, and the export of agricultural products are not important for the economy’s global integration. For minerals and oil, a few large SOEs have attempted to internationalize by entering into joint ventures with foreign companies in order to acquire capital, technology, and know-how for natural resource exploitation. An important example is the large Vietsovpetro joint-venture company established in 1981 by Zarubezhneft of Russia and PetroVietnam. Because of state regulations restricting investments into the sector, this company has dominated offshore crude oil production and export for a long time. Still, more foreign joint ventures are enter-

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The Dynamics of Firm Internationalization in Vietnam

ing the sector since Vietnam’s WTO commitments will eventually open it up. A number of agricultural products are important in Vietnam’s export such as rice, coffee, rubber, tea, and various spices. After Doi Moi, these products have mainly been grown by private farmers, but are often sold through state-owned trading companies at international markets. However, both in the coffee and tea industries, growers have been integrated into GVCs with large international lead firms governing the chains. The products have been at the low quality end for both tea and coffee with very limited opportunities for Vietnamese enterprises to establish their own brands or to develop a reputation for high quality, although there have been a few success cases of branding, particularly in the domestic market.

Export internationalization of light manufacturing domestic firms When the economy opened, it was the larger SOEs that started driving the export internationalization, often in joint-venture cooperation with foreign firms. Gradually, wholly-owned subsidiaries of MNCs and domestic private firms have taken over export shares from the SOEs. The large SOEs are also present in heavy and capital-intensive industries with limited potential for competing in international markets. In the shipbuilding industry, the large state-owned corporation Vinashin is an example of a heavy industrial firm that has struggled for a long time to get a position in the international shipyard market, where it faces tough competition from regional competitors (UNDP 2007). The private domestic sector in Vietnam is dominated by SMEs. Fairly little is known at the level of the firm about how they manage their ongoing internationalization processes. In 2002, a survey of about 1,400 SMEs, including household firms with fewer than one-hundred employees, found that these firms had very limited experience with international trade and that few of them were preparing actively for deeper internationalization (Kokko and Sjöholm 2006). Only three percent of the surveyed firms participated in export activities. An important explanation is that many of the firms surveyed are within industries like machinery, nonmetal manufacturing, and building materials, which are often small firms located in rural areas that do not have any comparative or competitive advantages to engage in export activities. The private domestic firms involved in exports are extremely concentrated in a few industries, located in urban areas, and the successful ones are fast growing out of the category of SMEs. While most of SOEs had prior sales experience in the domestic market and export to other planned economies, many of the private domestic export enterprises were born global and have not targeted the domestic market first. As was seen from the trade statistics, export internationalization is concentrated in the few light consumer goods industries: garments, footwear, furniture,

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The New Asian Dragon

and aqua-processing. The dominant internationalization strategy for these firms has been to integrate as sub-suppliers into GVCs. The organization and governance of the GVCs in these industries have been fairly well researched, but there are still relatively few Vietnamese studies at the level of the firm on the internationalization strategies of suppliers, perhaps with the exception of the garment goods industry (Knutsen 2004; MPDF 1999; Nadvi et al. 2004; SchaumburgMüller 2005; Thomsen 2007). Thomsen (2007) has shown how the barriers faced by private suppliers entering the Vietnamese garment export industry have been high, despite low technological requirements, because of the importance of relations to the state, which typically favors SOEs (2007). However, these barriers are likely to have diminished with the levelling of the playing field for all kind of enterprises and the opening of the markets beyond the capacities of the SOEs. The other important point is that the market expansion for garments has been concentrated on the American market, where the final buyers and lead firms are large brand and/ or retailer chain companies usually using a captive mode of governance for the GVC. The expansion of the industry has been in volume terms with limited upgrading possibilities. If there is one area where the suppliers in the export industries seem to have a strategic scope, it is the relation to marketing: being in a position to choose between several buyers and promoting their companies internationally at international fairs and on Web sites (Schaumburg-Müller 2009).

Investment strategies of foreign companies The entry strategies of foreign multinationals entering Vietnam can be analyzed by looking at their location motives, entry modes, and timing. Location Motives The overwhelming motive for foreign companies to locate activities in Vietnam has been its abundant cheap labor resources, which are not only cheap, but also relatively productive with primary education and often used to salaried employment in the long production and assembly lines in the manufacturing industries. The workforce is, however, not particularly technically skilled and the vocational training in the country is poorly developed (Nguyen et al. 2004). There is a generation of technical managers, mainly employed in the SOEs, who received training in the Soviet and East European countries before the dissolution of the Soviet Union in the late 1980s. The low-cost and low-skilled labor has attracted foreign companies in the light industrial export industries within garments, footwear, and furniture. Besides these traditional industries, foreign investors have more recently located more technologically advanced projects, like electronic assembling plants pro-

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The Dynamics of Firm Internationalization in Vietnam

ducing for export, in Vietnam. Similarly, foreign IT firms have set up subsidiaries in the country. These service firms, although producing routine IT services, also require more skilled labor and trained IT engineers. It is difficult to find consolidated information on the FDI operations within the electronic and IT industries apart from what is reported in the news media on individual projects. The FDI projects are often located in newly established hi-tech parks where national and local governments provide the needed infrastructure, such as in the Saigon HiTech Park.6 Besides resource investments, foreign markets have also found a location motive as a result of changing Vietnamese trade policies. In 1990, the potential market for manufactured goods was not that big, considering that country’s population consisted of nearly eighty million relatively poor people. However, the market was protected with high import barriers for consumer goods. It was, therefore, attractive to invest in assembly plants in industries where the demand was likely to rise quickly with economic development, such as the automotive industries (motorbikes and cars) and electrical and electronic goods (household and office machinery, audio electronics, and TVs). The structure of the import barriers created a large incentive for import substitution industrialization. Foreign firms invested in consumer goods industries where there was almost no competition from domestic firms, and where the production depended on import of machinery and components for the assembly production. Foreign investors have also been attracted by the political stability in the country despite its communist regime, because of its steady progress with market economy institutional reforms, and its high and constant economic growth rates (Nguyen and Nguyen 2007). In addition, some foreign investors strategically decided not to place too much of their investments in China, seeing Vietnam as an appropriate complementary location. Within Vietnam there has been a high concentration of the FDI projects located in a handful of provinces in Vietnam. Ho Chi Minh City and the neighboring provinces of Binh Duong and Dong Nai have received, by far, the largest share of the FDI projects. Most of the remaining projects are located around Hanoi and a few other coastal port cities (Nestor 2007). More rurally dominated provinces have received very few FDI projects. Reasons for these concentrations include access to infrastructure facilities and land availability (Meyer and Nguyen 2005). Entry mode The entry mode strategies of foreign firms have overwhelmingly been influenced

6 http://www.shtp.hochiminhcity.gov.vn/webshtp/news/content.aspx?cat_id=512

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The New Asian Dragon

by the institutional regime established to regulate the access of foreign investors. Most importantly, the regulations have made restrictions and limits with respect to the choice of sector in which foreigners could invest and on the maximum share of foreign ownership. Other important legal regulations have been restrictions on acquisitions and the procedures for granting investment licenses and land use rights, and regulations on recruitment, salaries, and taxation (Nguyen et al. 2004; van Arkadie and Mallon 2003). Many of these institutional restrictions and impediments have gradually been relaxed or have disappeared in the process of liberalizing the conditions for foreign investors and establishing a level playing field for all types of enterprise ownership. By 2008, only a few sectors continued to have restrictions for foreign investors. The local restrictions and uncertainties combined with the forces of economic globalization, which made cross border transactions much easier, have no doubt led potential foreign investors in the export sector to prefer non-equity based business relationships with domestic partners, thereby contributing to the development of GVCs governed in a non-hierarchical mode. From a transaction cost perspective, the risks and lack of information involved in investing in a subsidiary tend to outweigh the costs of outsourcing to a local supplier. With the institutional entry barriers set up when the FDI inflow started, many foreign investors preferred the joint ventures almost exclusively with SOEs. It was, however, not only the formal institutional restriction that motivated foreign investors to choose joint ventures as their entry mode, but also the uncertainties with respect to the business and political environment in Vietnam, and the risks involved were important reasons for foreign investors to seek a local partner. Local partners were also assumed to have knowledge about the local market, business practices, and networks. For all projects, access to land and land use rights motivated investors to join with SOEs, which, with their relations to the government system, could provide these resources (Meyer and Nguyen 2005). When the entry regulations were relaxed, the foreign investors turned rather quickly away from the joint-venture entry mode. Not only did new foreign investors prefer wholly-owned subsidiaries, but a large number of existing FDI projects were converted from joint ventures to wholly-owned subsidiaries when the foreign partners bought out the local partner (Nhuong et al. 2009). In 2006, seventy-four percent of the FDI projects were wholly-owned subsidiaries compared to six percent in 1990. Still, there are few FDIs that start as acquisitions and takeovers. Most new projects are greenfield investments. The main reasons for foreign investors to prefer the wholly-owned entry mode are: • Foreign firms operating in the light export industries prefer full control over their operations. This was not only a preference in relation to the joint-

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The Dynamics of Firm Internationalization in Vietnam

venture form but also when operating in GVC with non-equity forms of governance. When timeliness, quality, and flexibility prevailed, investors preferred wholly-owned subsidiaries. This was the case, for example, in the garment industry where investors, particularly from Asia, established fully-owned greenfield projects, which could easily fit into and be solely within their triangular production configurations serving the American market (in particular). • Vietnam does not continue to be an unknown and risky location for new foreign investors: experience and knowledge is available and institutional uncertainties have been reduced. Therefore, new investors have become less motivated to prefer the joint-venture mode where the investment contribution from the local partner to reduce financial risks was in most cases very limited. • The experience of foreign investors with joint-venture operations was not always successful. As in many other countries, partner strategies in the joint ventures often diverged, and differences in managerial practices were cumbersome if not directly risky, and counterproductive for the joint-venture’s survival. Timing When foreign investments were allowed, global producers in certain industries rushed in to grab the new opportunities for selling consumer goods and equipment on the domestic market. This was particularly the case in the automotive industry, where international manufacturers who gained first mover advantage within a short number of years received licenses to establish fourteen car assembly plants. Including sales taxes, cars were far too expensive for consumers in Vietnam resulting in a huge overcapacity in the sector. There was a similar rush of foreign investors into the motorbike industry, but here the local demand was increasing and able to absorb the production from the industry’s fast growing capacity. Foreign investors quick to establish themselves gained first mover advantage on the local market in other import substitution sectors as well, but again some companies, such as Canon, invested in larger plants than the future development in domestic demand justified. Until recently, very few of these import substitution investments had developed into export platforms. The car assembly plants catered only for the domestic market and produced models, which were no longer even on the regional market (Schaumburg-Müller 2003). Neighboring countries like Thailand and Malaysia had their own assembly plants and models produced by the same automobile companies. Only recently has the large Canon factory outside Hanoi been assigned to produce specific components for Canon’s regional production network. After the slowdown in the FDI inflow caused by the Asian financial crisis,

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The New Asian Dragon

the revival of the foreign investments came when the bilateral trade agreement with the United States was signed at the end of 2000. This time a new wave of export-oriented investors, particularly from the Asian region, rushed in to take advantage of the new opportunities for exporting to the American market.

The sustainability of Vietnam’s latecomer internationalization strategy Vietnam has without a doubt become integrated in the global economy and experienced a relatively long period of export driven economic growth, while at the same time reducing poverty significantly. But is the growth and, thereby, the development strategy sustainable? A strong argument for a positive answer is that the trend and the development of the main indicators have been robust over a long period of time, and the economy recovered quickly after the Asian financial crisis. This progress has been steady and gradual, characterized by expansion in exports and inward FDI flows. The high export growth rates reveal a sustained competitiveness in the light manufacturing sectors. New companies are entering and will maintain a competitive drive in the key exporting sectors. The demands from lead firms in the GVC, and the competition from new entrants maintain a pressure on product and process upgrading in the export firms.

Strategic shortcomings The strategy also has its obvious limitations and shortcomings. The expansion has almost entirely been a growth in volumes of the same kind of export products, and is confined to a very limited number of light consumer goods industries. Export is driven by the same small number of light manufacturing industries with few signs of functional upgrading and technological shifts. In the value chains there are only a few signs that enterprises are slowly advancing into creating their own designs or their own brand manufacturing. The underlying industrial structure is concentrated within a few sectors and the production capacity in the equipment and machinery industry remains weak. The higher technology electronic goods industry and the IT service industry are dominated by foreign companies, where the electronics plants are only doing the assembly tasks. When we compare these patterns with the processes described in the literature for latecomer industrialization, how far has Vietnam come toward achieving sustainable internationalization and adopting successful catch-up strategies? There is hardly sufficient research at the level of the firm to answer the question comprehensively, but there are sufficient indications that make a discussion of the issues meaningful.

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The Dynamics of Firm Internationalization in Vietnam

Latecomer catch-up strategies The literature on the catch-up possibilities of firms and countries focuses mainly on firms’ strategies in latecomer industrializing counties in Asia, such as South Korea, Taiwan, and Hong Kong (Hobday 1995; Lauridsen 2008; Mathews 2006), and also on other second generation industrializing countries in Asia, like Thailand, Malaysia, and Indonesia (Hobday 2001; Lauridsen 2008). More recently, attention has also been paid to the internationalization strategies firms use and capacity building in other countries like the large BRIC counties in Asia: China and India (Zeng and Williamson 2007; Altenburg et al. 2006). At the country, as well as at the level of the firm, Mathews advocates strategies that can exploit the latecomer’s advantages and thereby overcome the disadvantages of being late in global competition. The latecomer has the advantage of having a “roadmap” on how to develop with access to a world of knowledge and being able to see which products and technologies need to be mastered (Mathews 2006). The strategic task the latecomer faces in order to catch up is to get access to the knowledge and technology controlled by the advanced firms in the more developed countries. By technology, we are not confined to the narrow definition related to only machinery and production equipment, and the results of intensive research and development investments. Rather, technology is a concept encompassing a more complex bundle of knowledge, including knowledge of production operations, procedures, organizational arrangements, product specification and design, materials, product quality, and even market knowledge (Bell and Albu 1999). The question is how to enable the firms to get access to this knowledge and resources? The latecomer firm is often small and resource poor, and is not able internally to develop the needed resources, but can instead leverage knowledge and technology externally through linkages formed in various ways through supplier relations, alliances, and joint ventures. To get access to the needed resources, the latecomer firm has to be able to offer something in return to leverage the technology and know-how. Furthermore, these capabilities cannot be bought but must be built. The latecomer firm has to be able to learn, adapt, and use the needed technology and know-how in order to develop the capabilities needed for being competitive, and in order to sustain it when the competitive environment changes to develop its own dynamic capabilities (Teece et al. 1997). The institutional environment also plays an important role for shaping the linkage, leverage, and learning processes that shape the new capabilities. The complexity of the technology and the extent to which it depends on tacit knowledge is, however, not only dependent on the industry but also on the specific value-added activity. The requirements needed for the latecomer firm to get through the linkage, leverage, and learning processes to adapt new capabilities

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The New Asian Dragon

are therefore highly dependent on the specific industry and range of value-added activities in which it operates.

Positioning Vietnam’s firms as latecomers Firms in Vietnam can be seen as favorably positioned for linking up to external partners with the needed resources to develop their capabilities. In the manufacturing export industries they have easy access to GVCs and are linked to foreign partners with technology and know-how resources that suppliers in Vietnam do not possess. Furthermore, the huge inflow of FDI, combined with the large number of foreign firms present in the economy, provide the potential for establishing linkages for domestic latecomer firms. While Vietnam’s strategy as a latecomer industrializing country—pursuing a combined import substitution and export-oriented strategy—is similar to many other countries in the region, Vietnam’s foundation for such a strategy is different from those of other East Asian market economies like South Korea, Taiwan, Hong Kong, and Singapore, which had a base of either small (Taiwan) or large (South Korea) private companies that governments could, in different ways, support. In these countries, there was a capacity both in the private companies and in the government to enter into the competitive dynamics of the global economy. The situation was somewhat different in Vietnam’s planned economy. Technical experts trained in other socialist countries could have been available, but the drive in the state enterprises to change and innovate was limited, not least because the higher education sector in Vietnam was and continues to be weak. Basically, the direct and indirect import of technology was limited; therefore, the possibility to catching-up by importing, copying, learning, and developing new technology has not been as much of an option as it was in Taiwan and South Korea (Hobday 1999). The second generation of newly industrializing economies in Asia (i.e., Thailand and Malaysia) also gained strength from an existing structure of private companies, including larger ones combined with foreign-owned companies, to initiate their export industrialization strategies. China’s example may be more relevant for understanding the way Vietnam’s strategy has developed, because the two countries share the challenge of creating new market institutions. The magnitude of human and material resources available in China, and the breath and vertical integration of its industrial structure, are, however, quite different from Vietnam’s much more meagre resources and shallow industrial structure, with a limited capital goods industry. Furthermore, structural barriers are hampering the ability of linkage-leverage processes to evolve, particularly in the technologically more advanced sectors. The industrialization in Vietnam has so far been shallow, with limited vertical linkages. Both the export and import-substitution industries are heavily dependent on imports. They are not only dependent on imported equipment and ma-

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The Dynamics of Firm Internationalization in Vietnam

chinery but also on imported inputs including raw materials, components, and accessories. The textile-garment industry is a typical example. Textile production is not able to satisfy demand from the fast growing garment industry, which therefore depends heavily on imported materials (Thoburn et al. 2005). Not only the vertical, but also the horizontal linkages, are weakly developed in the private business sector. As already mentioned, the dominant export manufacturing industries have been embedded in GVCs. Local producers are thereby linked to foreign firms with superior technology (in the broad sense). The Vietnamese suppliers have been able to both leverage and learn from their partners in the chain; however, there are a number of problems that limit the linkage, leverage, and learning process: 1. The linkages are mainly confined to manufacturing industries with simple technology; therefore, the manufacturing capabilities are rather simple and easy to transfer. The companies in the up-and-coming electronics industry are confined to assembly production based on imported components. These companies are often wholly-owned foreign subsidiaries, and the Vietnamese owned firms do not gain unique manufacturing capabilities they can use as a competitive advantage. 2. The upgrading arising from the chain linkages has primarily been confined to product and process upgrading, while functional upgrading— including higher value activities such as R&D and design—have been limited. The lead firms maintain these activities. 3. In some industries, the foreign firms from the Asian region have increasingly been offshoring the production to their own subsidiaries in Vietnam, thereby reducing the direct linkages to domestic enterprises. The transformation of foreign joint ventures into wholly-owned subsidiaries, where the foreign multinational has bought out the domestic partner or sometimes acquired the partner firm, has particularly squeezed out SOEs from having close linkages with foreign multinationals. The parts and components are imported, sourced through the multinational’s existing network of efficient suppliers in the other Asian countries (Ca and Anh 1998; VDF 2007). With the commitments Vietnam has made in its trade agreements there is little room now to force the subsidiaries of multinationals to source local components, and the Vietnamese firms are also technologically inefficient. They do not operate at an optimal scale to be competitive suppliers (Nguyen and Giang 2007). 4. The possibilities of combining collective efficiency gains from cluster formations have also been limited. Some agglomerations of producers have existed, though these have usually clustered around traditional household

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The New Asian Dragon

craft industries within, for example, ceramics, furniture, handicrafts, and silk weaving. They have rarely been transformed into a more advanced industrialized stage of formal SMEs. When there are clusters of a more mature nature, as in the case of the furniture cluster in Qui Nhon, the collective efficiency impact appears limited and mainly confined to attract buyers and sharing a labor pool, while horizontal linkages and joint action appear to be rare. The possibilities for the import substitution industries to develop export production have so far also been limited because the foreign multinationals have rarely invested in Vietnam in order to develop a global or regional export platform. The investments Canon have made in Vietnam can, however, be seen as a case in this direction of forming an export platform for the corporation, but in the car industry the assembly plants do not even produce models that have a market outside Vietnam (Schaumburg-Müller 2003). When the import-substitution industries do not develop linkages and spillovers, and do not enter into exports, they become a burden to the economy (Moran and Graham 2005). The picture that has been drawn above may appear somewhat bleak and static with respect to the domestic firms’ possibilities to engage in a catch-up strategy. There are certainly also signs in a more positive direction pointing at dynamic tendencies in the business sector. The turnover of firms is a strong indication that some are closing and other, more efficient ones are starting. A recent study on firm turnover indicates that companies exiting one industry and entering another are more efficient than newcomers to the industry (Newman et al. 2007). Together with the fact that a large number of new domestic investors start companies each year, a very vibrant climate of entrepreneurship and risk taking in the Vietnamese business community have begun to emerge, which could offset some of the structural disadvantages. Likewise, although local suppliers have been embedded in GVCs, their ability to diversify their customer portfolios and marketing efforts also testifies to vibrant entrepreneurial potential.

Conclusions This chapter sets out to describe the fast growing internationalization of the Vietnamese economy and to identify export internationalization and inward FDI as key drivers of the integration into the global economy. Furthermore, the question was asked if the present internationalization could lead to a catch-up strategy for the economy and Vietnamese firms. The internationalization drive has continued over a relative long period of time and resulted in overall high and stable income growth, and a significant reduction of poverty. The economy has become highly integrated in the regional Asian economy. Radical restructuring reforms have taken place and basic institutions have been established to shape the way for a

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The Dynamics of Firm Internationalization in Vietnam

market economy. In the process, a private domestic business sector has emerged from almost nothing to form a substantial and dynamic part of the economy. These results are becoming manifest yet it is, however, doubtful if the economy is yet on the track to a sustainable and dynamic catch-up strategy. Much of the development has involved volume expansion within low-technology export sectors and protected assembly types of import-substitution industries. The latecomer advantages exploiting a linkage, leverage, and learning strategy to develop new capabilities within the present growth industries are limited. The fast growing sector of foreign-owned enterprises has not yet made technologically advanced linkages or spillovers that can pave the way for creating dynamic capabilities in the domestic firms. A number of economy-wide factors also hamper further developments of the business sector and its location attraction: infrastructure investments are lagging, and there are large problems with corruption, low performance in vocational training, higher education, and domestic research and innovation. To balance these disadvantages, the entrepreneurial drive found in the country may be the most important asset for its further development. The number of new private enterprises established has been very high. It has been proved that companies closing in one industry start in new ones, thereby increasing efficiency. Entrepreneurs are not restraining from moving into new ventures. Likewise, entrepreneurs embedded in GVCs are not locked into serving a single or a few customers. They have demonstrated that they can develop their skills to operate in different market channels, promote their companies, and find new customers. While, from the theoretical perspective gained from the literature on latecomers, Vietnamese firms cannot be said to follow in the footsteps of catch-up firms in Taiwan and South Korea, Vietnam’s internationalization path still remains similar to that of China, Thailand and Malaysia, albeit with differences owing to discrepant processes in these countries with respect to preconditions and the size of their resource endowments. The initial linkage part of the linkage, leveraging, and learning process is also difficult, while conditions favoring a volume expansion in Vietnam have caused the high export and income growth rates to continue without pressure to change the strategy. It may, however, be just a question of time before the entrepreneurial drive in the country starts the needed technological and know-how upgrading processes, perhaps not in the narrow sense of technology or starting brand manufacturing, but rather exploiting other dynamic capabilities.

