THEORETICAL FRAMEWORK
The OLI paradigm
The OLI paradigm is a widely used theory to explain FDI It states that FDI happens when these three determining factors exist simultaneously:
Ownership-specific advantages: firm-specific competitive advantages compared with local firms that can compensate for the additional costs of establishing production facilities in a foreign environment and help firms overcome their disadvantages compared with local firms in foreign countries.
Location-specific advantages: country-specific advantages that firms can combine with their firm-specific competitive advantages by establishing production facilities in foreign countries.
Internalization advantages: presence of superior commercial benefits for firms resulting from the exploitation of ownership-specific and location-specific advantages by investing in foreign affiliates that they control, rather than through transactions with unrelated firms located abroad.
For a couple of years, the OLI model has remained the significant framework for analyzing the activities of transnational corporations (TNCs) and the economic rationale behind their international operations This model also referred to as the eclectic paradigm proposed by J.H Dunning was first postulated in 1976 It elaborates the decision and growth drivers that enable firms operate in international production (Stefanovic 2008) The paradigm which has been broadly applied in the past to explain entry mode decisions and supported by several empirical studies
(Zhao 2005) is also not totally accepted, and described as limited in its accuracy to extrapolate definite methods of international operations
There is a heightened consciousness that FDI operations are also determined by other factors beyond the economic advantages of the OLI framework The gravity- model is one of the models which attempt to modify the limitations of the eclectic paradigm; it explores the process of international production and trade, inclusive of the OLI variables (Mateev 2008) Also in view is the fact that the underlying motives for production vary between regions which Dunning’s theory failed to consider A typical case to illustrate this is the fact that factors which influence foreign investment in a coal or Iron ore abundant region in Africa is likely to differ from those influencing investment by a car manufacturing company in Asia
However, the OLI framework has proven to be helpful in determining the basic motives that guide the international operations of TNCs and has set a well-informed ground work for studies in international investment, business and economics It is a helpful framework for classifying a good number of recent FDI researches With the limited time to do this case study, we found that OLI is an appropriate paradigm for us to achieve our research’s goal: analyze the motivations and determinants of FDI of Honda in Vietnam.
MOTIVATIONS FOR HONDA FDI
Ownership-specific advantages
Honda has been a well-known multinational corporation in the world coming from Japan, a country which is famous for qualified products and services With the characteristics of carefulness and responsibility of Japanese, the strict management from the office to factories in the checking process makes every product going to market completely perfect ones In the United States, according to R L Polk & Company, a provider of automotive information and marketing solutions to the automotive industry, Honda has ranked No 1 in owner loyalty in its industry Not only having good reputation all over the world, Honda also gains the trust and admiration in the hearts of most Vietnamese Vietnamese people easily put their belief on Honda due to its home country and it’s brand In Vietnam, people even use the word “Honda motorcycles” to imply motorcycles in general, regardless of which brands they are
1.2 High-quality products with reasonable price
Honda motorcycle is famous for its high quality for long time use and reasonable price Compared with products of some others famous brands such as Vespa from Italy, only rich people can afford a Vespa in Vietnam Also, some Chinese motorcycle have low prices and Vietnamese can easily buy one However, the quality is not high and the machine often breaks down Compared to these motorcycles about quality and price, Honda is acceptable for Vietnamese people to consider about the quality and service they can receive from a motorcycle and also the price they have to pay
In fact, when Honda Vietnam introduced its low-price Wave Alpha, it caused a sensation among consumers for whom a Honda had previously been out of reach Priced at just VND 11m (Dollars 720) - less than half the price of the more up- market Super Dream model - Wave Alphas sold as fast as Honda could make them.
1.3 Honda service and added in activities
Honda focuses strongly on the customer experiences, there are a lot of service team around the country to repair Honda products With qualified and enthusiastic employees, Honda rapidly become the best scooter brand in Vietnam.
Honda’s slogan is: “The power of dream”, which means everyone has a dream, a thing makes them happy and gives them motivations in their life, and Honda want to bring that dream to all people in the world Honda focuses on society activities Not only product introduction but also training about traveling laws, how to be safe when traveling… With many campaigns such as “Tôi yêu Vi t Nam” later which ệ can prove the variable aspect of Honda In comparison with local Vietnamese enterprises with poor experiences in customer services and marketing strategies, the aforementioned advantages are most-striking strengths of Honda.
The experience in designing its products suitable and fitting the taste of consumers in different cultures that Honda gained from running business Asia, Europe, South America was also a competitive advantage of Honda Choosing a motorcycle design model is never easy to satisfy the majority of Vietnamese They judge the
Honda motorcycles in Indonesia or Malaysia as unfashionable and not trendy So the Honda’s experiences in varying the product designs would help Honda satisfy these difficult customers.
Figure 1: Some of Honda’s products
Business relations are also vital for the new venture The operation of Honda relies heavily on the Honda procurement-network in the region With the wide network all over the world, ranging from America to Asia, the transportation of the accessories has been made easier for Honda This helps Honda save transportation cost as well as R&D cost, since people in nearby regions often share the same tastes.