References Altenburg, T., H. Schmitz, and A. Stamm. 2006. Building knowledge-based competitive advantages in China and India: Lesson and consequences for other developing countries. Paper presented at Global Development Network An-

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nual Conference, Saint Petersburg, Russia, 18-19 January. van Arkadie, B. and R. Mallon. 2003. Viet Nam: A transition tiger? Canberra: Asia Pacific Press. Bell, M., and M. Albu. 1999. Knowledge systems and technological dynamism in industrial clusters in developing countries. World Development 27(9): 1715–1734. Ca, T.N. and Anh, L.D. 1998. Technological dynamism and R&D in the export of manufactures from Viet Nam. In Technological Capabilities and Export Success in Asia, eds. Ernst, D., Ganiatsos, T. and Mytelka, L., Routledge: London. Deshpande, R., J. U. Farley, and D. Bowman. 2004. Tigers, dragons, and others: Profiling high performance in Asian firms. Journal of International Marketing 12(3): 5–29. GSO (General Statistical Office of Vietnam). 2009. http:// www.gso.gov.vn/default_en.aspx?tabid=491. Hobday, M. 1995. East Asian latecomer firms: Learning the technology of electronics. World Development 23(7): 1171–1193 ———. 2001. The electronics industries of the Asia-Pacific: Exploiting international production networks for economic development. Asian-Pacific Economic Literature 15(1): 13–29. Knutsen, H. M. 2004. Industrial development in buyer-driven networks: the garment industry in Vietnam and Sri Lanka. Journal of Economic Geography 4(5): 545–564. Kokko, A., and F. Sjöholm. 2006. The Internationalization of Vietnamese SMEs. Asian Economic Papers 4(1): 152-177 Kokko, A., K. Mitlid, and A. Wallgren. 2007. Internationalization and macroeconomic management in Vietnam: Some lessons from Swedish experiences. Working paper, Centre for Business and Policy Studies, Stockholm School of Economics. Lauridsen, L. S. 2008. State, institutions and industrial development: Industrial deepening and upgrading policies in Taiwan and Thailand compared. Aachen, Germany: Shaker Verlag. Mathews, J. A. 2002. Competitive advantages of the latecomer firm: A resourcebased account of industrial catch-up strategies. Asia Pacific Journal of Management 19(4): 467–488. Mathews, J. A. 2006. Catch-up strategies and the latecomer effect in industrial development. New Political Economy 11(3): 313–335. Meyer, K. E., and H. V. Nguyen. 2005. Foreign investment strategies and subnational institutions in emerging markets: Evidence from Vietnam. Journal of management studies 42(1): 63–93. Moran, T. H., and E. M. Graham. 2005. Does foreign direct investment promote Development? Washington, D.C.: Institute for International Economics, Cen-

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ter for Global Development. MPDF (Mekong Project Development Facility). 2000. Vietnam’s garment industry: Moving up the value chain. Private Sector Discussions 7. Hanoi: Labour and Social Publishing House. Nadvi, K. and J. Thoburn,eds. 2004. Vietnam in the global garment and textile value chain: Impact on firms and workers. Journal of International Development 16(1): 111–123. Nestor, C. 2007. Foreign direct investment in the socialist republic of Vietnam 1988–2000: Geographical perspectives. Department of Human and Economic Geography, School of Business, Economics and Law, Göteborg University, Göteborg. Newman, C., J. Rand, and F. Tarp. 2007. Sector switching: An unexplored dimension of firm dynamics in developing countries. Discussion papers no.07– 22. Department of Economics, University of Copenhagen. Nguyen, K. M., and T. L. Giang, eds. 2007. Technical efficiency and productivity growth in vietnam. Hanoi: Publishing House of Social Labour. Nguyen, N. A., and T. Nguyen. 2007. Foreign direct investment in Vietnam: An overview and analysis the determinants of spatial distribution across provinces. Development and Policy Research Centre, Hanoi, Vietnam. Nguyen, H. T., H. V. Nguyen, and K. E. Meyer. 2004. Foreign direct investment in Vietnam. In Investment strategies in emerging markets, eds. S. Estrin and K. E. Meyer. Cheltenham, U.K.: Edward Elgar: 243-268. Nhuong, B. H., N. T. Huong, N. A. Minh, T. V. Loi, and M. W. Hansen. 2009. Conversion of foreign direct investment projects in Vietnam. In A new Asian Dragon: Internationalization of firms in Vietnam, eds. H. Schaumburg-Müller and P. H. Chuong. Copenhagen: Copenhagen Business School Press. Saigon High-Tech Park. 2009. http://www.shtp.hochiminhcity.gov.vn/webshtp/ news/content.aspx?cat_id=512. Schaumburg-Müller, H. 2003. Rise and fall of foreign direct investment in Vietnam and its impact on local manufacturing upgrading. The European Journal of Development Research 15(2): 44–66. ———. 2005. Cooperation and upgrading in ‘small’ global chains: Vietnamese and Danish garment firms. In Clusters facing competition: The importance of external linkages, eds. E. Giuliani, R. Rabellotti, and M. P. van Dijk. Hampshire, U.K.: Ashgate: 61-83. Teece, D. J., G. Pisano, and A. Shuen. 1997. Dynamic capabilities and strategic management. Strategic Management Journal 18(7): 509–533. Thoburn, J., K. Nadvi, C. Edwards, and M. Eberhardt. 2005. Challenges to Vietnamese firms in the global garment and textile value chain. In Clusters facing competition: The importance of external linkages, eds. E. Giuliani, R. Rabellotti, and M. P. van Dijk. Hampshire, U.K.: Ashgate: 85-105.

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Thomsen, L. 2007. Accessing global value chains? The role of business-state relations in the private clothing industry in Vietnam. Journal of Economic Geography 7(6): 753–776. UNDP. 2007. Vietnam’s 200 largest firms. Hanoi: UNDP. VDF (Vietnam Development Forum). 2008. Vietnam as an emerging industrial country: Policy scope towards 2020, VDF Report, preview edition, www.vdf. org.vn/vdfreport.htm. World Bank. 2008. World Development Indicators. www.worldbank.org/data. Zeng, M., and P. J. Williamson. 2007. Dragons at your door: How Chinese cost innovation is disrupting global competition. Boston, Mass.: Harvard Business School Press.

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CHAPTER 2

Trade Internationalization Paths of Emerging Market Firms: Evidence from Vietnam Ha Thi Van Pham, Bent Petersen & Henrik Schaumburg-Müller

Introduction The internationalization of firms through international trade is usually portrayed quite differently in emerging market countries, such as Vietnam, than in the “old,” developed economies. In the latter case, internationalization is presented as an export-related learning process where the driving—or impeding—factor is considered to be experiential foreign market knowledge (Johanson and Wiedersheim-Paul 1975; Johanson and Vahlne 1977), which enables the entrant firm to conduct downstream value chain activities (i.e., marketing, sales, and customer service) as efficiently as local/domestic competitors (Porter 1985). Only through learning–by-doing processes is the internationalizing firm able to acquire downstream export activity capabilities sufficient to compete successfully with local competitors. In contrast, the internationalization of emerging market firms has been associated with incorporation in global value chains (GVCs) (Gereffi 1999; Schmitz and Knorringa 2000; Humphrey 2005).1 In GVCs, downstream-related capabilities—notably foreign export market knowledge—plays a diminutive role since the (Western) so-called lead firm in the GVC is the immediate key customer and gatekeeper to foreign markets. The emerging market firm concentrates on sustaining and developing differentiation and, in particular, cost advantages in relation to upstream value chain activities, including inbound and outbound logistics as well as operations (i.e., manufacturing and servicing). The creation of 1 This internationalization perspective appears in the literature under different labels, such as global production networks, global production chains, and global commodity chains.

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downstream cost advantages and differentiation advantages (via modification of products to comply with local preferences, or through marketing/branding, sales, and servicing) is basically left in the hands of the lead firm.2 In other words, the emerging market firm would meet almost insurmountable barriers should it single-handedly embark on export marketing and sales in the international marketplace. From this perspective, GVCs can be seen to fetter rather than springboard emerging market firms into developing their own export capabilities. The implications of these two contrasting internationalization paths (the downstream-oriented learning path versus the upstream-oriented GVC path) remain, however, an open and unresolved question in the GVC literature. Are emerging market firms better off following the traditional path of internationalization, in which firms gradually build up their own distribution channels as they learn about foreign customers and how they are serviced, or is this path basically an anachronism of the past? In an increasingly globalized marketplace, is the only feasible, or rather profitable, internationalization path that of incorporating emerging market firms in GVCs?3 This chapter does not set out to answer the “big question” of which of the two trade internationalization paths outlined above is better for emerging market firms. We have a somewhat more modest ambition of presenting explorative case studies of three Vietnamese firms, which have two things in common: First, they are deeply involved in international business and, second, their performance is clearly above average in their industry in terms of financial performance and competitive position. In fact, the three companies were picked on the basis of these two characteristics (in the next section we account for the selection criteria more specifically). Moreover, the companies were also selected in order to maximize variety in terms of which path towards internationalization they have followed. Hence, each of the three cases represents a distinct internationalization 2 In the extreme case, all competitive advantages of the GVC are proprietary to the lead firm. The lead firm in the GVC is in control of the upstream process and product technology as well as the intangible assets related to downstream activities, notably product brands and strong ties to distributors and end-users. In this extreme case, the competitiveness of the emerging market firm rests solely on the absolute and comparative advantages of the country: mainly access to cheap and abundant land, natural resources, and labor. Only to a very limited extent do GVCs allow the emerging market firm to develop competitive advantages (Porter 1980); that is, firm-specific advantages, such as proprietary technology. Even though the emerging market firm should be able to develop firm-specific advantages in relation to upstream activities of the GVC, the firm would have difficulties in circumventing the lead firm’s hegemony in terms of downstream activities. 3 We are in this chapter only concerned with trade internationalization and are not looking at foreign investments and the investment development path of emerging market firms.

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path, including the downstream-related, experiential learning and the upstreamrelated GVC paths mentioned above. Interestingly, the third case demonstrates a successful combination of these two paths. In addition to our presentation of three in-depth studies of distinctively different internationalization paths of emerging market firms, we also offer a simple and universal framework (“universal” in the sense that it is applicable to developed as well as developing market firms) for distinguishing different internationalization paths. The framework is based of the notion that a firm’s export performance is defined by sustainable international competitiveness in relation to upstream and downstream value chain activities, separately or in combination. Furthermore, we make the basic assumption that import and export activities of a firm are positively related to international competitiveness of upstream and downstream activities, respectively. In other words, import activities of emerging market firms predominantly enhance their upstream activity capabilities, whereas export activities are likely to improve downstream activity skills. This chapter is organized as follows: In the next section we account for our research methodology and make a short presentation of the three Vietnamese companies. Following this we present our analytical framework on the basis of a literature review. Next we unfold three distinctively different paths to successful internationalization, each of which is derived from our case study observations in combination with insights from the GVC and internationalization literatures. In the concluding section we summarize and discuss managerial implications.

Research methodology Case methodology

Following Yin (1994), we employed some general principles in our data collection procedure: using multiple sources of evidence, creating a case study database, and maintaining a chain of evidence. One of the strengths of case studies is the possibility of using multiple data sources, both qualitative and quantitative. We consistently used multiple sources of evidence (data triangulation) in order to enhance the construct validity of the research (Eisenhardt 1989; Yin 1994). The majority of the qualitative data was gathered through semi-structured in-depth interviews that took place in 2005 and 2006 at the company headquarters in the areas of Hanoi and Ho Chi Minh City. There were also follow-up telephone calls and email contacts from 2006 to end of 2007. In addition to the interviews, public documents were used, such as annual reports, newspaper articles, press releases, and company magazines, thus assisting in data triangulation. Throughout the process of data analysis, we continuously checked the reliability of data by comparing information from interviews with additional data sources. This method ensured that essential information was not ignored and, furthermore, enhanced the robustness of the data source.

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The main data analysis largely followed a program logic model and a pattern matching approach (Yin 1994, 118). The pattern matching approach was used because we wanted to uncover the cause-and-effect pattern between potentially influencing factors. Cause and effect loop diagrams were employed extensively throughout the analysis as a way of uncovering the different internationalization patterns contributing to the performance of the firms. The interview process went through the following two phases: • Locating informants: It is imperative that researchers lay out the rationale for choosing the particular respondents so that the reader can evaluate the findings and contributions of the case study (Gubrium and Holstein 2002). For this reason, key informants in these three companies were chosen due to their roles as decision makers and managers in relation to the formulation and exercise of their company’s overall strategy. There were two interviews conducted in each company. The informants in each company are chief executive managers and heads of the import/export departments. • Conducting interviews and collecting information: The process of being asked and answering questions can sometimes be distracting. Therefore, the interviewer needs to prepare the protocol of questions to keep the informants on track. The interviews were conducted with a semi-structured interview guide using open-ended questions. Each interview was conducted in around two hours.

Selection of case companies Our three case companies vary considerably in terms of industry and ownership structure: Thai Hoa Production and Trading Co. Ltd is a coffee processing and trading company; Woodsland Joint Venture Company (Woodsland JVC) is a supplier of solid wood furniture; and Saigon Cosmetics Corporation (SCC) is a joint stock company that produces and sells make-up and skin care products. These three companies were chosen on the basis of 1) their common superior export performance and 2) their representation of a variety of paths towards internationalization. The first basic selection criterion was a proven track record for successful export performance. In other words, the case companies were all persistent aboveaverage export performers within their particular industry. Hence, all three case companies were found to be successful in terms of their international competitiveness, their financial performance, and their export market shares of branded products. The annual export revenue growth rate in 2005 and 2006 of the SCC was thirty-five and forty percent, respectively. For Woodsland, the figures were as high as fifty and sixty percent. For Thai Hoa, the rates of export revenue growth were even higher in years 2005 and 2006, at eighty and ninety-five per-

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cent, respectively (GSOnet 2006). In comparison with other incumbent domestics companies in the same industries, all three companies have consistently been ranked number one in terms of export market shares of branded products (Global Market Information Database 2001–2006). The other basic selection criterion was variety of internationalization paths. As will be accounted for later, we identified successful export companies that differed distinctively regarding whether their international competitiveness was related to upstream or downstream value chain activities, or both. The number of employees of the three case companies ranges from 300 to nearly 800, and the total assets of the companies are in the interval of VND thirty to seventy billion (equivalent to approximately USD 2–4.5 million). These companies have been in operation for some time: from seven to thirty years. Their export revenues make up fifty to one-hundred percent of total revenues. SCC’s export turnover proportion equals fifty percent. Woodsland and Thai Hoa have ninety and one-hundred percent export revenues, respectively.

Literature review and conceptual framework For firms from emerging markets, upstream and downstream internationalization is often linked to contract production where a dominant customer (interchangeably called the principal, the contractor, the governor, the foster parent, or the lead firm) orders in advance, arranges the marketing and sales, and also acts as a supplier of materials, equipment, and training (Sørensen and Kuada 1998). The “upstream-downstream” terminology originates from the value chain concept developed by Porter (1985), who categorizes inbound and outbound logistics and production (“operations”) as upstream activities, while marketing, sales, and customer servicing are labeled downstream activities. Firm infrastructure, technology development, human resource management, and procurement are termed supporting activities. Internationalization through upgrading downstream activities “represents the conventional approach to the study of internationalization that focuses exclusively on the marketing of goods and services in a foreign country, especially through exports” (Kuada and Sørensen 2000, 156). The internationalization literature has devoted less attention to upgrading upstream activities, that is, acquiring international experience through import activities related to production (Kuada and Sørensen 2000).

Internationalization theories focusing on downstream activities The Uppsala internationalization process model The Uppsala internationalization process model (henceforth the “Uppsala model”), which is based on an organizational learning perspective, suggests that it is possible for small- and medium-sized enterprises (SMEs) to create international competitiveness in relation to downstream activities by acquiring experiential

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knowledge about foreign markets (Johanson and Wieldersheim-Paul 1975; Johanson and Valne 1977). The basic idea of the Uppsala model is that export activities develop incrementally and revolve around foreign market learning and commitment. The concept of market commitment deals with both the amount of resources committed and the degree of commitment. The amount of resources will be decided based on the size of investment in the foreign market. The extent of the commitment refers to the difficulty of finding alternative uses for the resources allocated to the foreign market and the costs of transferring the resources to the alternative use. Clearly, the Uppsala model focuses on firms’ export activities (rather than import activities) and how the conduct of these activities gradually improves the competitiveness in relation to downstream value chain activities (see figure 2.1). International competitiveness in relation to upstream activities is only implicitly assumed in this model. The upstream activities of firms fall outside the assumptions of the Uppsala model (Andersen 1993), but it seems reasonable to presuppose some ownership advantages (Dunning 1993) for the export firms in relation to design, procurement, logistics, or manufacturing (indicated by the shadowed, upper-hand circle in figure 2.1). The inward-outward connection model The connection between upstream and downstream activities and how they affect the internationalization process of the firm has received some, albeit limited, attention in the business literature in recent years. In the inward-outward connection model (Karlsen et al. 2003; Korhonen 1999; Welch and Luostarinen 1993), the focus is on a particular upstream activity, namely international procurement (e.g. import) and how it may affect international downstream activities, notably

+

In t’l competitiveness as to upstream activity

Succesful Export

Export activity

+

Int’l competitiveness as to downstream activity

+

Figure 2.1. The Uppsala model, focusing on export and downstream competitiveness

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export sales. The model contends that import activities (i.e., inward internationalization) may have positive network and learning spillover effects on export (i.e., outward internationalization) (see figure 2.2). Welch and Luostarinen’s (1993) work on the possible connections between inward and outward internationalization processes stresses that these spillovers or links may be important even at the earliest stages of international development for many companies. The limited evidence indicates that inward activities may provide a good opportunity to learn about foreign trade techniques, foreign operation characteristics, and ways of using different operation modes. By active use of this knowledge, the firm should be in a better position to undertake outward operations in a foreign market.

Import activity

Succesful Export

+

Export activity

+

Int’l competitiveness as to downstream activity

+

Figure 2.2. The inward-outward model: Export facilitation through import activities In a large-scale study of Finnish SMEs, Korhonen (1999) found that the majority began international activities on the inward side rather than on the outward side, thus pointing to the potential importance of inward activities as a springboard to outward activities. Korhonen found inward–outward connections at different stages of the internationalization process and revealed various contexts where inward–outward connections may emerge and develop. At the beginning of a company’s international life cycle unilateral connections were found to play a significant role, in the form of a direct link from inward operations to outward operations. Bilateral connections involved two-way interaction or use of international business partners, such as using a foreign supplier to help develop exporting operations, perhaps even as a distributor for the focal firm. The focal, internationalizing firm may be able to obtain detailed market specific knowledge of marketing conditions—central values held by market participants, and structural

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features of the market through its dealing with the foreign supplier. Multilateral connections involve a broader set of actors, interdependence, and influence in the move from inward to outward operations, or vice versa; for example, an inward–outward connecting chain that links a company to its foreign supplier, a customer or bank of that foreign supplier, or to a trade assistance agency. In this internationalization model, inward activities, such as imports, have been seen as important factors for the company to overcome psychic distance (Hallén and Wiedersheim-Paul 1989; Jain 1989) and then make the larger engagement in the foreign markets. The inward movement, in whatever form, signals the beginning of a relationship between a foreign seller and a local buyer, which creates the possibility of later using that link to acquire knowledge about a foreign market and create network in that market.

Internationalization theories focusing on upstream activities The technology import model As contended by proponents of the inward-outward connection, inward operations may enhance a firm’s international competitiveness, which, in turn, enables outward internationalization (in casu, export). By importing crucial raw material, components, or machinery, the overall export capability of firms may increase. The same beneficial export effect may be achieved when firms are buying patents or service expertise. A firm acquires a license for a new product or service, which, after some time, increases the firm’s skills in product design, marketing, and manufacturing. Hence, it is basically the import activity that ensures successful export (see figure 2.3).

Import activity

+

Int’l competitiveness as to upstream activity

+

Succesful Export

Int’l competitiveness as to downstream activity

Figure 2.3. The technology import model

46

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Trade Internationalization Paths of Emerging Market Firms

Based on several case studies of Korean licensees and franchisees Lim (2000) concluded that emerging market firms can overcome their resource limitations and build their competitive advantage by learning from licensors and franchisors. A firm’s technology capacity and productivity can be enhanced by the international license operations, thereby strengthening their ownership advantages (Dunning 1993). Much of the latecomer firms learning literature on the Asian newly industrializing countries is based on the notion that firms acquire foreign technology in various ways, familiarize themselves with the technology, and, as a corollary, manage to improve their manufacturing skills to a level where they are able to compete successfully in export markets (Hobday 1995; Mathews 2002). The technology import model implicitly assumes that either sales and marketing play a diminutive role in export—characterizing foreign markets as operating under almost perfect price competition—or, that the emerging market firms somehow pick up the necessary downstream activity capabilities. The latter assumption is indicated by the shadowed circle at the bottom of figure 2.3. The GVC model Globalization shapes the position of firms coming from developed and developing countries, and results in differing levels of involvement of firms in the internationalization process. Previous studies have been unable to fully explain why firms in emerging market countries follow different pathways entering world export markets. The export pattern may be examined more comprehensively through what is usually called the GVC process, or the framework of coordination of value added activities across firms’ boundaries (Gereffi 1994; Coe 2004). This framework not only highlights the importance of coordination across firm boundaries, but also the growing importance of new global buyers (mainly retailers and brand marketers) as key drivers and governors of the formation of globally dispersed and organizationally fragmented production and distribution networks. Gereffi (1994) uses the term “buyer-driven global commodity chains” to denote how global buyers create a highly competent supply base on which global production and distribution systems are built without having direct ownership of the supplying units. The production allocation process has witnessed the remarkable growth of emerging markets’ sub-suppliers. African horticulture producers have, for example, improved the quality of their fruits, canning, and packing techniques in order to integrate into the demanding English market. One may also observe the spectacular changes of Hong Kong and Chinese garments producers who have upgraded their marketing and design skills when joining global value chains with American and European partners (Humphrey 2004). However, in most cases, the emerging market producer or sub-contractor in-

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Import activity

+

Int’l competitiveness as to upstream activity

+ Contract manufacturing activity

Design and procurement

Succesful Export

Downstream acitivity

Global Value Chain

Figure 2.4. The GVC model

tegrated in the global value chain gets some of its upstream activity capabilities strengthened through linkages to the lead firm, but remains weak with respect to the independent performance of its marketing and sales activities (see figure 2.4).

The conceptual model of the study In our overall conceptual model (see figure 2.5) we combine the four outlined theoretical internationalization models of various (successful) export trajectories of emerging market firms.

Import activity

+

Int’l competitiveness as to downstream activity

+

+

+

Contract manufacturing

Export activity

Downstream activity

+

Int’l competitiveness as to upstream activity

Figure 2.5. The conceptual model of the study

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Successful Export

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Trade Internationalization Paths of Emerging Market Firms

Emerging market firms may follow different successful export internationalization paths depending on whether international competitiveness is developed in relation to upstream or downstream activities, or both. We derive from theory that strengthening international competitiveness leads to superior export performance and pertains to both upstream and downstream activities. While learning from export activities, in line with the Uppsala model, can strengthen competitiveness in downstream activities, the inward-outward connection scholars contend that import activities can also have an effect on strengthening downstream competitiveness when the firm, as a spillover effect, learns from the supplier firm how to form its own strategies for independent export marketing and sales. In the next three sections we will see how our conceptual framework fits the internationalization paths of the three Vietnamese case companies.

First internationalization path: Independent experiential learning Thai Hoa Production and Trading Co. Ltd: A coffee processing firm At the beginning of the 1990s, the Vietnamese government began promoting coffee production to develop a scarcely inhabited and little developed region known as the Central Highlands. This coffee production was intended to generate income for the low-income farmers in the area. The natural conditions in the Central Highlands, as well as in the mountainous areas of the north, provide favorable conditions for cultivation of the two commercially traded coffee berry species, Robusta and Arabica. During the mid 90s, world market prices for coffee were peaking. Skyrocketing world market prices coincided with policy changes in Vietnam for economic reforms. As part of the economic reforms, farmers were provided land for the purpose of cultivation at a time when many farmers were transitioning from being plantation workers to independent entrepreneurs (GTZ 2001). As a consequence of the tremendous growth of coffee production in some countries, notably Vietnam, there has been an oversupply of coffee on the world market. Consequently, since 2000 prices have steadily declined. The coffee sector of Vietnam is characterized by dispersed ownership as regards the primary coffee processing, which means that it is severely affected by price fluctuations in the world market. It is therefore imperative that coffee farmers, in addition to making technological investments in coffee processing, develop strong product brands that are less sensitive to price fluctuations. Early in March 1996, an agricultural engineer, Nguyen Van An, decided to establish his own company to realize his dream of building a brand name based on his Arabica coffee plantation in Phu Quy. Ten years later, his dream came true and today his company, Thai Hoa, is the biggest exporter of Arabica coffee

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in Vietnam. The firm’s brand name is highly appreciated by foreign customers, and Thai Hoa coffee is available in North America, Europe, Asia, and the Middle East. In Vietnam, Thai Hoa is credited for having made Arabica coffee a key product with high value in the international market. In 2000, successful penetration into the Japanese market was evidenced by the fact that export orders from this country equalled 6.5% of the total coffee export. Due to Thai Hoa’s effort, the Japanese have accepted Vietnamese Arabica, offered in a range of consumer products. Not content with penetrating the Japanese market, Thai Hoa has targeted South Korea and other Asian countries for export. As a part of this effort to expand into other Asian markets, Thai Hoa has adapted some of its cultivation processes. Because Korean and other Asian coffee drinkers have very diverse taste preferences, largely determined by ethnic differences, the company has changed its traditional harvesting techniques and diversified the growing location from the dry and cool middle region to the wet and cold north. The exporting orders from Malaysia and the Philippines have been rising significantly since these initiatives were implemented. Thai Hoa’s successful experience on the Asian market has motivated the company to enter the American market, not to mention the extremely demanding European market. Knowing that location advantages and regional trade experience are not enough to compete globally, Thai Hoa has intensified investment in wet processing technology and has worked to educate their contract farmers about foreign harvesting and processing techniques. In 2002, the first orders to France and Italy were not succeeded by new orders as expected. Subsequently, this commercial disappointment prompted An and his colleagues to pay numerous visits to the European and American markets. Studying the Western preferences and legislation induced Thai Hoa management team to replace the old processing lines. In 2003, Thai Hoa sat up four new wet processing lines, four Brazilian dry processing systems, two dyeing machines from Costa Rica, and six packing lines from Italy. In 2005, the company achieved a breakthrough in penetrating the world market. Thai Hoa’s share of the consumer coffee market has been increasing significantly along with the process of building up its brand name in the world market. Thai Hoa is among the very few Vietnamese companies who transact directly on two of the world’s biggest coffee trading floors: London and New York. This is a manifestation of the company‘s high-level international market integration. Thousands of customers, including well-known coffee trading groups from all continents, have assured that Thai Hoa will continue to have numerous sales outlets and steady business in repeat orders. Thai Hoa’s internationalization path echoes the traditional learning-oriented Uppsala model, in which firms gradually and independently expand their inter-

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Int’l competitiveness as to upstream activity

European and US market

Successful Export

Asian market

Export activity

Int’l competitiveness as to downstream activity

+

+

Figure 2.6. Thai Hoa’s internationalization path

national downstream activities (see figure 2.6). The entry of Thai Hoa into international markets may be seen as mirroring the so-called rings-in-water concept of the Uppsala model. To overcome its psychic distance to foreign markets and to increase its international competitiveness, Thai Hoa first commenced export to consumer markets with consumer habits resembling Vietnam (i.e., Japan) and then expanded to other Asian markets (e.g., Korea and Malaysia) possessing successively greater differences in taste. Eventually, Thai Hoa entered highly demanding American and European markets. Hence, after having built a strong foothold in the Asian region, the company then decided to enter culturally distant markets and learn, step by step, how to do business globally. It is difficult to establish from the interviews (or secondary sources) to what extent, if any, Thai Hoa has managed to ensure proprietary advantages in relation to its upstream activities as well; for example, in terms of privileged access to particularly well-suited farmland and competent farmers, or in terms of using advanced process technology, or if upstream advantages are country/regionrather than firm-specific and therefore fully imitable by other Vietnamese coffee producers. In figure 2.6, our uncertainty about this issue is indicated by the shadowed circle and the punctuated arrow pointing at the export activity box.

Second internationalization path: GVC incorporation Woodsland JVC: A wood furniture producer With a wealth of experience in producing wooden furniture for the Vietnamese domestic market, when Woodsland Joint Venture Company (henceforth Wood-

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sland) decided to enter European markets, it quickly got a toehold. Since its inception, the company has invested in building spacious workshops and buying machinery and equipment to be able to deliver a broad range of quality products. However, the company’s great success in foreign markets originates from its collaboration with the multinational retailing giant, IKEA of Sweden. Though it turned out to become a long-lasting collaboration, it was the company’s initial experience with IKEA that triggered Woodsland’s effort to enhance its capability to provide excellent quality and durability at low costs. IKEA, with its vast experience in product differentiation and cost leadership, assisted in fulfilling Woodsland’s mission. In return, IKEA benefited from expanding its supplier base in Asia. Over the years, IKEA has equipped Woodsland with technical assistance, leased equipment, and the necessary skills for producing high-quality items. This long-term supplier relationship does not only result in superior products, but also adds internal value to the supplier. Woodsland has to supply basic items, but has the freedom to design the rest of the product mix in order to fit domestic and foreign market needs. The basic core products count for around 12,000 simple and functional furniture items. The IKEA head office is actively involved in the product item selection processes and provides valuable advice. In order to maintain service, quality, and logistical standards, Woodsland is periodically audited and benchmarked against IKEA’s general key performance indicators. Extensive training and operational support is provided from the IKEA’s local procurement office. Over time, Woodsland has steadily expanded its wood processing plant located in the Vinh Phuc exporting zone. In 2005, Woodsland moved to bigger premises occupying a site of ten hectares in the Vietnamese furniture zone. This represents the flagship store for Woodsland and is their largest store in the suburb of Hanoi, offering more than 1,500 different home furnishing products. The relocation to the bigger premises enables Woodsland to follow the same concept of IKEA by providing customers with a fully-fledged store consisting of showrooms, home and room sets, a self-serving warehouse, market hall, restaurants, and facilities for children. Two fully furnished homes were built according to the layouts of apartments and terraced homes now available in Vietnam. The exhibition homes set feature furnishing ideas from the porch to the living room and right up to the kitchen, and provide four different style groups: Scandinavian, rural, modern, and classical. The store’s showrooms are adapted and localized according to Vietnamese tastes. In addition to producing in line with IKEA specifications, Woodsland has acquired modern machinery and technology to manufacture more than sixty types of industrial woods, meeting thirty percent of the domestic demand. The company has developed timber processing work standards to meet world market demand. Its business development has gone through several phases, starting with

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the processing of standard items sourced locally and ending with sophisticated components sourced overseas. The company plans to move further up the value chain in terms of producing sophisticated components in Vietnam. Operating in such a wide range of fields, the revenue of Woodsland keeps growing at a steady state. The internationalization path of Woodsland very much resembles the GVC model (see figure 2.4), insofar as the company’s international competitiveness is primarily related to upstream activities, which are closely coordinated in the GVC governed by IKEA. Woodsland is ascribed a role as efficient contract manufacturer, while IKEA takes care of the downstream activities, including branding. Furthermore, IKEA is responsible for the product design in relation to furniture sold under the IKEA brand. Still, Woodsland performs design activities and product modification in relation to other furniture products. Figure 2.7 illustrates the internationalization path of Woodsland. Import activity

Int’l competitiveness as to upstream activity

+

+

Design activity

Contract manufacturing activity

Marketing & Sales activity

Succesful Export

Global Value Chain

Figure 2.7. Woodsland’s internationalization path

There is little doubt that it was a right choice when the management group of Woodsland opted for IKEA as their partner in a GVC comprising design, production, marketing and sales of furniture. Its GVC incorporation was not just a subordination of Woodsland to IKEA’s hierarchical system: the GVC incorporation also brought to the company new, cutting-edge processing technology and internal values of designing and diversifying manufactured products. The subsequent expansion of Woodsland in terms of export markets and revenues has witnessed the success of this relationship.

Third internationalization path: Multi-chain strategy Saigon Cosmetics Corporation: A producer and marketer of cosmetics Saigon Cosmetics Corporation (henceforth SCC) started its business operations in the 1980s and is currently acknowledged as the leading producer of cosmet-

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ics in Vietnam. SCC specializes in producing perfumes, shampoos, soaps, and other detergents. In addition to the Vietnamese market, SCC’s products are also marketed in Cambodia, China, Laos, Mongolia, Myanmar, New Zealand, the Philippines, Taiwan, and Thailand. SCC’s entry into these export markets was triggered and facilitated by a contract manufacture arrangement with Pias ILC Corporation, a large regional producer and marketer of products and services in beauty and healthcare. Pias ILC is based in Osaka, Japan. In 1997, Pias ILC came to Vietnam looking for a suitable partner for processing its beauty products sold in the Asian market. Since there are a number of competent producers of cosmetics in Vietnam it took a lot of effort and determination on the part of the SCC to become the exclusive Vietnamese partner to Pias ILC. SCC had to make considerable investment not only in its marketing apparatus, but also in modern know-how and equipment in order to fulfil strict environmental demands (such as removing the use of substances damaging the ozone layer), thereby qualifying its products for “green” trademarks. According to the long-term agreement with Pias ILC, SCC is in charge of the manufacturing and packing of skin care, makeup, perfume, and shampoo products. On the other hand, the Japanese partner is in charge of designing the products, specifying the inputs, and bringing the products to the markets. Over time SCC has, however, developed its capacity to absorb modern technology and improved the design and quality of the products. Through its collaboration with the Japanese corporation, SCC has enhanced its skills in product design and has gained insights as to how to distinguish the tastes among Asian consumers: the company has learned how to segment the export markets and to keep focus on these individual customer segments. For example, the Thai consumers seem to focus on the design of the packaging (bottles and jars) whereas the Philippines tend to prefer strong fragrance perfume and simple design. Another important factor that has facilitated SCC’s penetration of the Asian market (including Thailand, Cambodia, Laos, Myanmar, China, Taiwan, Mongolia, and the Philippines) is that the company, in agreement with Pias ILC, has developed a material distribution relationship with its Thai suppliers. In return, the suppliers in Thailand have assisted SCC in getting footholds in adjacent markets in the region. In general, SCC has improved its international supply chain management. As an example of its supply chain management professionalism, SCC has established its own product testing facilities that enable local accreditation in compliance with international product quality norms and environmental standards. SCC’s next step is to escalate the adaptation of the Pias ILC partner products and to introduce its own cosmetic products to the Asian market. One may say that the success story of SCC is due to its R&D investments and efforts in marketing upgrading. Today, SCC produces a variety of product lines in cosmetics, including fragrances, hair care products, toiletries, and household

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care; however, SCC’s flagship product line that enjoys international brand recognition is the Miss Saigon and Miss Vietnam perfumes. The product’s popularity is underpinned by the interesting design of Miss Vietnam – Miss Hanoi, Miss Hue, Miss Saigon, with ceramic packaging that features images of Vietnamese women from the country’s northern, central, and southern regions, respectively, dressed in typical traditional costumes. The product design, as well as the allure of the fragrance, has made the perfume the best selling souvenir purchased by tourists visiting Vietnam. In other words, Miss Saigon is a good example of an on-the-spot export product. As such, Miss Saigon serves as a free market communication channel when tourists recommend the fragrance to other people in their home countries. Targeting middle- to upper-income group consumers, SCC diversified its marketing strategy with premium prices for some brands, such as Miss Vietnam and Miss Saigon, and competitive pricing for other SCC perfume products for teenagers, such as Fantasy and Cindy. Toiletries and hair care products from SCC are 10-20 percent cheaper than other popular brands from manufacturers like Unilever or Procter & Gamble. More importantly, SCC has integrated the price strategy in its marketing effort by entering cross-distribution agreements with global cosmetics companies (see Schaumburg-Müller and Ngo [2003] for other Vietnamese examples of strategic alliances). The agreement ensures that SCC product lines are marketed abroad through the distribution channels of global cosmetics companies. In exchange, SCC is responsible for the local marketing and sales of the globally branded cosmetics of its partners. Realizing that brand loyalty is imperative for consumers’ choice and purchase of cosmetics, SCC is collaborating with global cosmetics producers in an effort to combine reasonable prices with the image and reputation of foreign countries for elegance, fame, and luxury. Prior to the launch of Fantasy in 2006, SCC conducted in-depth market research and targeted teenagers with five types of its women’s fragrance. To support the sales during the forecast period, SCC set up numerous beauty centers, including beauty salons, hair salons, and showrooms. The salons provide free skin testing as well as free consulting services, advice regarding how to use cosmetics, and professional makeup skills for local consumers. This breakthrough investment has helped SCC to gain updated responses from customers so that the company can develop its products in the direction of becoming more consumerfriendly and attractive to all ages and both genders. With these efforts, SCC has been successful in promoting its brands not only in the domestic market, but also throughout the world, where SCC has achieved significant sales in fragrances. SCC products have continuously gained the “Vietnamese High Quality Goods Awards” 10 times since 1997, voted by domestic consumers every year and have been in the top 5 of Vietnamese cosmetics for

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many years (http://www.saigoncosmetics.com). Its annual revenue growth rate is about twenty-five percent, with a spectacular export growth rate that reached 40 percent in 2006 and 45 percent in 2007. Once a company with rather unnoticed products in the domestic market, SCC chose to increase its competitiveness and brand recognition by becoming a subcontractor for an already well-known corporation, Pias ILC. By working together with the Japanese company SCC got to know its customers’ tastes and preferences. Quite interestingly, the relationship, or rather strategic alliance, with Pias ILC not only gave SCC new and valuable export market knowledge. The alliance encouraged and enabled the company to develop its own international marketing relations. Unlike the internationalization cases of Thai Hoa and Woodsland, which complied, respectively, to the Uppsala and GVC internationalization models, the internationalization path of SCC does not fit one particular model. SCC’s internationalization has included elements from the Uppsala model, the InwardOutward model, and the GVC model, with the last-mentioned in the first phases of the internationalization process. The incorporation of SCC into Pias ILC’s GVC was never complete inasmuch as the relationship quickly developed in the direction of becoming a strategic alliance between two equal business partners in relation to downstream activities (see figure 2.8). Working as a subcontractor to Pias ILC (where the Japanese company supplied product design and product specifications for its cosmetics) SCC soon embarked on a functional upgrading to the extent that the company unfolded as an international marketer selling via its own, independent distribution chan-

Import activity

Int’l competitiveness as to upstream activity

+

+ Contract manufacturing activity

Succesful Export

Strategic alliance SCC / PIAS ILC

Global Value Chain

+ Export activity

+

Int’l competitiveness as to downstream activity

Figure 2.8. SCC’s internationalization path

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+

Trade Internationalization Paths of Emerging Market Firms

nels. Somewhat surprisingly, at no point in time did Pias ILC seem reluctant to share marketing knowledge with its subcontractor/supplier. One might speculate whether this openness was due to the regional (rather than global) market orientation of Pias ILC. Perhaps Pias ILC did not consider SCC as its direct competitor in these product lines? Even though SCC has functionally upgraded (involving the development of its own products and brand names) it has to some extent maintained its contract supplier role in the GVC of Pias ILC. Hence, SCC seems to follow a multi-chain strategy (Humphrey and Schmitz 2004) in which the company, beyond making use of Pias ILC’s GVC as an outlet, also distributes through its own international value chain. We may conclude that our theory-derived conceptual framework has difficulties in fully comprising the case of SCC because of the multi-chain strategy the firm has been able to pursue.

Conclusions and managerial implications As our three Vietnamese cases have demonstrated, firms in emerging markets like Vietnam may follow paths to export success significantly different from those of firms from mature markets. Some firms achieve export success mainly through international competitiveness in upstream activities—notably manufacturing—while other firms develop strong competences in downstream activities, such as marketing and sales. Our first case company, Thai Hoa, had, by and large, followed a traditional, incremental internationalization pathway, as outlined in the Uppsala model. The company’s export success resulted primarily from its persistent upgrading of downstream activities in foreign markets. As predicted by the Uppsala model, this coffee producing company commenced export to adjacent markets where consumers exhibit taste and preferences similar to those in the home market. After this initial success and through experiential learning, Thai Hoa entered more distant and demanding export markets, such as the European Union. The internationalization path of our second case company, Woodsland JVC, was quite different from that of Thai Hoa. Woodsland’s export success was mainly achieved through upstream activity upgrading. Assisted by its “foster parent,” IKEA, the company managed to develop sub-contractor capabilities up to a very high international standard in wood processing – both in terms of output quality and cost efficiency. Woodsland is a positive example of a GVC incorporation of an emerging market firm, far from pessimistic pictures of sub-contractors locked into unprofitable, subordinated roles as deliverers of cheap factor inputs. Moreover, we found some indications in the Woodsland case of upgrading in relation to downstream activities as well, such as substantial investments in top-class showrooms where the end products—furniture—are exhibited in different lifestyle settings.

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From a management perspective SCC’s road to success is perhaps the most interesting case regarding internationalization. SCC’s successful subscription to a double, or multi-chain, strategy is a strong case against presentations of GVCs as fetters to emerging market firms. Rather than being trapped into a subcontractor role in Pias ILC’s value chain in cosmetics, SCC has used the GVC as a springboard to new export markets and is in a process of developing its own branded products and distribution channels. SCC seems to have succeeded in gaining international competitiveness in both upstream and downstream activities through a parallel learning process. The cross-distribution arrangements that the company has made with some of the global players in the cosmetics industry provides a final point of interest in the SCC case. This is an intriguing example of a relatively small emerging market firm forging alliances with well-established, global companies from developed countries.

References Andersen, O. 1993. On the internationalization process of firms: A critical analysis. Journal of International Business Studies 24(2): 209–231. Coe, N. M. 2004. Global production networks in Europe and Asia. Research paper presented at the Conference on Globalization, Internationalization of Companies, and Cross-Cultural Management, Aalborg University, Denmark, 27–29 October 2004. Dunning, J. 1993. Multinational enterprises and the global Economy. New York: Addison-Wesley. Eisenhardt, K. M. 1989. Building theories from case study research. Academy of Management Review 14(4): 532–550. Global Market Information Database. 2001–2006. http://www.euromonitor. com. Gereffi, G. 1994. The organization of buyer-driven global commodity chains: How U.S. Retailers shape overseas production networks. In Commodity chains and global capitalism, eds. G. Gereffi and M. Korzeniewicz. Westport, Conn.: Praeger. 171-192. ———. 1999. International trade and industrial upgrading in the apparel commodity chain. Journal of International Economics 48(1): 37–70. GSOnet (General Statistics Office Vietnam). 2005. Thuc trang doanh nghiep dieu tra tu nam 2000 den nam 2005, http://www.gso.gov.vn/default.aspx?tab id=409&idmid=4&ItemID=6710. GTZ (Deutsche Gesellschaft für Technische Zusammenarbeit). 2001. Improvement of coffee quality and sustainability of coffee production in Vietnam, http://www2.gtz.de/vietnam/ppp/ppp_coffee_eng.htm. Gubrium, J. F. and J. A. Holstein, eds. 2002. Handbook of interview research: Context and method. Thousand Oaks, Calif.: Sage Publications.

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Hallén, L. and F. Wiedersheim-Paul. 1989. The evolution of psychic distance in international business relationships. In Between market and hierarchy, eds. I. Haag and F. Wiedersheim-Paul, 15–27. Uppsala, Sweden: University of Uppsala. Hobday, M. 1995. East Asian latecomer firms: Learning the technology of electronics. World Development 23(7): 1171–1193. Humphrey, J. 2004. Upgrading in global value chains. ILO policy integration working paper no. 28. Geneva: International Labour Organization. ———. 2005. How does insertion in global value chains affect upgrading in industrial clusters. Regional Studies 36(9): 1017-1027. Humphrey, J. and H. Schmitz. 2004. Chain governance and upgrading: Taking stock. In Local enterprises in the global economy, ed. H. Schmitz, 349-381. Cheltenham, U.K.: Edward Elgar. Jain, S. C. 1989. Standardization of international marketing strategy: Some research hypotheses. Journal of Marketing 53(1): 70–79. Johanson, J. and J. E. Vahlne. 1977. The internationalization process of the firm: A model of knowledge development and increasing foreign market commitment. Journal of International Business Studies 8(1): 23–32. Johanson, J. and F. Wiedersheim-Paul. 1975. The internationalization of the firm: Four Swedish cases. Journal of Management Studies 12(3): 305–322. Karlsen, T., P. R. Silseth, G. R. C. Benito, and L. S. Welch. 2003. Knowledge, internationalization of the firm, and inward–outward connections. Industrial Marketing Management 32(5): 385–396. Korhonen, H. 1999. Inward-outward internationalization of small and medium enterprises. PhD dissertation, Helsinki School of Economics (HeSE) Print. Kuada, J. and O. J. Sørensen. 2000. Internationalization of companies from developing countries. New York: International Business Press. Lim, W. 2000. The origin and evolution of the Korean economic system. Seoul: Korean Development Institute. Mathew, J. A. 2002. Dragon multinational: A new model for global growth. Oxford: Oxford University Press. Porter, M. E. 1980. Competitive Strategy. New York: Free Press. Porter, M. E. 1985. Competitive Advantage: Creating and sustaining superior performance. New York: Free Press. Schaumburg-Müller, H. and Q. N. Ngo. 2003. Vietnamese firms in international strategic alliances. Economics and Development Review. National Economics University (NEU) Vol. 1: 11-14. Schmitz, H. and P. Knorringa. 2000. Learning from global buyers. Journal of Development Studies 37(2): 177-205. Sørensen, O. J and J. Kuada. 1998. Approach to the integration of Ghanaian

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companies into the global economy. Working paper no. 30. Department of Business Studies, Aalborg University, Denmark. Welch, L. S and R. Luostarinen. 1993. Inward-outward connections in internationalization. Journal of International Marketing 1(1): 44–56. Yin, R. 1994. Case study research: Design and methods. 2d ed. Thousand Oaks, Calif.: Sage Publishing.

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CHAPTER 3

An Explorative Study on Functional Upgrading and Export Development of Vietnamese Wood Furniture Producers Pham Thi Song Hanh

Introduction In an increasingly globalizing economy, markets for traditionally manufactured products have become highly competitive. In response to this trend, firms from high-income economies have tended to consolidate core competences and delegate labor-intensive activities to partners in developing countries, where labor costs are much lower. This sourcing trend, in turn, pulls an increasing number of producers from developing countries to work as suppliers for sourcing firms, and the competition between these suppliers has become more and more intensified, raising the fear of immiserizing industrial growth (Kaplinsky 1998). Kaplinsky and Readman (2000) identify the existence of immiserization in the furniture industry, where a number of countries have experienced growing export volumes and falling aggregate receipts. Kaplinsky (2005) provides evidence of the decline in the terms of trade for developing country manufactured exports. Too many enterprises from low labor cost economies are compressing into the manufacturing stage, leading to the squeezing of price and profit in manufacturing. Schmitz (2006, 563) points out that: Many producers, especially those of small and medium size, find that participating in and gaining from the global economy do not always go together. This then gives rise to the question whether other nodes of the value chain (such as logistics, design, marketing) offer higher returns. On this critical question there is little information.

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In fact, the critical question of whether developing country producers should involve themselves in the design and marketing functions, where developed country firms hold strong positions, has been theoretically debated in different literature streams. Competitive advantage theory suggests that a firm should focus on what it does well and outsource activities in which it has less of a competitive advantage. Compared to sourcing firms from high-income countries, developing country firms have more advantages in producing labor-intensive products due to lower labor costs. They do not have advantages in marketing, since there is a lack of managerial skills, marketing knowledge, as well as the capacity to brand their products in the consumer markets. According to this reasoning, for economic efficiency, developing country firms should specialize in producing and delegating export marketing responsibility to foreign partners. The global value chain (GVC) literature tends to recommend that suppliers upgrade toward design and marketing functions. The underlying idea of this literature is that competing in today’s intensified competitive global market, one where buyers demand many more attributes in addition to price (e.g., product variety, quality, customization), firms in low-income countries need to develop competences that go beyond the traditional factor of low labor cost. These capabilities include skills, management practices, and productive relationships that allow firms to combine speed and scale with higher value-added functions, such as design and marketing, to build more dynamic comparative advantages (Tewari 2006). GVC literatures (Gereffi 1999b; Kaplinsky and Readman 2001; Schmitz 2004; Humphrey 2004; Bair and Dussel 2006) indicate the inequality in value distribution among the chain leader and producers. Recent GVC studies (Bazan and Navas-Aleman 2003, 2004; Schmitz 2006) begin their query by asking whether functional upgrading really makes developing country firms better off. In an empirical study of the Brazilian shoe industry, Bazan and Navas-Aleman (2003, 2004) found that the profitability of manufacturers who embarked on selling their own designs and who established their own marketing channels is not higher than of those who kept to manufacturing only. In fact, the debate is a double-sided. On the one side, for economic efficiency, a developing country firm should not involve themselves in design and marketing functions where developed country firms keep strong positions. On the other side, such an international division of labor creates the opportunity for powerful actors to assume leadership, taking the authority in deciding economic returns for other members of the value chain, possibly furthering the inequality in value distribution among the chain leader and producers. Developing higher skilled functions such as design and marketing, accomplishing so-called functional upgrading (Gereffi 1999a; Kaplinsky et al. 2003; Humphrey 2004), is a way for developing country firms to increase their economic returns.

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My research aims to provide empirical evidence to this theoretical debate. The research question is: “How does functional upgrading link to firms’ export development.” My research employs a GVC perspective to analyze the relationship between functional upgrading and a firm’s export development. A qualitative research methodology was employed for the empirical study of Vietnam’s wooden furniture industry. There are several reasons for this choice. Firstly, the wood furniture industry is a traditional manufacturing sector employing a large labor force. However, the industry flourishes in high-wage economies, suggesting that there is a potential upgrading path, which firms in low-wage countries can pursue. Secondly, by focusing on Vietnam, an emerging market economy, I hope to shed light on the development pathway for firms in other developing economies operating in similar contexts. In the context of an emerging market, where international players come to source for suppliers, the empirical study of a firm’s ability to utilize existing relationships to upgrade may provide fruitful managerial implications. The following section presents the furniture industry value chain and upgrading typologies. Next the research methodology is presented. This is followed by an overview of the institutional context shaping the industry; a description of the Vietnamese wood furniture industry development; an analysis of the position of the Vietnamese wood furniture producers; an analysis of cases of successful export development are then made in connection to their upgrading; and, finally, I conclude with a summary of key findings and implications.

Theoretical background Gereffi (1994) introduced the term global commodity chains, which enabled important advances in the analytical and normative usage of the value chain concept. Based on his analysis, the GVC approach has been further developed by several other researchers who consider the value chain as a range of linked activities, which are not confined within one firm but include activities between firms in the same country and across countries. Kaplinsky and Morris (2001, 4) define a value chain as “the full range of activities which are required to bring a product or service from conception, through the different phases of production. . . [to] delivery to final consumers, and final disposal after use.” Mitsuhashi (2005, 25) has developed a detailed map of the value chain, which include both actors and their linkages (see figure 3.1) Mitsuhashi’s value chain figure depicts both value chain functions and actors, distinguishing between information flow and physical flow. However, it is inappropriate to assume that wholesaler or distributors are the only ones in charge of design. In many cases, producers take responsibility for design and marketing, as illustrated by case studies in the Vietnamese wood furniture industry. Addition-

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ACTORS

VALUE CHAIN FUNCTIONS INFORMATION FLOW

PHYSICAL FLOW

Input suppliers Raw materials Part suppliers

Part supplies

Producer/assembler

Production

Wholesaler/distributor

Design

Retailer

Marketing

Consumer

Disposal center

Distribution

Retailing

Consumption

Major link

Disposal/Recycling

Minor link

Source: Mitsuhashi (2005, 25)

Figure 3.1. Value chain’s functions and actors

ally, the marketing function should not be confined only to retail marketing. In the global market, business-to-business marketing also plays a significant role; therefore, this figure can be applied to map the value chain of a finished product, as long as modifications are made to overcome the aforementioned weaknesses.

The furniture industry value chain Based on the linkages among actors and sequences of activities along the value chain, Kaplinsky et al. (2003) present a map of a wood furniture value chain (see figure 3.2). The authors explain that activities in the global furniture value chain range from production (which can be done anywhere in the world) to retailing (which is carried out in the consuming market). Activities at the upstream end involve the forestry sector and its supplementary sectors (e.g., seed inputs and water), as well as sawmills and their supplementary sectors (e.g., chemicals and the machinery sector). Furniture producers obtain cut logs from sawmills and other inputs from the machinery, adhesives, and paint industries, in addition to

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An Explorative Study on Functional Upgrading and Export

Machinery Water

Seeds Forestry

Chemicals

Machinery Sawmills

Design

Machinery

Logistics, quality Furniture manufactuers Paint, adhesives, etc. Buyers

Domestic wholesale

Foreign wholesale

Domestic wholesale

Foreign retail

Consumers

Recycling

Refuse

Source: Kaplinsky et al. (2003, 6)

Figure 3.2. Wood furniture value chain

design and branding services. Depending on which market is served, the furniture passes through various intermediary stages before it reaches final customers. Kaplinsky et al. (2003) note that distribution channels in consumer markets vary from region to region. For example, retailing is popular in France, Germany, large multi-store outlets in the USA and the United Kingdom, but small independent outlets are common in Italy.

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Typologies of industrial upgrading The GVC literature provides a view of industrial upgrading from a wider perspective, which is systemic in nature and involves firms linked together in value chains. This relates both to the achievement of new product and process development, and to the functional reconfiguration of actors’ responsibilities in the chain as a whole (Kaplinsky and Morris 2001). The concept of upgrading—making better products, making them more efficiently, or moving into more skilled activities—has often been used in studies on competitiveness (Porter 1990; Kaplinsky 2000). Finally, inter-sector upgrading occurs when the competence acquired in a particular (sub)industry is used to move into a new one. For example, in Taiwan, competence in producing TVs was used to make monitors and, thus, move into the computer sector (Humphrey and Schmitz 2001; Gereffi et al. 2005). Kaplinsky and Morris (2001) explain in detail that functional upgrading is changing the mix of activities within and between links. They depict functional upgrading as arrows from production to design and marketing and branding (see figure 3.3).

Production

Design

❒ Logistics ❒ Transform inputs ❒ Quality ❒ Packaging etc.

Branding

Marketing

Source: Kaplinsky and Morris (2001, 39)

Figure 3.3. Functional upgrading linkages

Gereffi (1999a) and Humphrey (2004) provide discussion on functional upgrading as a hierarchical process, whereby a developing country firm transforms from original equipment assembler (OEA) under contract to global buyers, to original equipment manufacturer (OEM) (i.e., manufacturing a product under a buyer’s brand), to own design manufacturer (ODM), and further to own brand manufacturer (OBM).

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Upgrading and economic returns The aim of upgrading, as suggested by GVC literature, is to increase economic returns. Summarizing key ideas in GVC literature on the relationship between economic returns and functional activities, Mitsuhashi (2005, 28) draws a figure describing the link between upgrading and economic returns (see figure 3.4). Economic returns Design

Design

Marketing

B Production

Marketing

A Production

Upstream of the chain

Downstream of the chain

Product/process upgrading Functional ugrading Source: Mitsuhashi (2005, 28)

Figure 3.4. Upgrading and economic returns

Mitsuhashi explains that the process and product upgrading are indicated as an upward shift of production activities from A to B, which allows the industry or firm to take part in a higher-level value chain. In contrast, functional upgrading is denoted as movement or expansion along the value chain by acquiring design and marketing functionality, which is expected to yield higher returns, especially in a buyer-driven chain. Previous research, for example Gereffi (1999a), proposes that participation in global commodity chains enables a local industry and its firms to obtain both the upward shift and movement/expansion along the value chain. The GVC literature posits that functional upgrading makes developing country producers better off, but Bazan and Navas-Aleman (2003, 2004) provide counter-evidence. They point to the example of firms in the Sinos Valley foot-

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wear cluster in Brazil where functional upgrading has not led to high economic returns. From this evidence, Schmitz (2006) has queried whether functional upgrading really makes a developing country firm better off.

Research methodology The units of analysis in this chapter are two: the industry and the firms in the industry. The research uses qualitative methods including in-depth interviews, direct observation, and descriptive analysis. Primary and secondary data is used. Secondary data was collected from official statistical sources including those by the Vietnamese General Statistics Office, the General Department of Customs, Vietforest, as well as published research. Primary data is collected from my fieldwork, including interviews and observations in the Dong Ky, Quy Nhon, and Binh Duong furniture clusters. I visited four firms in each of the three clusters1 and conducted twelve interviews with managers. In addition, I conducted four interviews with official leaders in the three clusters, and leaders of two associations (Vietforest and HAWA2). The interviews were semi-structured3 and designed using two sets of questions. The interviews with association and local government leaders were based on questions relating to institutional factors and the export development of firms in the industry. The interviews with firm export managers were based on questions relating to the export activities, including design and marketing activities, and the firm’s business relationships. Each interview lasted for more than an hour. The direct observation method employed in this study was limited to what I could see when I was present during the interviews. Descriptive analysis was mainly used when studying the context of the Vietnamese wood furniture industry.

1 The researcher visited four firms in Dong Ky, including Hung Long, Viet Ha, Viet A, Dong Duong; four firms in Quy Nhon, including Duc Nhan, Phu Hiep, Tan Duc Duy, My Tai; and four firms in Binh Duong, including Truong Thanh, AA, Tan Phu, Tan Thanh. 2 Handicraft and Wood Industry Association of Ho Chi Minh City (HAWA) was established in 1991 and acts as a volunteer organization consisting of 269 enterprises that are operating in the following fields: Indoor and outdoor furniture, interior decoration, pottery, porcelain, bamboo, rattan lacquer ware, fine arts. Vietnam Association of timber & forest products (Vietforest) was established in 2000 is an volunteer organization operating in the fields of forestation, exploitation, processing, distribution, business and import-export of timber-forest products. 3 Jones (1985) guides that in preparing for interviews researchers will have, and should have, some broad questions in mind, but argues that although they are, to some extent, tied to their frameworks, they should not be restricted by them.

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Context of the Vietnamese wood furniture industry Global context

The furniture industry has become a big global business. By 2005, the total furniture trade was USD 97 billion, accounting for 0.95%4 of the total global commodity trade and ranking as the nineteenth biggest trading sector, exceeding apparel (ranked twentieth) and footwear (ranked thirty-first). Global furniture trading volume has been increasing faster than that of apparel and footwear product (UNCTAD 2007). High-income countries including the United States and Canada, members of the European Union, and Japan are the major wood furniture consuming markets. Wood furniture firms in these consuming markets tend to consolidate core competence in design and marketing and to delegate the manufacturing function to firms in labour intensive countries. They are coming to developing countries to find wood furniture supply at low cost. This trend has led to a boom in the furniture production industry in developing countries like Vietnam.

National context and regulatory framework Trade policy A key reform strategy of the Vietnamese government has been to liberalize the economy and open it up to foreign trade. With a predominantly import-substituting manufacturing sector developed under a long-term protectionist regime, Vietnam’s trade policies have been gradually shifting towards an export-oriented strategy following Vietnam’s accession to the ASEAN Free Trade Area (AFTA) in 2006 and the World Trade Organization (WTO) in 2007. Export stimuli Stimuli includes measures such as a duty rebate scheme, which provides export producers (firms exporting more than fifty percent of their output) with dutyfree access to the imported intermediate inputs and has been applied since 1991. Concessions are given to exporters relating to corporate income tax and turnover tax. Exports are also exempted from value-added tax and other domestic taxes (Athukorala 2006). Other export subsidies mainly take the form of interest rate support managed by the Export Promotion Fund (to first-time exporters, for exports to new markets, or for goods subject to major price fluctuations). The Fund also provides export rewards and bonuses for agricultural and non-agricultural products, such as handicrafts.

4 Calculated based on data supplied in UNCTAD Handbook of Statistics 20062007.

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Foreign Exchange system Foreign exchange policy has been used to regulate import flows from time to time in line with government priorities. Dealing with the impact of the East Asian crisis in late 1998, two major instruments were used: 1) one limited the foreign invested enterprises to the actual amount of foreign exchange they brought into the country in a year (“balancing” their foreign exchange); 2) another required an advanced payment for importing consumer goods. Over the years, these requirements have been relieved and were finally removed in 2004.5 This has helped Vietnamese wood processing exporters to reserve foreign currency for importing materials. Regulation of the wood processing business The wood processing industry has been subject to a recently re-enforced legal framework, designed to improve the domestic wood supply situation, as well as to regulate the forest environment. To register as a wood processing company, a producer has to register with not only the Ministry of Planning and Investment but also the Ministry of Agriculture and Rural Development. The customs clearance procedure requires a permission certificate for the export of wood material. A national forestry strategy for 2006–2020 has been launched. A revised Law on Forest Protection and Development went into effect in April 2005. The Forest Sector Monitoring and Information System (FOMIS) was set up to enforce these legal frameworks meant for protection (Fripp 2006, 17). The export promotion system Vietnam has a system of trade promotion organizations including the state system, non-governmental organizations (NGOs), and various commodity associations. In the state system, the Trade Promotion Agency is the national promoter and belongs to the Ministry of Industry and Trade. It is in charge of trade management and promotion services, and currently operates two Vietnam Trade Centers overseas. The Vietnam Trade Center in New York significantly contributes to the promotion of Vietnamese furniture firms in the United States. Since 2005, it has been supporting Vietnamese furniture firms’ participation in some big furniture trade fairs in the United States. In addition to the national trade promotion system, some provincial trade departments, especially the Ho Chi Minh City Department of Industry and Trade, are helpful resources for firms’ promoting activities. The Ho Chi Minh City Department of Industry and Trade is an experi5 Government Decision 46/2003 reduced the foreign exchange surrender requirement to zero percent.

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enced organizer of annual export trade fairs in Vietnam. Each year, it provides financial and technical support for some firms to participate in furniture trade fairs abroad, including, the biggest annual furniture trade fair in Europe, the Tendence Lifestyle in Frankfurt, Germany. Among trade supporting service suppliers, Vietnam’s Chamber of Commerce and Industry (VCCI) is the biggest professional organization. In the wood processing sector, there are two big commodity associations, HAWA and Vietforest, and one specialized agency funded by Germany: the Vietnamese-German Forestry Program. Generally, the results from the interviews with the twelve wood furniture industry entrepreneurs indicate that trade promotion organizations play an important role in their exporting activities. The interviewees strongly appreciated how HAWA and the Vietnamese-German Forestry Programs provided such services as furniture trade fairs, market surveys, enterprise connections, information resources, consultations, training sessions, and publications. HAWA has been an experienced organizer of the Vietnam International and Home Accessories Fair (VIFA)6 since 2005. With HAWA’s efforts to promote the trade fair abroad, especially to American, European, and East Asian customers, the annual VIFA often attracts a large number of global buyers from all over the world.

Effects of context on the Vietnamese wood furniture industry The above analysis of the institutional context suggests that Vietnamese wood furniture firms operate in a rich contextual environment that has both positive and negative impacts on their export business. Among the positive trends are: • The sourcing trend in high-income consuming markets for wood furniture supply at low cost has created opportunities for developing country firms to join the global market. • Natural forest and plantation forest provide material supplies for the industry. • Thanks to the country’s location close to wood material supplying countries (Laos, Indonesia, Malaysia), Vietnamese producers can access material supplies. • The country’s geography, with a long coastline, enables easy importation of wood materials, as well as exportation of finished products. • With a large population and labor force of forty-six million people, Vietnam has emerged as a low labor outsourcing destination and has attracted foreigners to come to Vietnam to find suppliers of labor-intensive products, leading to the integration of Vietnam’s wood furniture producers into the global market. 6 www.vifafair.com

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The New Asian Dragon • The regulatory framework has been increasingly adjusted, further enabling export business. • Simplification of the complex business licensing procedures has encouraged many small wood processors to set up new private firms, leading to more chances to work with foreign buying firms who like to deal with a registered firm rather than a small workshop. • A stable macro-economic and political environment with export stimuli, such as the duty rebate scheme and export bonuses mentioned previously, facilitate Vietnamese wood furniture producers’ involvement in the export business. • Finally, the well-developed system supporting trade—especially the efficient trade promotional support by HAWA, the Vietnam Trade centre in New York, the Ho Chi Minh City Department of Industry and Trade— significantly contributes to the export development of wood furniture producers. There are also several negative effects. Vietnam’s infrastructure, such as transport, ports, and power, especially in mountainous areas where wood supplies are available, are not good enough to facilitate business operations, making input costs high and possibly reducing their competitive advantage. The spontaneous and unpredictably change and amendment of the Vietnamese regulatory framework also makes the enterprise difficult. For example, in June 2006, the government’s sudden suspension of exporting solid wood products made many firms unable to deliver shipments as stipulated in their export contracts. The regulation on wood processing business, which requires that a wood processor must register with both with the Ministry of Planning and Investment but also with the Ministry of Agriculture and Rural Development, discourages a small producer to register as a company. These institutional factors should be taken into account when examining functional upgrading in the Vietnamese wood furniture industry.

The industry’s development In the past ten years, Vietnam’s wood furniture industry has achieved remarkable growth in scale and production, and increased in foreign investment and export turnover. Export turnover from wood products has reached an annual growth rate of forty percent, multiplied almost tenfold since 2000, reaching USD 2.4 billion in 2007. Wood products have been officially included in the country’s top five products since 2005 (Vietnamese-German Forestry Program 2008).7 Vietnam has become one of the world’s top furniture exporters, ranking as 7 After crude oil, footwear, garments, and seafood

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the fourth largest wood furniture exporter, holding 0.78% of the world’s furniture market share since 2005 (UNCTAD 2007). The main markets for Vietnamese wood furniture are the United States, Europe (United Kingdom, France, Germany, Netherlands, Denmark, and Sweden), and East Asia (China, Japan, and South Korea), though Vietnam currently exports to more than 120 countries in total. In 2007, Vietnam surpassed Indonesia and Thailand to be the second biggest ASEAN furniture exporter, after Malaysia (Hong Van 2008). Its furniture export turnover to the United States, Japan, the United Kingdom is USD 948 million, USD 307 million, USD 196 million, respectively (General Department of Vietnam Customs 2008). Outdoor furniture is the industry’s main export item. In 2007, outdoor furniture manufacturing accounted for approx ninety percent of Vietnam’s total wood product exports (Vietnamese-German Forestry Program 2008) 2.500 Millions

2.000 1.500 1.000

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

0

1995

500

Source: General Department of Vietnam Customs

Figure 3.5. Wooden furniture exports

According to the Vietnamese Ministry of Agriculture and Rural Development, in 2006, there were 1500 companies registered in the wood processing industry, thirty percent of which are state-owned or joint stock companies. Sixty percent are privately owned, while the remaining ten percent are foreign-invested companies. Besides the number of registered companies, there are thousands of small woodworking manufacturers, which are not registered, across Vietnam. Wood furniture producers mainly gather in three regions: 1) the northern Red River delta provinces (densely in Dong Ky village in the Bac Ninh province), 2) the central highland provinces (densely in Quy Nhon city), and 3) the southeast provinces (densely in Binh Duong, Ho Chi Minh City, Dong Nai industrial parks). These three main production areas can be distinguished from each other by their institutional contexts, the scale of their firms’ production, their products, and their target markets.

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The institutional context, for example in Dong Ky village, is a traditional handicraft village with a small production area. Workshops are in living quarters. Dong Ky’s infrastructure, although being improved by widening the main road, is quite poor in comparison to the other two clusters. Although the local authority has been open-minded on upgrading infrastructure to meet demand for production sites, they still lack the necessary knowledge to manage the industrial cluster. Meanwhile, industrial parks in the Quy Nhon and Binh Duong clusters are quite different from Dong Ky in the sense that they are newly built with good infrastructures, enabled by favorable supporting policies by the local governments. The Binh Duong cluster is being recognized as the area where local government is actively providing favorable conditions for business, while the Quy Nhon cluster is recognized as a favorable geographical location due to its closeness to the sea and Laos, where almost all of the wood supplies come from. The differences in institutional contexts among the three clusters may lead to different business patterns among firms in the three clusters. Firms in Dong Ky are often on a small scale of around ten workers, and develop from family businesses. Their internationalization pattern can be seen as gradual. Such firms serve domestic consumption and may be involved in export business with Chinese and South Korean buyers who visit the village and make orders. They rarely receive big orders. Their customers are often consumers of a solid carved style piece of furniture. Local production networks are naturally created among firms based on kinship or friendship. When one firm obtains an order bigger than its capacity, the owner-manager of the firm often will sub-contract the order to his relatives or friends. The contract is relational and not in written form. Meanwhile, firms in Quy Nhon and Binh Duong range from medium to large scale. Many of these firms were established to serve export markets. Their customers are often big global buyers who make large orders. They supply the European and American markets with both indoor and outdoor furniture. Local network ties are not as closed as the ones in Dong Ky. On the whole, the scale of production in these enterprises is relatively small, with the exception of some export-oriented furniture factories. The companies that employ less than fifty employees are sixty-three percent, while companies employing more than 500 workers account for only seven percent of the total number of enterprises (General Statistics Office 2005).8 The industry produces outdoor furniture, indoor furniture, and fine art products. Firms in the central highland and southeast provinces produce westernstyle furniture mainly for the European and American markets. A small minority 8 Calculated based on data supplied in the Statistical Handbook of Vietnam (2007).

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produces for the domestic market, while firms in the Northern provinces make home accents and traditional solid wood furniture for the domestic market, as well for China, Japan, and South Korea.

Vietnamese wood furniture producers move towards functional upgrading Upstream activities

This section examines upstream activities from the perspective of inputs needed for production. Vietnamese wood furniture producers purchase imported machines, but buy small tools and equipment from domestic makers. Specifically, Dong Ky producers mainly buy domestically made machines or imported ones from China. Producers in Quy Nhon and Binh Duong mainly import machines and equipment from Taiwan, Japan, or Germany. As far as wood material is concerned, producers rely heavily on imported wood material. Eighty percent of the furniture industry is based on imported supplies (Dawson 2008). Statistics from Vietforest show that Vietnamese enterprises need between 3 and 3.5 million cubic meters of wood per year, while the firms serving the domestic market only needs twenty percent of that total volume. In 2006, the wood sector imported USD 700 million worth of wood materials, accounting for one-third of the export turnover.9 Producers mainly buy wood material imported from Malaysia, Laos, and Cambodia. The dependence on imported materials make Vietnam’s wood processing firms vulnerable to the fluctuation in material supply. Since 2005, when its major suppliers in Southeast Asia, like Malaysia, halted exporting sawn timber, Vietnamese enterprises found it difficult to source their timber input, leading to competition for materials. Moreover, the increasing concern in high-income markets like Europe, the United States, and Japan regarding legality and sustainability of raw material sourcing will also limit a furniture firm’s choice of wood material suppliers in the future. The fact that Vietnam’s wood furniture sector has been growing at a rapid rate while its material supply is limited makes Vietnam’s costumers suspect that the producers may be involved in the illegal trade of wood. In response to the requirements made by consuming markets, Vietnamese firms have been paying attention to and source legal wood materials. Many firms comply with the requirements by the European and American markets for certificates by the FSC (Forest Stewardship Council) chain of custodies by sourcing legal and secure source materials. Some firms, like Truong Thanh, Tan Thanh, 9 Calculated based upon figures in the Statistical Handbook of Import Export 2007, General Department of Vietnam Customs (2008).

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Duc Nhan, and Tan Phu, have invested in forestation in Lao to ensure the legality of their materials. Many firms such as Truong Thanh and Dai Thanh, have applied and been accepted as members of the Vietnam Forest and Trade Network (VFTN), meaning that they pass the VFTN membership requirements by demonstrating long-term commitment to responsible forest management and trade (Fripp 2006). Currently, to deal with the issue of decreasing material supply, without breaching standard regulations, Vietnamese producers have also begun turning their eyes to Africa, and even America. Some enterprises, like Truong Thanh and Tan Thanh, are investing in forestation and saw mills in Africa to secure their supply. Regarding other sub-materials, including adhesives, paints and finishing materials, producers often will buy products imported by domestic trading companies because these supporting industries have not been well-developed in Vietnam.

Downstream activities and the move toward functional upgrading After primarily serving the domestic market, the industry began the internationalization process in the early 2000s. Presently, Vietnamese wood furniture producers have become very active in downstream activities. In this section, downstream activities are examined in connection to specific value chains with European, American and East Asian partners, who are key buyers of these Vietnamese producers. The European market has been a traditional market for Vietnam’s furniture producers. The European market is recognized as being a more stringent one in terms of the requirements for legality and sustainability, compared to markets such as the Japanese and American. Across the European Union, different member states are at different levels of awareness and action. Five member states, Denmark, France, Germany, the Netherlands, and the United Kingdom, all currently have a national legal framework which requires, as a minimum, proof of legal origin for purchases of wood products (Fripp 2006, 10). To enter this market, Vietnamese producers have tried their best to comply with all the European Union’s regulations on raw material origin and environmental standards. Vietnamese producers are very active, with more than seventy percent coming from certified sources, for having a reliable FSC chain of custodies. Vietnamese producers normally sell their products to large retailers like IKEA, Carrefour or a medium scale wholesaler like ScanCom, or even a small specialized retailer like Lapeyre. Some small firms export through other exporting agents. The main export items to Europe are outdoor furniture and westernstyle hardwood indoor furniture. Previously, Vietnamese producers had worked as processors using designs by European buyers, but now they can offer their buyers their own catalogs. In the industry’s early days, very few producers un-

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dertook marketing activities abroad. They just produced and waited for foreign buyers to place orders, but now the number of Vietnamese producers undertaking export marketing activities is increasing. With financial support from the Vietnamese Trade Promotion Agency, more and more furniture firms frequently participate in the Tendence Lifestyle fair mentioned above, and obtain big orders. This shows that Vietnamese furniture producers are moving toward a design and marketing function in the value chain with European buyers. Vietnam’s wood furniture exports to the United States have greatly expanded since 2004, when import duty penalties were imposed on Chinese furniture. Vietnam is now the sixth largest exporter of wood furniture and components to the United States (Dawson 2008). This market has been moving towards systems, such as those in the European countries mentioned previously, that require, as a minimum, proof of legal origin for purchases of wood. Although the demand for verified legal timber products in the United States is less pronounced than in Europe, some retailers have announced procurement standards that favor certified wood. For example, Clarke Veneers, which is responsible for approximately twenty-five percent of tropical plywood imports into the United States, is FSC certified and prefers to buy from FSC certified suppliers (Fripp 2006,13). To enter the market, many Vietnamese firms, such as Truong Thanh and Duc Nhan, comply with the requirements and supply buyers with FSC products. Regarding the distribution channel, except for the case of the AA Corporation, almost all Vietnamese producers have not sold directly to American end users. Most of them sells product to large retailers such as Jofran, John-Richards, Wyckes, Stickley, and Walmart. Some small firms export through other exporting agents. Furniture exported to the United States includes both outdoor and indoor products, which are mainly based on a western design style and are mass-produced, flat-pack furniture. Vietnamese producers are mainly producing indoor products based on the samples provided by American buyers; therefore, they can be said to be imitating OEM for these indoor products. For outdoor products, Vietnamese producers produce their own designs, which are copied by the Europeans, with some modifications. They can be said to be quasi-ODM and ODM. Regarding the marketing function, almost all Vietnamese producers obtain orders when United States’ buyers come to the two annual international furniture trade fairs held in Vietnam (Expo and VIFA). In addition, under support by the Trade Centre in New York, many firms have, since 2005, been participating in big furniture trade fairs in the United States, such as International Furnishing/ Merchandise in North Carolina, the Houston Furniture and Accessory Market in Texas, and the International Contemporary Furniture Fair in New York, and obtained big orders. It can therefore be concluded that Vietnamese producers have been taking steps toward functional upgrading in the downstream value chain with buyers.

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Vietnam exports solid indoor furniture, often with some detail decorations (e.g., eggshells, lacquer, and carvings) to East Asia, including China, Taiwan, Singapore, Japan, and South Korea. Such products sold in these markets are made mainly by Dong Ky producers, who have engaged in traditional craftsmanship since the sixteenth century.10 Some Vietnamese producers open sales offices in China to sell their products directly to Chinese consumers. A few firms sell directly to Japanese or South Korean consumers. Many firms sell products to specialized retailers in the Japanese market. East Asian buyers seem to be design takers. Vietnamese furniture producers export products to these markets with their own traditional design, which often date back to the times of the old Chinese dynasties. Some firms are very active in undertaking marketing activities in the Japanese, Chinese, and Singaporean markets. Since the early 2000s, firms have been participating in furniture trade fairs in Singapore (e.g., International Furniture Fair Singapore) and China, allowing many of them to obtain large orders, not only from Singaporeans and the Chinese, but also from other global buyers from Japan, Europe, the United States, Canada, and Australia.11 It can be concluded that there is a diversification in functions of Vietnamese producers in value chains with East Asian buyers, some operating as ODM and some as OBM.

Position of Vietnamese wood furniture producers in the GVC Summing up downstream and upstream activities conducted by Vietnam’s wood furniture firms, it can be concluded that the Vietnamese wood furniture industry is highly internationalized in both the upstream and downstream ends of the global wood furniture value chain. The majority of the industry’s inputs are imported and the majority of its outputs are exported. Design is mainly supplied by foreigners. Distribution and post-sale service in export markets are mainly operated by foreign buyers. However, many Vietnamese firms have taken steps toward functional upgrading, working as ODM and OBM in some value chains. The position of a majority of Vietnam’s wood furniture firms in the global value chain can be illustrated in the simple value chain figure drawn by Kaplinsky and Morris (2001), shown in figure 3.6. Figure 3.6 shows that most Vietnamese furniture firms are in the manufacturing function, producing under a buyer’s design or their own copied design, delegating distribution and the post-sale service functions in final markets to foreign partners. However, this figure does not clearly show the link between 10 This fact was revealed by Mr. Nguyen Van Sang, the Vice Chairman of Dong Quang Commune (where Dong Ky village is located) during an interview. 11 http://muasam247.vn/Desktop.aspx/Tin-DN/Thi-Truong/Do_go_VN_thang_lon_ tai_Singapore/

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Foreign partner

Design and R & D

Vietnamese wood furniture firm

Foreign partner

Production: - Inward logistics - Transformation - Input - Packaging

Marketing (and post-sale service)

Foreign consumers

Consumption/ recycling

Figure 3.6. Position of Vietnam’s wood furniture firms in the GVC

Vietnamese producers and their partners. Based on the value chain figure by Mitsuhashi (2005) and the wood furniture value chain figure by Kaplinsky et al. (2003) introduced previously, and the analysis above of Vietnamese producers’ upstream and downstream activities, this research develops a map of linkages between Vietnamese wood furniture producers and suppliers and buyers, which is shown in figure 3.7. The major link indicates commonly used marketing and sales linkages. The minor link indicates uncommonly used marketing and sales linkages. Vietnamese producers hold a major marketing and sales link with distributors in the domestic market and foreign markets like Europe, the United States, and East Asia. The marketing and sales to domestic buyers is a major link because almost all producers have direct contact with end users through their own sales offices. Marketing and sales to foreign end users is a minor link, because almost all producers sell their products through foreign distributors. However, it is worth noting that some producers hold direct sales linkages to end users through their own sales offices (opened in China and Japan) or their international participation in trade fairs (e.g., Tendence Lifestyle, Houston Furniture and Accessory Market, etc.

Cases of successful export development Development profile of case firms

The four case firms were founded in the middle of the 1990s, when the Vietnamese government’s reform policy began taking effect. The four firms come from three main wood furniture clusters: Dong Ky, Quy Nhon, and Binh Duong. All firms have demonstrated successful development as a result of their upgrading in the international market.

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Foreign forest planter

Domestic forest planter

Log traders

Sawmill

Vietnamese Producer

Domestic distributor

Domestic consumers

Minor link

East Asian distributor

East Asian consumers

Export agents

European distributor

European consumers

American distributor

American consumers

Major link

Figure 3.7. Map of marketing and sales linkages

The Hung Long Company12 Hung Long Company was founded in 1994 in Dong Ky village with a small workshop. After nearly 15 years in operation, its business has increased in scope. Its production site has been enlarged 25 times. Besides the old shop Dong Ky Fine Art, another three shops of the company have now opened. Its current turnover has increased thirty times compared with the initial year of opening. It firstly served a local market, mainly supplying furniture for local province consumption. Its first export to China was conducted five years after its establishment and now its export market has expanded to South Korea, Japan and Europe. Its initial products are solid wood carving furniture. Together with producing traditional wood carving furniture for the domestic and Chinese markets, Hung Long is now producing a western designed product for export to Europe. 12 Hung Long Company website, http://www.hunglong.com.vn

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An Explorative Study on Functional Upgrading and Export The Duc Nhan Company13 The Duc Nhan Company was founded in 1995 with its first factory in Gia Lai, a central highland province. They have since opened a second factory in Quy Nhon and are planning for a third in Binh Duong. The company’s production site has been enlarged four times and current turnover has increased fifteen times since the first year of their operation. The company has produced exports since its establishment, first in Scandinavia and now expanding to other western European countries and the United States. Their initial products were outdoor furniture. Presently, together with producing outdoor furniture for Scandinavian customers, Duc Nhan is now producing western-designed indoor furniture for some other western European buyers. The Truong Thanh Furniture Corporation14 The Truong Thanh Furniture Corporation was founded in 1993 with its first small factory in Dak Lac. Subsequently, they opened a second factory in Quy Nhon and a third factory in Binh Duong. After fifteen years of operation, the firm’s production capacity has increased fifteen times, with a current turnover that has increased forty times since establishment. Founded as a private limited company, Truong Thanh has now become a public limited company. Its stock market price is five times higher than its face value, even in the downturn period of the Vietnam stock market in early 2008. Truong Thanh began serving its local market, mainly supplying furniture for local provincial consumption. Its first export to France was conducted three years after its establishment and now it has expanded to many other western European countries. Currently, besides serving export markets, Truong Thanh is one of the most reputed producers of indoor wood furniture in the domestic market. AA Corporation15 AA Corporation was founded in 1993 with its first factory in Ho Chi Minh City, opening a second factory in Binh Duong. Founded as an architecture and industrial design company, AA began by serving demand for industrial decoration in the domestic market. It provided design and supplies interior decoration for hotels and apartments. Three years after its establishment, the firm shifted focus to indoor furniture. The first export of indoor furniture was to Japan, under the brand name of a Japanese buyer. AA’s current turnover has increased twenty-five times since its establishment. Currently, besides serving export markets, AA is the most well-known producer of indoor wood furniture in the domestic market. 13 Duc Nhan Company website, http://www.ducnhan.com 14 Truong Thanh Furniture Corporation website, http://www.truongthanh.com.vn 15 AA Corporation website, http://www.aacorporation.com/

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Functional upgrading and export development At the beginning of their internationalization, Duc Nhan, Truong Thanh, and AA acted as processors, or as an OEM for some European and East Asian branded retailers. Specifically, a year after it was established, Duc Nhan began its export business as a processor for ScanCom.16 Truong Thanh first began working as a processor for Lapeyre17 and sold its first OEM furniture to Carrefour.18 Six years after AA’s establishment, its first OEM furniture shipment to Japan was exported. After several years of working as processors and OEMs, AA and Truong Thanh have been upgraded to ODMs as a result of their efforts in production and functional upgrading, including investing in machinery and design teams to maintain their competitiveness, developing their own brand names, and conducting marketing activities in export markets. AA, specifically, is currently working as an ODM to supply Jadora, a special furniture collection for the American market, and Kecebo, a line of furniture created for the European market. Notably, unlike other export-oriented producers who often ignore the domestic market, AA has developed to become the national leading interior furniture producer with the brand name Nha Xinh.19 With the desire to brand Nha Xinh as a world name, AA is conducting a series of marketing activities overseas in both the United States and Europe, including opening a sales office in both countries. The key factors for AA’s success have to do with its investment in design (hiring a talented foreign designer to work at the company) and its multi-chain strategy (working as an ODM for the export market and branded producer for the domestic market). Besides investing in advanced machinery to upgrade production capacity, Truong Thanh has invested in building the firm’s design capacity20 to work as an ODM for three of the largest British distributors.21 Although similar to AA in 16 ScanCom International A/S is one of the world’s largest manufacturers of outdoor furniture, as well as decorative accessories. See http://www.scancom.net. 17 Lapeyre is the largest specialized wood furniture retailer in France. See http://www. lapeyre.fr/. 18 Carrefour is the world’s second-largest retailer and the largest in Europe. See. http:// www.carrefour.com/. 19 Nha Xinh, meaning beautiful house, is a line of furniture, which AA has created for the domestic market. Nha Xinh is a well-known brand name for middle- and upperclass households in cities. Designs in the Nha Xinh line look similar to those in the European and American markets. 20 Some companies fund potential employees (e.g, daughter and son of the firm’s President, Vo Truong Thanh) to study design and marketing in the United Kingdom. During their study, they have worked as the company’s marketing staff, creating business relationships with three of the largest British distributors. 21 They are Argos and Homebase (U.K.), KingFisher (U.K.), Alexander Rose (U.K.)

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upgrading design capacity, Truong Thanh still supplies outdoor furniture, which is considered a less design-led product, while AA focuses only on indoor furniture. Except for AA and Truong Thanh, which have developed a distinctive design capacity to work as ODMs in export markets, many producers imitate designs ordered by foreign customers or from competitors. Unlike AA and Truong Thanh, who have both reached the position of a brand producer in the international market, other companies, such as Duc Nhan, are still OEM and ODM suppliers. They also use a mixed strategy to develop their export. One the one hand, they work as processors under the name of foreign-branded firms, while on the other they develop their own designs to command higher prices.

Combination of relationship marketing and transactional marketing Relationship marketing and transactional marketing are the terms used by Grönroos (1997) to distinguish between a classical 4P marketing mix tool and relationship building considered as two marketing approaches composing a continuum for a firm’s marketing strategy. The four cases considered in our study combine relationship marketing and transactional marketing as a key to their success. Transactional marketing tools play an important role in attracting buyers, while relationship marketing helps to maintain existing relationships. Personal relationships are considered the most useful marketing tool, not only for the small firm like Hung Long but also for the big firm like Truong Thanh. Hung Long represents a typical success case for a small firm in Dong Ky village that often uses personal relationships (e.g., kinship, friendship, or acquaintanceship) to get orders. Through kinship and friendship, Hung Long gained some contracts to supply furniture for local state organizations. First, foreign buyers came to Hung Long as a result of the recommendation by local officials with whom Hung Long holds good personal relationships. Keeping good personal relationship with buyers is Hung Long’s key toward development. Hung Long, who is an owner-manager, is also the main person taking responsibility for face-to-face communication with foreign customers, as well as big domestic customers. Besides satisfying the buyers’ requirements for quality, design, and delivery, he possesses good communication and negotiation skills, all of which contribute to the firm’s success in keeping buyers. Because Hung Long holds a big share of the carved wood furniture domestic market, the firm now has expanded into the export market starting with China, then South Korea, and now Europe. However, this expansion is different from the first foreign business transaction brought to the company by local authorities. Later foreign buyers have come as a result of Hung Long’s efforts in transactional marketing activities, including export trade fair participation and making sure that their

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name and website address are listed on the websites hosted by domestic trade promotion agencies, including those by Vietforest and HAWA. Similarly to Hung Long in the North, Duc Nhan in Quy Nhon developed as a result of maintaining good business relationships with foreign buyers. Established as an export-oriented firm, initially focused on outdoor furniture, Duc Nhan gained its first foreign buyer through the recommendation of a local authority.22 Keeping cooperative business relationships with ScanCom, by meeting quality requirements and delivery times, Duc Nhan has accumulated significant production technology and market knowledge. In addition to these marketing relationships, Duc Nhan has been significantly investing in transactional export marketing activities including participation in international furniture trade fairs and assuring that its name and website address are listed on business-to-business sites, including Ebay and Alibaba. With efforts in both relationship and transactional marketing, Duc Nhan has now established itself as one of the leading furniture manufacturers, with key buyers not only from Europe, but also the United States and Korea.

Summary of case findings From the evidence provided by the case studies, it is apparent that the process of successfully developing export internationalization occurs along two different pathways: incremental and international from the beginning. The producers in Dong Ky village (Hung Long) developed from a small family business, starting their business to serve the domestic market, then expanding it to a neighboring country, and later to high income countries in the region, such as Taiwan, Japan, and South Korea. Producers in Quy Nhon (Duc Nhan) and Binh Duong (Truong Thanh) started in the export business from their inception, working as processors or sub-suppliers for export to Europe and America. Many of these firms had to learn to upgrade their quality to meet the requirements in high-income markets. Together with working as processors or as OEMs, these firms actively developed their own designs and undertook marketing activities to brand their products in the international market. The export success of these firms closely links to the upgrading trajectory. The upgrading trajectory of the selected case firms is summarized in figure 3.8. Position in GVC

---- OEM  ----

----  ODM ----

----  OBM ----

Case firms

Duc Nhan, Truong Thanh

AA, Truong Thanh Hung Long,

AA

Figure 3.8. Upgrading trajectory of the selected case firms 22 ScanCom was the first foreign buyer of Duc Nhan.

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An Explorative Study on Functional Upgrading and Export

The case studies reveal the significant contribution of functional upgrading to the firms’ export development. By conducting transactional export marketing activities, like trade fair participation, the firms make their produce known to more potential buyers. Many buyers, which the firms attracted from trade fairs, have become long-term partners as a result of the firms’ efforts in relationship management. Relationships with buyers play a significant role for the firms’ export development. Besides meeting buyer’s requirements on quality and price, the firms maintain long-term relationships with buyers through personal communication.

Conclusions This explorative study of the Vietnamese wood furniture industry points out that the case study firms were born in a rich context, which can potentially affect a firm’s business behavior and performance. The impacts can be both positive and negative, with institutional context serving as both a facilitator and constraint. Facilitators include favorable natural forest resources; a good location close to ports and countries with supplies of wood materials; a large labor force; a stable economic and political environment; a trade policy emphasizing an export-oriented strategy, including measures such as a duty rebate scheme; attractive income tax rates for export producers; and a useful system of trade support. Constraints include the absence of well-developed infrastructure, such as transport, ports, and power systems, and spontaneous and unpredictable changes in the regulatory framework. These institutional factors are believed to contribute to each firm’s performance; hence such factors should be controlled if conducting a comparative study between Vietnamese firms and their counterparts in other countries. This study signals that the Vietnamese wood furniture sector has been booming as a result of the outsourcing trend from high-income economies. Although there are a number of firms (in Dong Ky) that develop an export business as an incremental process, many firms engage in the international market as a result of a global buyer’s sourcing activities. Some become a part of the captive chain with big buyers. Some engage in the market-based chain with small, specialized retailers. The majority of the industry’s inputs are imported and the majority of its outputs are exported. Design is mainly supplied by foreigners. Foreign buyers still operate distribution and post-sale services in export markets; however, some firms are operating their own sale offices in export markets. Many Vietnamese firms have been taking steps toward functional upgrading, working as an ODM and OBM in some value chains. This study answers the research questions by confirming that functional upgrading has been implemented, although it is not very common in the industry. Some of the case study firms have transformed from an OEM to an OBM in different chains. The firms undertaking functional upgrading have not experienced

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economic downturn, but instead demonstrated success in export development. Trade fair participation is the most popular and efficient marketing tool. The case study analysis suggests that the heterogeneous characteristics of firms, with respect to ownership structure, size, and export experience and location, should be taken into account when examining the phenomenon of functional upgrading in the context of the Vietnamese wood furniture industry, and may contribute to differences in their export performance. My research provides both theoretical and managerial contributions. It answers the query of whether moving beyond manufacturing to a marketing function will lead to a firm’s export success. The findings challenge the theories of competitive advantage, which suggest that a developing country firm should specialize in activities where they would have a competitive advantage (i.e., low labor cost manufacturing activities). Actually, specializing in production helps a developing country firm in the short run to learn to produce better and to make the best use of its current comparative advantage of cheap labor cost. However, in the long run, this specialization causes firms to be stuck in the vulnerable position of a threatening price war, reducing profit margins. Building new capabilities through functional upgrading is a dynamic process, creating new comparative advantages. Managerially, the research suggests that to develop in the global market, firms should be more active in design and export marketing. Combining different functions in different value chains is a good strategy for long-term development. More specifically, when conducting export marketing, a firm should combine both relationship marketing and transactional marketing. Transactional marketing tools play an important role in attracting buyers, while relationship marketing helps to maintain existing relationships.

References Athukorala, P. 2006. Trade policy reforms and the structure of protection in Vietnam. The World Economy 29(2): 161–187. Bair, J. and P. Dussel. 2006. Global commodity chains and endogenous growth: Export dynamism and development in Mexico and Honduras. World Development 34(2): 203–221. Bazan, L. and L. Navas-Aleman. 2003. Upgrading in global and national value chains: Recent challenges and opportunities for the Sinos Valley footwear cluster, Brazil. Paper presented at the EADI Workshop, Novara, Italy, October 30–31 2003. http://www.eco.unipmn.it/eventi/eadi/papers/bazannavasaleman.pdf. ———. 2004. The underground revolution in the Sinos Valley: A comparison of upgrading in global and national value-chains. In Local enterprises in the global economy: Issues of governance and upgrading, ed. H. Schmitz. Chel-

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tenham, U.K.: Edward Elgar. Dawson, T. 2008. Vietnam’s wood processing industries: Status and challenges. Paper presented at national workshop, http://www.ptm.org.vn/. Fitter, R. and R. Kaplinsky. 2001. Who gains from product rents as the coffee market becomes more differentiated? A value-chain analysis. IDS Bulletin 32(3): 69–82. Fripp, E. 2006. Illegal logging and related trade: The global response and indicators of change. London: Chatham House. General Statistics Office. 2005. Statistical Handbook of Vietnam 2005. Hanoi: General Statistics Office. Gereffi, G. 1994. The organization of buyer-driven global commodity chains: How U.S. retailers shape overseas production networks. In Commodity chains and global capitalism, eds. G. Gerrefi and M. Korzeniewicz, 95–122. Westport, Conn.: Praeger. ———. 1999a. International trade and industrial upgrading in the apparel commodity chain, Journal of International Economics, Vol. 48, pp.37-70. ———. 1999b. A commodity chains framework for analysing global industries, in Institute of Development Studies, 1999, Background Notes for Workshop on Spreading the Gains from Globalisation, www.ids.ac.uk/ids/global/conf/ wkscf.html Grönroos, C. 1997. Keynote paper: From marketing mix to relationship marketing–towards a paradigm shift in marketing. Management Decision 35(4): 322–329. Hong Van. 2008. More than 500 stalls at VIFA 2008. Saigon Economics Times, February 29. http://www.thesaigontimes.vn/Home/kinhdoanh/xuatnhapkhau/3490/. Humphrey, J. 2004. Upgrading in global value chain. ILO Working Paper No. 28, International Labor Office, Geneva. ———. 2001. Governance in global value chains. IDS Bulletin 32(3). Jones, S. 1985. Depth interviews. In Applied qualitative research, ed. R. Walker. Aldershot, U.K.: Gower. 56-70. Kaplinsky, R. 1998. Globalization, industrialization and sustainable growth: The pursuit of the nth rent. IDS Discussion Paper 365, University of Sussex, Institute of Development Studies, Brighton, U.K. ———. 2000. Globalization and unequalization: What can be learned from va­ lue chain analysis? Journal of Development Studies 37(2): 117–146. ———. 2005. Globalization, poverty, and inequality: Between a rock and a hard place. Cambridge, U.K.: Polity Press. Kaplinsky, R. and M. Morris. 2001. A handbook for value chain research – Prepared for the IDRC. Brighton: Institute of Development Studies, University of Sussex.

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Kaplinsky, R. and J. Readman. 2000. Globalization and upgrading: What can (and cannot) be learnt from international trade statistics in the wood furniture sector? Centre for Research in Innovation Management, University of Brighton and Institute of Development Studies, University of Sussex. Kaplinsky, R., M. Morris and J. Readman. (2001). Globalization and Upgrading: Innovation and learning in the Wood furniture value chain, UNIDO Kaplinsky, R., O. Memedovic, M. Morris and J. Readman. (2003) The global wood furniture value chain: what prospects for upgrading by developing countries: the case of South Africa. Geneva: UNIDO Mitsuhashi, K. 2005. The furniture value chain from Thailand to Japan: Upgrading and the roles of buyers. PhD diss., University of Sussex. Porter, M. E. 1985. Competitive advantage: Creating and sustaining superior performance. New York: Free Press. Schmitz, H., ed. 2004. Local enterprises in the global economy: Issues of governance and upgrading. Cheltenham, U.K.: Edward Elgar. ———. 2006. Learning and earning in global garment and footwear chains. European Journal of Development Research 18(4): 546–571. Tewari, M. 2006. Is price and cost competitiveness enough for apparel firms to gain market share in the world after auotas? A review. Global Economy Journal 6(4): 1–46 UNCTAD. 2007. Handbook of statistics 2006–2007. Geneva: U.N. Conference on Trade and Development. Vietnamese-German Forestry Program. 2008. Forest products: Promising and renewable. http://www.ptm.org.vn/.

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Conversion of Foreign Direct Investment Projects in Vietnam

CHAPTER 4

Conversion of Foreign Direct Investment Projects in Vietnam Bui Huy Nhuong, Nguyen Thi Huong, Nguyen Anh Minh, Ta Van Loi & Michael W. Hansen

Introduction A firm expanding into a foreign market through foreign direct investment (FDI) must choose between acquiring an existing firm or setting up a new business. Moreover, the firm has to decide between either keeping full control of its subsidiaries or sharing them with others. Entering the local market by one entry mode does not mean that the ownership configuration must remain unchanged over time. It could be converted into another form as the mission of the business or the conditions in the host country shift and change. There are many studies of the determinants of the choice between full and partial control of subsidiaries. However, very few studies have focused on this topic in Vietnam. Moreover, where the literature does focus on the entry mode of choice, few studies have examined how the mode changes as the project matures. These post-investment issues are particularly important in Vietnam, where in recent years the government has made substantial changes to its FDI regulations, inter alia gradually allowing full foreign ownership in most sectors of the economy. This change in policy encouraged a large number of multinational corporations (MNCs) to convert their initial investment into new forms, especially from joint venture (JV) companies to wholly-owned subsidiaries. This chapter analyzes the dynamics of entry mode choice and changes of ownership configuration of MNCs in Vietnam. The study contributes to the entry mode research by providing new empirical evidence from Vietnam, a transitional economy, and offers insights to MNCs choice of entry mode strategy and to the discussion of foreign investment policies.

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Scope of the research and research questions According to the Vietnamese regulations on FDI, the term restructuring includes division, de-merger, merger, consolidation, and the conversion of the form of investment. In this research, we only focus on conversion of the form of FDI (hereafter referred to as “the conversion”). Our research aims to answer the following questions: 1) how do MNCs select their entry mode in Vietnam and what are the key factors that influence their choice; 2) how and why are FDI projects converted; and 3) how does the conversion affect the Vietnamese partners.

Entry mode and conversion The entry modes

Essentially, there are two principal types of equity based entry modes: whollyowned enterprises and joint ventures.

Wholly-owned enterprises This entry mode gives full control of overseas operations and access to the full earnings of the investment. The foreign investor has to make all his/her own decisions, involving issues such as recruitment, training, and management of the local as well as the expatriate workforce, contacting authorities, getting permits and approvals, etc. Moreover, with a wholly-owned investment, the foreign investor carries the full risk of financing of equity and debt.

Joint ventures Joint ventures are partnerships between the foreign investor and local firms or other multinational corporations. The partnership can take a large number of forms. In some countries there are hybrid forms of partnership agreement, like contractual JVs in China, or business cooperation contracts in Vietnam. Some governments want to ensure that domestic firms get the maximum benefit from FDI and ask foreign investors to cooperate with local firms before granting them an investment license. Such regulations are prevalent in several Asian developing countries like China, Vietnam, and Indonesia, and are especially applied in so called ‘strategically sensitive’ sectors like media, telecom, electronics, and hotels. Through JVs, foreign investors can reduce their risk, especially when the financial investment is high, or the return on the investment is uncertain. Through the partnership, the foreign firm gets quick access to local markets, industry, and political intelligence, as well as local skill and resources.

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Wholly-owned

Joint venture

1. Up-front investment: financial and managerial

High

Medium

2. Speed of entry

Slow

Quick

3. Market penetration

Medium

Medium/High

4. Control of market

High

Medium

5. Political risk exposure

High

Medium

6. Technological leakage

Low

High/Med

7. Managerial complexity

High

High

8. Potential financial return

High risk High/Med return High payout

Med/High risk High/Med return Medium payout

Source: Adapted from Lasserre (2003)

Table 4.1. Comparing entry modes

Conversion of foreign investments Types of conversion

Conversion of the form of foreign investment means that a project, which has been started in one form of investment, converts into another form of investment. Theoretically, the following types of conversions can be envisioned: 1) from JV to whole ownership, 2) from whole ownership to JV, and 3) from one form of JV to another. As mentioned above there are in addition a number of other forms of contractual business cooperation in Vietnam.

Reasons for the conversion of the form of foreign investment There are a number of factors influencing the conversion of FDI projects, including factors related to the host country as well as to the investors. Those factors are summarized in figure 4.1. Host liberalization Local industry/ market

Strategic objectives Conversions of FDI projects

Privatization policy

Internal capailities Joint Venture decay/failure

Figure 4.1. Factors affecting conversion

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Host country factors A number of factors in the host country may lead to conversion, including changes in government policy, developments in the local industry/market, or privatization policy.

Changes in government policy In the early stages of opening their economies, developing countries often push foreign investors into partnership with local firms in strategically sensitive sectors. As the economies mature, they may remove restrictions and become open to wholly-owned enterprises. Moreover, more forms of investment are typically allowed for foreign investors.

Local industry/market When entering into a foreign market, the investor may fear that their investment would not be profitable in the long run due to lack of local purchasing power or lack of demand for the investor’s product and services. In this case, they may wish to partner with a local company to share the risk. As the market size increases, they may wish to expand the activity to obtain economies of scale. Foreign subsidiaries can obtain additional capital from the parent companies or raise it from local or international capital markets. In some cases, where the local partner is unable or unwilling to contribute additional capital, the foreign investor may choose to buy the local partners shares.

Privatization policy In emerging markets, the government may implement its privatization policy by asking foreign investors to buy shares of privatized state-owned enterprises (SOEs). This type of effort has historically been a major driver behind FDI in emerging markets.

Factors related to firms A number of factors related to the investors may lead to conversion of the FDI for example: changes in strategic objectives, and the development of internal capabilities.

Changes in strategic objectives There are several types of strategic objectives that can be pursued when a foreign investor enters new markets, including getting access to markets and/or resources, or to access learning and coordination opportunities. The objectives of the investment influence the entry mode. For instance, if the investors want to achieve learning and coordination objectives, they can enter by JVs, but, if the concern is control, they may go for a wholly-owned subsidiary. Thus, conversion of the form of investment is a way of achieving strategic objectives.

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The development of internal capabilities The capabilities of the firm concerning the local market strongly affect the conversion process. For some MNCs, JV entry is only an intermediate step in internationalization; as the project matures, the need for a JV partner may disappear. Thus, when the market, policy, and internal capabilities change, conversion provides an opportunity for the firm to reconfigure to a more appropriate ownership configuration. The varied operations of the subsidiary in the foreign country, its knowledge of the market, the conditions of production, the experiences gained by its officials, and the position it may have established for itself with its own customers all tend to create new opportunities for full ownership that did not exist at the time the firm was established.

Joint venture decay/failure According to Lasserre (2003), the main causes of JV decay are the absence of strategic vision, the failure to understand the local partner’s strategic logic and culture, haste in negotiation, insufficiently prepared staff, lack of organizational support, “believing without seeing”, and lack of capabilities on the part of the local partner. These causes often reinforce each other, leading to a “vicious circle of misunderstanding”, and eventually leading to joint venture failure.

Analytical framework and research hypotheses The mode of investment

As mentioned above, there are many types of conversions, but in the case of Vietnam, we group business cooperation on contract together with JVs into one group. We suppose that there are two main types of conversions in Vietnam: 1) JVs converted to wholly-owned enterprise and 2) wholly-owned enterprise converted to JVs. These two main types of conversions account for more than ninety percent of all converted FDI projects in Vietnam. Consequently, the analytical framework can be described as shown in figure 4.2.

Hypotheses Many developing countries, including Vietnam, have restricted inward FDI with measures such as excluding all foreign investment from certain fields, insisting on local capital participation in foreign corporate ventures, foreign exchange restrictions, bureaucratic procedures, and foreign employment restrictions (World Bank 1993). From the first Law on Foreign Investment, foreign investors were allowed to invest in Vietnam in the following forms: 1) business co-operation on the basis of a business co-operation contract; 2) JV enterprise; and 3) enterprise with one-hundred percent foreign ownership. In most sectors, foreign investors were not freely allowed to choose the form of investment and were required to partner with a Vietnamese company. The amendments of the Law on Foreign

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Investment in 1990, 1992, 1996, and 2000 removed many of the restrictions on JVs, allowing FDI projects to be converted. After opening its economy, Vietnam has gradually liberalized its FDI regulation, allowing investors to go from JVs to fully-owned subsidiaries in a large number of sectors. This change has fundamentally altered the strategic choices regarding entry mode and ownership for MNCs in Vietnam, and a large number of MNCs have converted their original investment into new forms. Thus, we hypothesize that: Hostcountry country Host

H 1, 2

H6

Joint-Ventures Joint-Ventures

Firm Performance H4 Effects Effects

Entry modes

W Wholly-owned holly-owned

H3

H5

Vietnam Development

H6

Firms’ Firm s’

Figure 4.2. The analytical framework H1: The original selection of entry modes is strongly affected by regulation. Regulation initiated by the Vietnamese government in 2000 became the primary legal base for allowing FDI projects to be converted, though conversions had unofficially been occurring since 1997. At the same time, many sectors earlier restricted to JV establishments were opening for wholly-owned projects. As discussed above, there are some other factors, apart from regulation (including the decay/failure of JVs and lack of capabilities on the part of the Vietnamese partners) that affect the conversion process. Thus, we hypothesize that: H2: FDI projects registered prior to 2000 restructured much more than those registered after 2000 and that the FDI projects registered in the industries that had earlier required JVs (like food, electronics, and hotels) restructured more than others.

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Conversion of Foreign Direct Investment Projects in Vietnam

As previously mentioned, there are several factors that influence entry modes (Lasserre 2003), such as government polices, country risks, market attractiveness, strategic objectives, internal capabilities, and timing. It can also be argued that the entry mode depends on the home country of the investor. Thus, MNCs coming from the EU and the United States tend to choose JVs, whereas MNCs coming from Asia will be less inclined to use JVs, as they can be expected to understand the Vietnamese environment better. Thus, we hypothesize that: H3: MNCs coming from the EU and the United States restructured more than MNCs coming from Asia. Many MNCs consider JVs as an intermediate step in entering a foreign market. After gaining the benefits of local partnerships in accessing the local market, they want to maximize their profit of overseas subsidiaries, especially when they can foresee a positive development of the industry in question; therefore, they only increase implemented capital after the conversion. Hence, we hypothesize that: H4: Restructured FDI projects operate more effectively after rather than before the conversion. More than ninety percent of Vietnamese partners of JVs are SOEs. Consequently, local companies and governments can gain advantages from foreign partners in JVs, such as management skills, technological knowledge, an international distribution network, exposure to product standards of foreign market, etc. This means that local partners would gain less if projects converted. Thus, we hypothesize that: H5: The conversion from JVs to wholly-owned enterprises negatively affects the Vietnamese partners and government.

Research methodology Research design

In any scientific undertaking, the choice of method is dependent on the purpose of the research. As described above, we use both secondary and primary data. As for the secondary data, after reviewing the entry mode and conversion literature closely, we contacted the Ministry of Planning and Investment (MPI) to obtain data on the converted FDI projects in Vietnam. In addition, we designed a questionnaire for foreign and local investors, and developed a semi-structured questionnaire for in-depth interviews with experts.

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Defining the population of relevant firms According to the Vietnamese FDI legislation, all restructured FDI projects must be reported to the Foreign Investment Agency (FIA) under the Ministry of Planning and Investment (FIA/MPI). So, there exists a list of converted FDI projects at FIA/MPI, and the list provides the population of this research. There were 257 converted FDI projects in the whole country. From this database, we analyzed the overall situation of the conversions, thus getting partial inputs for the discussion of our hypotheses. Moreover, this general information provided the background for the development of a questionnaire and an interview guide.

Constructing the questionnaires The draft questionnaire was sent to the MPI for comments. Moreover, we conducted a pilot survey to evaluate its usefulness. The pilot test involved eight converted FDI projects in the northern Vietnam. The purpose of this test was mainly to test the relevance of the questions underlying the survey instrument, as seen from the perspective of practicing managers. The final questionnaire poses a variety of questions, including both closed and opened, and multiple choice questions. The questionnaire consists of four main parts, following the sequence of entry into the Vietnamese market: 1) the first part deals with the profile of the company; 2) the second part with the initial decision to invest in Vietnam; 3) the third part concerns the restructuring process; and 4) the final part deals with the respondents’ opinions and suggestions.

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Conversion of Foreign Direct Investment Projects in Vietnam

MNC’s origin EU

United States

57

Sectors

HCM

Other

HN

Others

Total

Industry

11

9

6

9

35

Agriculture

1

2

0

4

6

Service

5

0

3

8

16

5

3

3

2

13

Agriculture

0

0

0

0

0

Service

2

1

2

0

4

37

29

11

31

108

Agriculture

1

2

0

17

20

Service

19

2

6

9

36

3

2

2

5

12

Agriculture

0

1

0

1

2

Service

2

0

2

1

5

88

31

50

88

257

17 Industry

164 Industry Asia

BD & DN

19 Industry

257

Key: HCM (Ho Chi Minh City), BD&DN (Binh Duong and Dong Nai), HN (Ha Noi)

Table 4.2. Cross-tabulation of the MNC’s origin, sectors, and location (population)

In-depth interviews We interviewed thirteen experts in total, including five staff from the MPI and one official working for the Provincial Department of Planning and Investment in Ho Chi Minh City, Ha Noi, Binh Duong, Dong Nai, Ha Tay, Hung Yen, Hai Phong, Hai Duong.

Data collection and sample From the above population, our aim was to get approximately 100 to 120 responses. We tried to select a symmetrical sample in terms of sectors, destinations, and MNC origin. Data collection was conducted from September 2006 to January 2007. For each investment, we called the firm to present the purpose of the survey and asked them for their email address. Then we sent them a questionnaire and a letter of introduction from the National Economic University (NEU) (each in English and Vietnamese). In the mail, we asked the respondents to choose one of three ways of responding: 1) reply through e-mail, 2) return the questionnaire to

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a specified address, or 3) arrange an interview with the research team. To obtain their confidence, we accompanied the questionnaire with a letter of introduction from NEU and a reference to our website. We strived to collect information from the manager with the best knowledge of the firm’s conversion. Typically these managers were General Directors or Deputy General Directors. Some were expatriates and others were Vietnamese. In some cases, we had to contact the person who previously worked for the company during its conversion simply because they knew the subject better. In northern Vietnam, questionnaire data were mainly collected by team members. To access provincial investment authorities, we presented a letter of introduction from NEU. After the interview, we asked them for a sealed official letter to be presented to the companies in the relevant provinces. In the South, data were collected through the FIA/MPI, who sent an official letter sealed by the agency. Collecting data through FIA/MPI had two advantages: First, the survey could be conducted on a larger scale and over wider geographical distances. Second, respondents usually take a letter from a ministry seriously and put more effort into answering the questions. However, we also selected some companies in the South to interview directly in order to get a direct feel of these cases. We know that in Vietnam, unlike developed countries, people generally will respond to a survey only if it is from a government office, an association that they have a beneficial link to, or because they have personal relationship with the people doing the survey. To encourage responses, the authors, an FIA staff person, and one other field researcher hired by us, made intensive follow-up interviews by phone. Each returned questionnaire was checked to see if there were any problems with the answers. Apparently, the respondents had no problems understanding the questions. However, there was often missing information, which we subsequently tried to obtain through telephone calls. In total, we made more than one-hundred phone calls to the respondents and received much useful additional information, including answers to some unanswered questions. The composition of the respondents to the survey is detailed in table 4.3. By the end of February 2006, we had 103 completed questionnaires eight of which were eliminated because they lacked complete information. Thus, in total, there were ninety-five responses from the total of 257 converted FDI projects. Of the ninety-five responding FDI projects, forty firms were in the North and fifty-five in the South. In terms of the MNCs’ countries of origin, the number of respondents from EU, the United States, and Asia were thirty-one, eight, and fifty-six respectively. By sector, seventy-five firms operated in industry, three in agriculture, and seventeen in services. Of the received questionnaires, eightyfive were answered by Vietnamese managers and ten were answered by foreign managers.

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Conversion of Foreign Direct Investment Projects in Vietnam

MNC’s origin EU

United States

31

8

56 Asia

Sectors

HCM

HN

Others

Total

Industry

8

5

5

4

22

Agriculture

-

1

-

2

3

Service

2

-

2

2

6

Industry

3

1

2

1

7

Agriculture

-

-

-

-

-

Service

1

-

-

-

1

Industry

15

13

8

10

46

-

-

-

-

-

4

-

10

20

21

19

95

Agriculture Service 95

BD & DN

6 35

Table 4.3. The cross-tabulation of location, the MNC’s origin, and sectors of the sample (survey)

All questionnaires collected were analyzed using Microsoft Excel. We used the pivot table function to summarize and analyze the data.

Results and interpretations

The evolution in FDI regulation The first Law on Foreign Investment in 1987 allowed foreign investment in any of the following forms: 1) business co-operation on the basis of a business co-operation contract; 2) JV enterprise; and 3) enterprise with one-hundred percent foreign-owned capital. During the implementation of projects, investors could not convert the form of investment. The Law on Foreign Investment was amended in 1990 and 1992, and although it did not allow more forms of investment, it provided incentives for enterprises to move toward one-hundred percent foreign-owned capital. This was an important basis for foreign investment in the subsequent years. Although there were no amendments to the legislation in 1993, the Government of Vietnam issued Decree 87/CP that opened a new form of investment– build, operate, transfer (BOT)–in order to attract more FDI into Vietnam. The Law on Foreign Investment was amended again in 1996, allowing foreign investors to assign more capital. In 2000, Vietnam officially permitted enterprises with only foreign-owned capital and parties to business co-operation contracts to convert the form of investment, split, de-merge, merge, and consolidate during

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the course of their operation. This is the central important legal basis for converting the form of investment in Vietnam. To increase the efficient operation of foreign invested enterprises and to provide further dynamics in the Vietnamese stock exchange market, Decree 38/2003/ ND-CP allowed the conversion of a number of foreign invested enterprises operating under the Law on Foreign Investment into public shareholding companies with foreign invested capital. Enterprises eligible for conversion must satisfy the following conditions: they must 1) have contributed the full legal capital in accordance with the provisions of the investment license; 2) have officially been in operation for at least three years, and made a profit in the last year prior to the conversion; and 3) submit a proposal for the conversion. Due to requirements related to being a member of the World Trade Organization (WTO) (e.g., national treatment clauses), Vietnam issued the Law on Investment No 59/2005/QH11, combining the Law on Foreign Investment and the Law on Domestic Investment. This law has been enforced since the beginning of July, 2006. The Law either conceded all the forms of investment issued in the above different legal documents, or issued indirect forms of investment for foreign investors. Nevertheless, Article 21 of the Law continues to allow the conversion of the form of investment.

Conversions of the form of foreign investment in Vietnam Trends in forms of foreign investment in Vietnam

Since the issuance of the Law on Foreign Investment in Vietnam in 1987, the form of FDI flowing into Vietnam has fluctuated. The number of JV and Business Cooperation Contracts (BCC) projects has been decreasing, while one-hundred percent foreign-invested projects have been increasing rapidly. In the first years, JVs accounted for the majority of FDI projects, both in terms of number of projects as well as registered capital. Currently, one-hundred percent foreign-invested projects accounts for the majority of FDI projects. From 1988 to 1990, JVs accounted for up to seventy-five percent of the projects. BCCs accounted for eighteen percent, and one-hundred percent foreign invested-projects only accounted for a little more than six percent. By the end of 1995, FDI projects registered as JVs and BCCs had been reduced, accounting for 64% and 8.13% respectively. However, the percentage of FDI projects registered as onehundred percent foreign-invested increased to 18.25. As of 2000, only 39.38% of FDI projects were JVs, 4.9% were BCCs, while 55.5% were registered as one-hundred percent foreign-invested. By the end of 2005, one-hundred percent foreign-invested projects accounted for the majority—nearly seventy-five percent—of FDI projects. 22.4% of the projects were JV and 3.0% were BCCs. In addition, there were more than twenty BOT FDI projects, companies, and holding companies. There are a number of reasons why the form of FDI projects in Vietnam has changed over the past eighteen years.

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Conversion of Foreign Direct Investment Projects in Vietnam

1988–1990

1988–1995

Project

Registered capital -

0.02

0.21

BCC

18.22

38.33

8.13

13.11

WOEs

6.07

9.33

21.91

18.27

JVs

75.7

52.33

64.55

74.33

Joint-stock foreign invested

-

-

-

Holding company

-

-

-

Forms of investment BOT

Total

100

100

Project

100

Registered capital

1988–2000

1988–2005

Registered capital

Project

0.15

1.14

0.09

2.68

4.94

10.44

3.0

8.17

55.51

29.39

74.1

50.1

39.38

59.01

22.4

38.3

-

-

-

0.13

0.39

-

-

-

0.02

0.10

100

Project

100

100

100

Registered capital

100

Source: FDI Agency, Ministry of Planning and Investment Table 4.4. FDI projects in Vietnam by form, 1988–2005 (percentages)

Why JVs dominated in the early years The first foreign investors had little knowledge about the Vietnamese business environment. Through their Vietnamese partners in JVs, they began to understand more, and share initial capital and risks. Consequently, foreign investors partnered with local firms. Foreign investors partnered with local firms, not only because they wanted to but also because of legal requirements in some sectors (e.g., electronics, cement production, automobile, motorcycle production, etc.). Foreign investors were not allowed to register in one-hundred percent ownership in most sectors. Moreover, the Vietnamese government provided financial incentives, such as tax exemptions, in order to encourage more JVs. Nevertheless, administrative formalities to apply and establish foreign invested companies were complicated, and often foreign investors relied on their Vietnamese partners to take care of them. Through their “forced marriages” with foreign partners - that is JVs mandated by government regulation - Vietnamese firms could obtain management and technological experience from JVs. Thus, fifty percent of the respondents reported that the Vietnamese partner had gained experiences through interacting with foreign investors, and thirty-one percent reported that they gained access to better technology. As discussed above, there are many factors affecting the selection of entry mode, but the survey results support H1: fifty-four of ninety-five respondents stated that the requirements of the Vietnamese legal system are the main factor

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affecting the selection of entry mode. Another important factor is market access: fifty-two respondents said that they opted for JVs because they wanted easy access to the Vietnamese market.

Why the number of JVs has been reduced in recent years? The legal rules and regulations on one-hundred percent foreign owned enterprises (FOEs) have been relaxed in recent years. The 1996 Law on Foreign Investment removed some industrial sectors that required JVs, and opened up more sectors and industries to one-hundred percent FOEs. As a result, FDI projects registered as JVs were reduced, while the number of one-hundred percent FOEs increased. Foreign investors have become better at understanding the Vietnamese business environment since the first Law on Foreign Investment and, consequently, the number of one-hundred percent foreign-owned projects continues to increase. Foreign investors that actively control their own projects can maximize profit and draw on assistance from the parent company. Vietnam allowed foreign firms to invest in industrial zones, export processing zones, and high-tech zones through infrastructure development enterprises. In these cases, the infrastructure is available, the land rent or the rent for subleased land on which the infrastructure is developed, and the fees for use of infrastructure facilities are paid on the basis of a simple contract signed with the infrastructure development enterprise. Therefore, the projects in industrial zones are often registered as one-hundred percent foreign-invested capital.

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Conversion of Foreign Direct Investment Projects in Vietnam

MNC’s origin

EU

United States

Asia

31

8

56

95

Sectors

Shared risks during business operation

Initial investment capital reduced

Necessary to access Vietnamese market

Gained skills from Vietnamese partner related to production

Industry

8

-

8

-

4

28

-

Agriculture

-

-

-

-

-

-

-

Service

-

-

-

-

-

-

-

Industry

-

-

-

-

-

-

-

Agriculture

-

-

-

-

-

-

-

Service

-

-

Industry

8

Gained Required access to by Vietauthori- namese ties legal /govern- system ment

Gained skills from Vietnamese partner related to distribution and marketing

-

-

-

8

-

36

4

20

8

-

Agriculture

-

-

-

-

4

-

-

Service

-

-

8

-

-

-

-

16

-

52

4

28

54

-

Table 4.5. Factors affecting entry mode—the JV case (survey)

The current status for conversion of FDI in Vietnam For a long time, Vietnam has officially permitted FDI projects to convert the form of investment, and the conversion first took place in 1997. By the end of 2005, more than 257 FDI projects had been converted (see table 4.6) (This refers only to converted FDI projects directly reported to MPI).

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Forms of investment

Number of projects prior to conversion

Percentage

Number of projects after conversion

Percentage

- WOEs

17

6.61

231

89.88

- JVs

226

87.94

20

7.78

- BCC

14

5.45

0

0

- BOT

0

0

0

0

- Holding company

0

0

0

0

- Joint-stock company

0

0

6

2.33

257

100.00

257

100.00

Total

Source: FDI Agency, Ministry of Planning and Investment

Table 4.6. Form of investment prior to and after conversion (population)

The majority of converted FDI projects are JVs. Of 257 converted projects, 231, or more than 89%, converted to one-hundred percent FOEs. Only twenty projects convert to JVs, and six projects converted to joint-stock companies. There were 228 projects that converted from JVs to one-hundred percent FOEs. Eight projects converted from business co-operation on contract to JVs, and three projects converted from business co-operation on contract to one-hundred percent FOEs. Twelve projects converted from one-hundred percent FOEs to JVs, and five projects converted from one-hundred FOEs to joint-stock companies. Types of conversion - Converted from JVs to 100% FOEs

Number of projects

Percentage

228

88.72

- Converted from BCC to JVs

8

3.11

- Converted from BCC 100% FOEs

3

1.17

- Converted from 100% FOEs to JVs

12

4.67

- Converted from 100% FOEs to joint-stock company

6

2.33

257

100.00

Total Source: FDI Agency, Ministry of Planning and Investment

Table 4.7. Types of investment conversion (population)

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According to table 4.7, the majority of FDI projects were converted from JVs to one-hundred percent FOEs, mainly for the main following reasons: • Disputes between parties in some JVs could not be resolved through negotiation and conciliation. As a result, a) the foreign parties bought the Vietnamese share of capital contribution, and the JVs converted to onehundred percent FOEs, or b) the Vietnamese parties bought the foreign share, resulting in the JVs converting to one-hundred percent Vietnamese enterprises. • Foreign companies are said to need to partner with SOEs that have good relations with local government authorities in order for business to operate smoothly in Vietnam. After establishing a JV, foreign investors discover the challenges of "forced marriages." SOEs, as partners in joint ventures, pursue a broader set of objectives and are subject to direct interference from their governing authorities. As a consequence, foreign investors face considerable challenges. Such challenges may compel them to buy out the SOEs, in order to get full control, as soon as restrictions on the acquisition of local firms are removed. Many MNCs consider JVs as intermediate steps in entering a foreign market. After becoming established in the foreign market, they convert the form of investment. Often, foreign companies increase advertising costs as much as possible to promote their position in the market and to weed out local competitors, even if this takes place at a loss. To overcome this loss or to expand the size of operation, the foreign investor may ask the Vietnamese partner to contribute more capital. As the Vietnamese partner often lacks funds for this, they may have to accept to assign their share of capital contribution to foreigners. The conversion from JVs to one-hundred percent FOEs includes some advantages for MNCs and government alike: • SOEs no longer have to be debtors to the government. In the past, the Government of Vietnam allowed SOEs to mortgage land to contribute capital to the formation of the JVs. After conversion to one-hundred percent FOEs, projects would have to pay rent on the land directly to the local government. • The Government of Vietnam receives taxes from effectively operating onehundred percent FOEs. • In some cases, the foreign partner continues to provide assistance for the Vietnamese partners, as well as to local government authorities. Some previous partner companies have become subcontractors to the new onehundred percent FOEs.

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A few projects converted from FOEs to JVs for several reasons: • As an effect of the financial crises in Asia, many foreign investors faced bankruptcy and were forced to transfer their capital from Vietnam, which led to the conversion of the form of investment. • To catch up with the expansion of the growth of market size, some foreign companies wanted to obtain capital from Vietnamese parties in order to increase sales volumes. • A few foreign companies ceased to view Vietnam as a main target for their future strategy and consequently sold their shares to local partners.

Discussion of the hypotheses H1: The original selection of entry modes is strongly affected by regulation. As discussed above, there are many factors affecting the selection of entry modes, but as hypothesized, our survey shows that the main factor affecting the selection of entry mode were requirements by the Vietnamese legal system. This was indicated by fifty-four respondents (see Table 4.5). H2: FDI projects registered prior to 2000 restructured much more than those registered after 2000 and that the FDI projects registered in the industries that had earlier required JVs (like food, electronics, and hotels) restructured more than others. Of 257 converted FDI projects, most (seventy-two percent) were established between 1991 and 2000. Moreover, eighty-six respondents to the survey indicated that their FDI projects were established before 2000. In the past, FDI projects were forced by legal regulations to be registered in JVs.

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Conversion of Foreign Direct Investment Projects in Vietnam

Year of establishment

Number of projects

Percentage

Year of establishment

Number of projects

Percentage

1988

1

0.39

1997

28

10.89

1989

3

1.17

1998

17

6.61

1990

5

1.95

1999

11

4.28

1991

13

5.06

2000

14

5.45

1992

13

5.06

2001

8

3.11

1993

24

9.34

2002

14

5.45

1994

25

9.73

2003

6

2.33

1994

38

14.79

2004

7

2.72

1996

28

10.89

2005

2

0.78

Source: FDI Agency, Ministry of Planning and Investment

Table 4.8. Year converted FDI projects were established (population)

MNC’s Origin EU

Sectors

After year 2000

31

Industry Agriculture Service

22 3 6

-

8

Industry Agriculture Service

7 1

-

56

Industry Agriculture Service

46 0 10

9 -

86

9

United States

Asia

Prior to the year 2000

95

Table 4.9. Year responding converted FDI projects were established (survey) The data shows that two factors in particular affected the conversion. These were liberalization of regulations and JVs decay and failure. The Vietnamese partner’s performance was more important than the Vietnamese partner’s ability to raise the required capital for the project. The findings regarding factors affecting the conversion are presented in table 4.10.

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EU

United States

Asia

Total

18

8

30

56

-

6

27

33

- The Vietnamese partner’s performance did not meet expectations

18

3

3

24

- Entry was always seen as a temporary solution

6

8

9

23

- Vietnamese partner was incapable of/ unwilling to raise required capital for the project

12

6

3

21

- Concerns regarding propriety technology

-

-

15

15

- Need to increased profits in Vietnamese market

-

3

12

15

- We do not need JV partner since there are now better networks to local subcontractors

-

-

-

-

- Have built good understanding of Vietnamese business environment and therefore do not need Vietnamese partner

0

3

9

12

- Liberalization of regulations made onehundred percent FOEs possible - Inefficient operation of JVs

Table 4.10. Factors affecting the conversion (survey) H3: MNCs coming from the EU and United States restructured more than MNCs coming from Asia. According to the database and the survey, the number of converted FDI projects from Asian countries is the highest, accounting for 63.8% of the population and 58.9% of the survey sample. In contrast, the number of converted FDI projects from the EU and United States are lower than for the Asian projects. This is an interesting finding; indeed, we expected that foreign investors from EU and the United States would have less understanding of the Vietnamese environment than Asian investors. However, if we compare the number of converted FDI projects and registered capital with the total number of invested FDI projects and their registered capital, it seems that hypothesis H3 is valid. The number of converted FDI project coming from EU countries accounted for 6.41% the total number, while Asian projects accounted for 3.58%. Moreover, in terms of registered capital, converted EU projects account for 8.71% of the total, while Asian projects only accounted for 7.67%. It is interesting to note that if we consider the implemented capital, the percentage of Asian converted FDI projects is higher than EU projects: 12.2% compared to 9.5%.

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Conversion of Foreign Direct Investment Projects in Vietnam 70 60 50

Total population

40 30

Sample

20 10 0

Other

Asia

EU

USA

Figure 4.3. Comparing the sample and the total population of projects

Most of the converted FDI projects are small in terms of capital size. Projects having an average capital size of less than five million USD account for nearly sixty percent of the total. More than thirty percent of the converted FDI projects have a capital size of between five and ten million USD. About ten percent have a capital size between ten and forty million USD. Capital size ($ million)

EU

American

Asian

Total

Percentage

- Less than 5

24

3

29

56

58.9

- 5 & less than 10 mil.USD

3

5

21

29

30.5

- 10 & less than 40 mil.USD

4

6

10

10.5

- More than 40 mil.USD

-

-

-

-

-

31

8

56

95

100.0

Table 4.11. Capital size of converted FDI projects (survey)

H4: Restructured FDI projects operate more effectively than before the conversion. Our survey clearly suggests that conversions lead to better project performance. Only nine of the FDI projects—incidently all service projects promoted by Asian MNCs— reported that their projects became worse after the conversion. Conversely, nearly ninety percent reported that the converted FDI projects operated more effectively after conversion.

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Much worse Worse Better Much better 0

20

40

60

80

Figure 4.4. Business operation after conversion (percentage)

MNC’s origin EU

United States

Asia

31

8

56

Sectors

Much better

Better

Worse

Much worse

Industry

5

17

-

-

Agriculture

-

3

-

-

Service

-

6

-

-

Industry

1

6

-

-

Agriculture

-

-

-

-

Service

-

1

-

-

Industry

7

34

-

-

Agriculture

-

-

-

-

2

4

9

-

15

71

9

0

Service 95

Table 4.12. Operation of FDI projects after the conversion (survey) H5: The conversion from JVs to wholly-owned enterprises negatively affects the Vietnamese partners and government. As mentioned previously, Vietnamese partners may acquire skills, technologies, and contacts through cooperating with foreign partners. With conversion, the Vietnamese partner would loose these opportunities. The study identifies differing opinions about the effects of conversion: In the opinion of government officials, some Vietnamese partners were hurt after the conversion, because they had become dependent on foreign partners. Thirty-nine of the investors responding to the survey said, however, that they had no information about the effects of

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Conversion of Foreign Direct Investment Projects in Vietnam

the conversion on the Vietnamese partners. Twenty-one investors reported that the Vietnamese partner is doing very well after the conversion. Some investors reported that they helped their former Vietnamese partner, for example by buying inputs and assets at a higher price than the market price, or by offering to let them become subcontractors. None of the investors reported that the Vietnamese partner has gone bankrupt or closed business since the conversion. This is supported by the fact that forty-two investors reported that Vietnamese partners wanted to withdraw capital in order to operate separately. Only six investors said that the Vietnamese partners were forced to convert because of an incapability to contribute more capital. There are a number of reasons why Vietnamese partners want to withdraw from a JV: thirty-five investors reported that they want to gain higher profit in the short term and that they do not want to reinvest in the business to get longer-term profit. Seven respondents reported that they want to withdraw capital to privatize their companies. Few respondents said that they regret having withdrawn the capital.

Conclusions The study shows that there are many factors affecting the selection of entry modes, with requirements by the Vietnamese legal system being the primary one. This factor accounts for more than fifty-five percent of the projects. When Vietnam allowed the conversion of FDI projects in 2000, it led to a surge; seventy-two percent of converted projects were established before 2000 and only twenty-eight percent after. It appears that FDI projects promoted by Asian MNCs convert more than projects from the EU and United States, which can be explained by the greater cultural distance and consequent dependence of American and European investors on local partners. Finally, the study found that nearly ninety-percent of the respondents reported that the converted FDI projects operate more effectively after conversion. Still, the question of whether the local Vietnamese partners have or have not benefited from the conversions remains an open question. Thus, the study shows differing opinions, ranging from respondents who indicate that Vietnamese partners would be hurt after the conversion, to others who report that the Vietnamese partners were doing very well after the conversion. More research on the effects of conversions on local partners, private as well as SOEs, is needed in order to arrive at firm conclusions regarding the benefits and costs for local industry of liberalizing the FDI regime and allowing for conversion to fully-owned subsidiaries.

List of background literature Brewer, T., S. Young, and S. Guisinger, eds. 2002. The new economic analysis of

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multinationals: An agenda for management, policy, and research. Cheltenham, U.K.: Edward Elgar. Beugelsdijk, S. and G.J. Hospers. 2005. Networks and clusters of economic activity. In Comparative International Management, ed. C I. Koen. London: McGraw-Hill. Blodget, L. L. 1991. Partner contributions as predictors of equity share in international joints ventures. Journal of International Business 22(1): 63–78. Chang, S. J. 1995. International expansion strategy and Japanese firms. Academy of Management Journal 36(2): 383–487. Decree 62/1998/ND-CP dated 15 August 1998 on Investment Basis of BuildOperate-Transfer Contracts, Build-Transfer-Operate Contracts and BuildTransfer Contracts Applicable to Foreign Investment in Vietnam, Government of Vietnam. Dicken, Peter (2003), Transnational Corporations and Transnational Production Network, Global Shift, UK: Cromwell Pres. Hansen, M. W. and H. Schaumburg-Müller. 2006. Transnational corporations and local firms in developing countries. Copenhagen: Copenhagen Business School Press. Hennart, J.-F. 1991. The transaction cost theory of joints ventures: An empirical study of Japanese subsidiaries in the United States. Management Science 37(4): 483-497. ———. 1991. The transaction cost theory of the multinational enterprise. In C. Pitelis and R. Sugden eds. The nature of the transnational firm, 81-116. London: Routledge. Hennart, J.-F. and Y.-R. Park. 1993. Greenfield vs. acquisition: The strategy of Japanese investors in the United States. Management Science 39(9): 1054– 1070. Hoskisson, R. E. and T. Turk. 1990. Corporate restructuring: Governance and control limits of the internal market. Academy of Management Review 15: 459–477. Kenichi, O. 2003. The policy package for attracting a critical mass of foreign direct investment in Vietnam. The Economic and Development Review, NEU, volume 71. Lasserre, P. 2003. Global strategic management. New York: Palgrave Macmillan Madhok, A. 1997. Cost, value, and foreign market entry mode: The transaction and the firm. Strategic Management Journal 18(1): 39–61. Ministry of Investment and Planning. 2004. Vietnam’s foreign investment outlook. Hanoi: Ministry of Culture and Information of Vietnam. Ministry of Investment and Planning & JICA. 2004. Foreign Investment Promotion into Vietnam. Hanoi: Ministry of Culture and Information of Vietnam. Law on Investment in Vietnam and the Government Decree 108/2006/ND-CP of

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the Government dated 22 September 2003 providing detailed regulations on the implementation of the law (2006), Government of Vietnam. Nestor, Kurt, Foreign Direct Investment in the Socialist Republic of Vietnam 1988-2000. Department of Geography Series B. no 112, Göteborg: Göteborg University, School of Business, Economics and Law. Nhuong, B. H. 2006. Enforcement of implementation of FDI projects in Vietnam, PhD diss., National Economic University, Vietnam. Segal, Susan (2005), “The Dynamics of International competition”, in Koen, C. The Dynamics of International Strategy, UK: Thompson Learning. Thanh, N. C. 2004. The development of form of FDI in Vietnam. PhD diss., National Economic University, Vietnam. The Law on foreign direct investment in Vietnam and their Decrees (1987, 1990, 1996, 2000, 2005), Government of Vietnam. Reports on FDI of the Ministry of Planning and Investment in the period of 19882005. Government of Vietnam. United Nations Conference on Trade and Development, World Investment Report - The Shift Towards Services, United Nations, New York and Geneva. (2004) World Bank. 1993. The East Asia miracle. Washington, D.C.: World Bank.

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114

Culture and Performance of International Joint Ventures in Vietnam

CHAPTER 5

Culture and Performance of International Joint Ventures in Vietnam Phan Thi Thuc Anh & Ngo Thi Minh Hang

Introduction Firms enter into international joint ventures (IJVs) for a variety of reasons, including turbulence in world markets, technological and economic uncertainty, cost minimization, foreign market entry, organizational learning, and cultural access (Zander and Lerpold 2003). For Vietnamese firms, establishing joint ventures with foreign companies is one of the most effective ways to gain access to new knowledge and capabilities in order to enhance their international competitiveness (Thuc Anh et al. 2006). Despite a great hope from international cooperation, research has shown a high rate of IJV dissolution (Hennart and Zeng 2002) and a high rate of unsatisfactory alliance performance (Zander and Lerpold, 2003). Many researchers attribute the difficulty in succeeding with alliances to the differences in objectives, capabilities, behavior, and especially in culture (Shenkar and Zeira 1992; Barkema and Vermeulen 1997; Yan and Zeng 1999; Zander and Lerpold 2003). Despite vast research in this area, the relationship between culture and IJV performance remains unclear (Li et al. 2001). Past studies diverge rather than agree both conceptually and practically on the relationship between culture and IJV performance. With few exceptions, such as those of Meschi (1997) and Pothukuchi et al. (2002), most cross-cultural research focuses on differences in national culture, while the relationship between organizational cultural distance and IJV performances is largely ignored. Most research on cross-cultural management in IJVs examines only one aspect of IJV performance (concentrated mainly on JV longevity or instability), while it is a complex concept that includes many aspects (Arino 2003).

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This research describes cultural differences between the two partners of IJVs in Vietnam, and explores the impact of national culture and organizational cultural distance on IJV performance. By studying cultural distance at both levels, we can be more confident that the finding at one level is not obscured by potential effects of the other (Pothukuchi et al. 2002). More importantly, this research examines the impact of cultural distance on performance in the presence of cultural attractiveness, one of the most important elements in cultural studies, and yet one largely missing in the literature to date (Shenkar 2001). Theoretically, this research will contribute to the growing body of literature on IJVs by proposing a model of cultural distance that incorporates the cultural attractiveness dimension, as well as providing new and interesting empirical evidence from Vietnam, an economy in transition. Practically, this research will offer insights into how cross-cultural issues should be managed in IJVs in transitional economies. In particular, its implications will help expatriates, as well as Vietnamese managers, successfully manage their ventures. The chapter is structured in the following sections: a description of the research questions and hypotheses; a discussion of the methodology employed; a presentation on the research results and interpretation; and a discussion and conclusion.

Research questions and hypotheses This research is designed to answer the following questions: • What are the differences between the local and foreign cultures in Vietnamese IJVs? • How do differences in national and organizational culture, and the interaction between them, affect IJV performance? • What role does cultural attractiveness play in determining IJV performance? We hypothesize that IJV performance is affected by national cultural distance and organizational cultural distance, as well as by the interaction between them. IJV performance is also affected by the attractiveness of cultures to one another. These relationships are present when controlling for the effects of a number of variables as shown in Figure 5.1.

Cultural distance and IJV performance In the broadest sense, culture can be defined as “the collective programming of mind, which distinguishes the members of one human group from another” (Hofstede 1984). It is generally agreed that culture refers to patterns of beliefs and values that are manifested in practices, behaviors, and various artifacts shared

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Culture and Performance of International Joint Ventures in Vietnam

by members of an organization or a nation (Pothukuchi et al. 2002). Cultural distance is the difference in values and beliefs, as well as practice and behaviors, between one group and another. In this research, cultural distance at both national and organizational levels is examined.

National cultural distance

H1 (-) H3 (+)

Organizational cultural distance

H2 (-)

IJV Performance

H4a (+) H4b (+)

Cultural atractiveness

Control variables IJV size IJV age Equity split No. of Vietnamese personnel interacting with foreigners Percentage of work time interacting No. of foreign personnel interacting with Vietnamese Technology intensity VN parnt’s ownership Respondent’s years of working with foreigners Respondent’s years of working with parent firm Respondent’s years of working for the IJV

Figure 5.1. The conceptual model On the surface, it can be seen that national cultural distance can create problems in language and communication. Ineffective communication will not allow IJVs to reach a needed level of understanding and adaptation (Hennart and Zeng 2002). At a deeper level, differences in values and beliefs can lead to different ways of seeing and dealing with things. Partners from different nations or from different organizations suffer great difficulty in their interactions and this can lower their performance (Pothukuchi et al. 2002). Many researchers of IJVs argue that cultural asymmetries lead to their low performance and failure (see Lyles and Salk 1996; Barkema and Vermeulen 1997; Zeira et al. 1997; and Zander and Lerpold 2003). Several researchers take a different view, such as Shenkar and Zeira (1992) and Beamish and Kachra (2004), by positing that partners can benefit from diverse cultural backgrounds. They see the cultural differences as positive things that could translate into business synergies and increased innovation.

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Similar to differences in theoretical arguments, empirical findings are also reported in different directions, with some research finding a positive relationship, some a negative one, and other no significant relationship between the two variables (Hennart and Zeng 2002). In the Vietnamese context, we suspect that these differences would hinder rather than support the IJV’s performance. Therefore, we hypothesize as follows: H1: National cultural distance is negatively associated with IJV performance. H2: Organizational cultural distance is negatively associated with IJV performance. Although national culture and organizational culture are separate constructs, it is widely accepted that organizational culture is nested in national culture (Pothukuchi et al. 2002). Indeed, these two cultures are blended into a single way of working that distinguishes one entity from another. The existence of the difference in culture at one level can exemplify the impact of the difference in culture at another level of IJV performance. In other words: H3: Interaction between national cultural distance and organizational cultural distance is positively associated with IJV performance. Recently, some authors have suggested that the relationship between cultural distance and IJV performance is more complex, with different dimensions having different levels of impacts (Barkema and Vermeulen 1997) or with impacts that could be in different directions (Pothukuchi et al. 2002). We acknowledge this insight and investigate it when the data is collected. At this point, we leave it as an exploratory issue and form no formal hypotheses.

Cultural attractiveness and IJV performance Shenkar (2001) argues that different conceptualizations and methodologies in cultural studies have led to inconsistent findings in the relationship between cultural distance and performance. He identifies several elements that are crucial yet still missing in the literature to date. One of those important elements is cultural attractiveness. This is where parties in an IJV can be brought together. Some cultures can be attractive to other cultures (Gould 1996; Shenkar 2001) while others are not. When cultural attractiveness is present, people from one side will value actions and behaviors of the other. In this case, more cooperation can be expected, which will enhance IJV performance. On the contrary, if a culture is found unattractive, people from one side will not value the other’s actions

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Culture and Performance of International Joint Ventures in Vietnam

and behaviors. This will lead to uncooperative behavior, which can eventually adversely affect IJV performance. Thus, overall, cultural attractiveness is likely to determine IJV performance. Consequently, we hypothesize that: H4a: Organizational cultural attractiveness is positively associated with IJV performance. H4b: National cultural attractiveness is positively associated with IJV performance.

Control variables Control variables are listed in figure 5.1 and have been selected for different reasons. Previous research has found significant correlations between an IJV’s age and its effectiveness (Newburry and Zeira 2003), between equity split (Boateng and Glaister, 2002) and IJV size (Dhanaraj et al. 2004) and its performance. Frequency of contacts between partners’ personnel and the number of personnel involved could be a factor that influences the impacts of culture on performance (Pothukuchi et al. 2002). We suspected that performance could be different between high-tech and low-tech IJVs. As the only legitimate form of business in Vietnam for a long time, state-owned enterprises (SOEs) are different from other types of business, such as privately-owned, in their behavior, including the way they interact with their foreign partners. Thus, the type of parent ownership of a Vietnamese IJV may have an influence on its performance. Finally, differences in answers could also be influenced by the respondents themselves. Therefore, we also control for the differences in respondents’ years of experience in working with foreigners, for the parent firms as well as for the JVs.

Research methodology

Data collection and sample We used a survey to answer the research questions. The survey population was defined as all manufacturing IJVs operating in Vietnam. According to the list provided by the Ministry of Planning and Investment (MPI), there were 630 manufacturing IJVs in the whole country. Data were collected through a self-administered questionnaire. In each targeted IJV, we gathered information from one executive, typically one of the IJV’s general directors or deputy general directors, who are responsible for their JV’s overall performance and have frequent contact with both parents (Simonin 1999). Data were collected through the Foreign Investment Agency (FIA) belonging to MPI by means of an official letter sealed by the Agency. Of 630 manufacturing IJVs, 480 received the questionnaire due to some non-updated addresses

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provided by the MPI list. In total, 154 usable responses were retrieved, which yielded a response rate of thirty-two percent (154/480). Of 154 responding IJVs, the number with parents from Japan, Taiwan, South Korea, Singapore, Hong Kong, Europe, and the United States were 27, 24, 23, 15, 7, 25, and 8, respectively. Twenty-five IJVs were from other countries. This sample reflects the pattern of foreign investment in Vietnam in terms of country of origin. The responding IJVs had been in operation from one to seventeen years, with an average of 9.2 years. Of 154 IJVs, 141 firms were represented by Vietnamese respondents and 13 were represented by foreign counterparts. Out of 154 respondents, 115 were IJV general directors or deputy general directors. The rest (39) were branch directors or department heads who were assigned to respond to the survey by their superiors. On average, the respondents worked for their parent firms for 12.8 years and for the IJVs for 6.2 years.

Variables and measures Observed variables included in the model were measured by facts. Latent variables were measured by an indirect mean through verbal expressions. All latent variables were measured by multiple items using a Likert-type scale ranging from one to five. Multiple items measures were used because they could increase the measures’ reliability (Neuman 2000). Dependent variables In this research, IJV performance was measured in three ways: 1) strategic goals fulfillment, which consists of seven items measuring the extent to which the identified strategic goals are important to the respondents’ IJVs, and how far their IJVs have achieved those strategic goals; 2) respondents’ satisfaction with the IJVs, which consists of nine items measuring the extent to which the respondents were satisfied with their partners and with management of the joint venture, and 3) the extent to which the IJVs have achieved their business goals. The first two ways of measurement were adapted from Pothukuchi’s (Pothukuchi et al. 2002) research, which was based on Geringer and Hebert (1991) and Parkhe (1989). The last form of measurement was taken from Thuc Anh’s research (Thuc Anh et al. 2005).

Independent variables Measures of cultural distance For measures of cultural distance, Hofstede et al. (1990) found that whereas organizations from different nations differ in fundamental values, organizations from the same nation differ only in organizational practices. This has a very important implication for the operationalization of the concepts. While national

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culture should be measured in terms of values, organizational culture should be measured in terms of core practices. Following this line, Pothukuchi et al. (2002) adopted national culture scores reported in Hofstede’s (1997) survey and modified his organizational culture measures to include eighteen questions, which were argued to have “relevance for JVs” for primary data collection in their research. The authors used Kogut and Singh’s (1988) cultural distance formula to calculate the composite index for both national and organizational cultures. This type of culture measurement is also widely used by many other researchers such as Barkema and Vermeulen (1997), Minbaeva et al. (2003), and Beamish and Kachra (2004). The formula is as follows:

where Iij stands for the index for the ith cultural dimension and jth country. Vi is the variance of the index of the ith dimension. Vn indicates Vietnam, and NCDj is the national cultural distance of the jth country from Vietnam. In this research, we adopted the same measurement for organizational cultural distance as in Pothukuchi’s research (Pothukuchi et al. 2002). Organizational culture was presented by eighteen questionnaire items supposed to measure six dimensions: 1) process vs. result, 2) employee vs. job, 3) parochial vs. professional, 4) open vs. closed, 5) loose vs. tight, and 6) normative vs. pragmatic. Each organizational cultural dimension was measured by three items. Respondents were asked to rate the Vietnamese parent organization’s culture along eighteen questions (OCvn), and then their foreign parent organization’s culture (OCfr) on the same set of questions. The distance between cultures of two partners was calculated as the difference between two partners (OCvn - OCfr) along each item. A composite index for organizational cultural distance was then calculated for each IJV by applying a formula similar to that of national cultural distance. For national culture, we used the data from Hofstede’s survey (2002) and applied the Kogut and Singh’s formula to calculate the distance between Vietnamese partners and their counterparts. We developed cultural attractiveness measures ourselves, since they were not available in the literature. The measure for organizational cultural attractiveness includes four statements asking the respondents to rate the extent to which they believe that the venture benefits from adopting: 1) problem solving methods, 2) management style, 3) organizational practices, and 4) the corporate culture of their partner’s parent firm. Measure for national cultural attractiveness included eight statements asking the respondents to rate the extent to which they have favorable attitudes toward their partner’s country of origin’s: 1) people, 2) lifestyles, 3) values, 4) products, 5) companies, 6) business culture, 7) government policies, and 8) national culture.

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Control variables IJV size was measured by the IJV’s number of employees. IJV age was calculated as the number of years in operation up to the time the respondents filled in the questionnaire. Equity split (local) was the proportion of equity in the venture held by the Vietnamese parent. Technology intensity was measured as dummy with one equaling high-technology intensity and zero equaling low-technology intensity. The respondents were asked to write down their firms’ industries. Based on these answers, we arranged the IJVs’ industries into four types: 1) high-technology, 2) medium-high-technology, 3) medium-low-technology, and 4) low-technology. This arrangement was based on the OECD’s (2005) classification of manufacturing industries based on technology. We then coded all IJVs in the first and the second groups as high-technology IJVs, and all IJVs in the third and the last group as low-technology IJVs. Vietnamese parent’s ownership was also measured as a dummy variable with one equaling state-owned and zero equaling non-state-owned. Other control variables were measured as stated in their names.

Data processing First, reliability analyses and factor analyses were used to evaluate the measures’ reliability and validity (Aaker et al. 1998). Second, bi-variate correlations were performed to explore bi-variate relationships among variables. Multiple regressions were then used to estimate the relationships between ‘independent’ and ‘dependent’ variables. Data analysis was performed using the Statistical Package for the Social Sciences (SPSS) computer software package.

Results and interpretations Analysis of measurement

Organizational cultural distance measures Factor analyses with the varimax rotation method and reliability analyses were used to test the appropriateness of the six-dimensional model. However, an unsatisfactory result was found. Among the six assumed dimensions, only the loose vs. tight dimension has both reliability and validity. In the end, we decided to accept organizational culture as it is, with eighteen questionnaire items measuring eighteen dimensions. The composite index for organizational cultural distance was calculated for each IJV based on these eighteen dimensions. The formula is:

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Culture and Performance of International Joint Ventures in Vietnam where VNPxy is the Vietnamese parent’s organizational culture for the xth cultural dimension and yth IJV. FPxy is the foreign parent’s organizational culture for the same cultural dimension and the same IJV. Vx is the variance of the xth cultural dimension, and OCDy is the composite index for organizational cultural distance of the yth IJV.

Cultural attractiveness measures Factor analysis showed that twelve cultural attractiveness items were loaded onto three factors, including one organizational cultural attractiveness and two national cultural attractiveness factors. Reliability statistics were then calculated for the three loaded factors. The results showed a good level of measurement reliability (Cronbach’s alphas were 0.73 and above). Thus, the three-factor model is appropriate. Consequently, three variables were created: 1) organizational cultural attractiveness, 2) national culture-people’s attractiveness, and 3) national culture-products, companies, government policies attractiveness. These were created by calculating the means of loaded items.

IJV performance measures First, for strategic goals fulfillment, new items were created by multiplying a respondent’s assessment of the importance of each strategic goal to his/her IJV by his/her respective assessment of the degree to which the IJV had achieved that goal. Thus, seven new Importance x Fulfillments were created. We then ran factor analysis on twenty-three items measuring IJV performance together. All items were loaded onto five factors with three factors almost congruent with the results of Pothukuchi’s research (Pothukuchi et al. 2002). Two additional factors were Learning and Business performance. The five factors were: 1) Performance – Business (eight items); 2) Performance – Satisfaction (eight items); 3) Performance – Efficiency (four items); 4) Performance Learning (one item); and 5) Performance - Competitiveness (two items). Factor loadings were 0.45 and above, indicating that the original items are significantly correlated with their respective factors (Hair et al. 1998). Together, they explain 71.33% of the total variance. Reliability analyses were then conducted for multiple-item measures of IJV performance. The results showed that Cronbach’s alphas for all factors with multiple items were 0.65 and above. Together with factor analyses, this indicates that measures for IJV performance are both valid and reliable. For subsequent analyses, an index was created for each of the multiple-item performance factors.

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Descriptive analyses Differences in organizational cultures Table 5.1 presents differences between Vietnamese parent organizational culture and the culture on the foreign parent side. VN parent (mean)

For. parent (mean)

Difference (in means)

Sig. (2-tailed)

0.30

0.00

1

Typical employee is fast at work

3.73

4.03

2

Typical employee takes initiative

3.59

4.11

0.52

0.00

3

Style of dealing with each other is informal

3.95

3.62

-0.32

0.00

4

Decisions are centralized at the top

4.36

4.09

-0.27

0.00

5

There is little concern for personal problems of employees

2.86

3.33

0.47

0.00

6

Organization is interested only in the work of employees

3.05

3.39

0.34

0.00

7

People’s private lives are treated as their own business

2.99

3.42

0.44

0.00

8

Job competence is the only criterion in hiring people

3.32

3.88

0.56

0.00

9

Think (plan) three years ahead or more

3.27

3.83

0.57

0.00

10

Only specific kinds of people fit in the organization

3.06

3.09

0.03

0.71

11

Organization is closed and secretive

2.78

3.01

0.23

0.00

12

New employees need more than a year to feel at home

2.71

2.90

0.19

0.02

13

Everybody is cost-conscious

3.68

4.11

0.43

0.00

14

Meeting times are kept punctually

3.70

4.13

0.43

0.00

15

Employees always speak seriously about organization and job

3.62

4.01

0.39

0.00

16

Employees tend to be pragmatic in matters of ethics

3.27

3.47

0.20

0.00

17

Major emphasis is on meeting customer needs

4.36

4.49

0.13

0.14

18

Results are more important than procedures

3.68

4.25

0.57

0.00

Table 5.1. Organizational cultural differences

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The first column presents the Vietnamese parent’s organizational culture, calculated as the mean of all responses along each questionnaire item. The second column is the mean of foreign parent’s responses along the questionnaire items. Note that the bigger the number the larger the extent to which the respondents agreed with the statements. The third column shows the differences between the first and the second column, representing differences in organizational cultures between Vietnamese parents and foreign parents. To test if these differences are statistically significant different from zero, we conducted one-sample t-test. The significance statistics are shown in the last column. As can be seen, except items ten and seventeen, where p > 0.1, other items have p < 0.05, indicating that the differences between the Vietnamese parent’s and foreign parent’s organizational cultures are significantly different from zero. Correlations analysis The bi-variate correlation analysis shows that all performance measures are highly correlated with each other at p < 0.001, with the exception of the relationship between Performance – Satisfaction and Performance – Competitiveness. Organizational Cultural Distance and national Cultural Distance have insignificant relationships with most of IJV performance measures except with the Performance – Business. Meanwhile, Organizational Cultural Attractiveness has a strong positive significant association with all IJV performance measures (p < 0.001) except the measure for Performance – Competitiveness. National Culture – People Attractiveness is positively significantly associated with Performance – Satisfaction at ß = 0.16 and p