Being an Asian company, Honda have good understandings about Asian region’s habit and interest, so they easily understand Vietnamese ‘Asian culture is based on a community spirit and obligation Our cultural affinity to the Vietnamese was a reason for our confidence in making our investment into Vietnam a success’
With the pushrod overhead valve (OHV) air-cooled four stroke single cylinder engine, Honda motorcycle uses less gas and less exhausted fume to environment, enabling people to save fuel cost, and also meeting emission standards of most countries Compared with the two stroke engine of other brands such as Yamaha, Suzuki, and other European and Chinese ones, the four stroke engine is more favorable in Vietnam market They told that the air-cooled four stroke single cylinder engine makes them feel comfortable when riding and look more elegant.
These advantages make Honda overcome all the disadvantages when approaching Vietnam market, so which kind of entry mode did Honda choose to approach
Internalization advantages
According to the previous advantages, Honda Motor Corporation can consider leveraging these advantages abroad There are two main different options for them to expand their operation: export, licensing, franchising; or FDI forms such as associate and subsidiaries Each option has its own advantages and barriers for every TNC, which depend on both the host-country and home-country regulations, potential partners, product markets, government or non-government trade barriers, However, Honda Motor Co., Ltd chose internalizing FDI via joint- venture with Vietnam Engine and Agricultural Machinery Corperation (VEAM) Which Honda Group contributes 70 percent of the legal capital (Honda Motor Co., Ltd contributes 42 percent and Asian Honda Motor Co., Ltd contributes 28 percent) and VEAM contribute 30 percent of the legal captital So why did they make such decision? This is mainly because the imperfection of the markets.
First, Honda cannot choose to export a large number of motorcycles into Vietnam due to the regulatory barrier from the government Vietnamese government applied a 60 percent tariff rate on imported complete motorcycles in order to protect the local market The industry has been protected by a high tariff on motorcycle imports that, until 2000, the domestic price had been at about 1.5 times higher than the price of similar models in Thailand, the price that Vietnamese people can hardly afford as most of them are in the middle-income class In fact, before and even after establishing a company in Vietnam, Honda had exported motorcycles to Vietnam market, but only in a small number due to the barrier Therefore, choosing export as a main approach to the Vietnam market is proved to be an inappropriate solution.
Second, if Honda chose licensing or franchising, the corporation could find it hard to look for a Vietnamese company to corporate with due to some factors like the low-level of technology, the manufacturing capabilities, meanwhile Honda wanted to maintain the production quality to keep their reputation Technology helps to attain product quality, as well as cost control Even though there is nothing advanced in the technology to make standard motorcycle models, technological know-how, managerial know-how, and practical experience are needed to obtain a consistent level of high quality and reliability.
Therefore, Honda decided to internalize their operation, that is, investing in foreign affiliates that they control, rather than through transactions with unrelated firms located abroad This internalization practice helps the firm to exploit ownership- specific advantages and also location-specific advantages that will be discussed in the next sections
Honda chose to establish a joint-venture with Vietnam Engine and Agricultural Machinery Corporation (VEAM), while with the experiences and skills, they actually could open a 100 percent wholly own subsidiary and operate it on their own in Vietnam In fact, instead of contributing to the technology, the primary role of this VEAM is merely to support Honda in land ownership and building headquarters for the joint venture This is clear from the fact of the 15 subsidiaries of VEAM are failed to become suppliers of components for the joint venture with Honda.
The reason is that as many communist conservatives feared that domestic companies would not be able to compete and would quickly go out of business, so the attraction of foreign investors and companies was a risk In the early 1990s, with the government objective of attracting foreign investors into the automobile and motorcycle industry, few FDIs were allowed to take the form of 100 per cent foreign-owned Later on, joint venture with Vietnamese enterprises was effectively the only choice for Honda in this sector.
As soon as Honda Motor Co., Ltd gained the ownership and internalization advantages, it had to choose the country to invest in So at that time, why did
Location-specific advantage
The location-specific advantage, also known as unique advantages of host country, is extremely important factor to determine which country is the destination of TNCs.
Economic determinants play a vital and basic role when TNCs make the decision Honda has lots of targets when entering Vietnam market such as market-seeking, resource-seeking, efficiency-seeking Among these factors, as mentioned in introduction part, the most important motivation as well as the target of Honda is market-seeking.
The entry of Honda into Vietnam might be seen as a result of several forces, one of which is the size of the Vietnamese market
+ The booming Vietnam economy, which was matched by the rising incomes of a vast section of Vietnamese residents and the new ability to purchase luxury items with excess income, meant the demand for motorbikes consistently increased over the last few years The Transportation Police Bureau-Vietnam declared the number of registered motorbikes in the whole country increased by about 12 per cent annually in the period of 1995-1999 By the end of 1999, in the 77-million population (as in table 1) there were approximately 20 million bicycles and 5.6 million motorbikes In the year 2000, total number of motorbikes sold by all motorbike assemblers over the country reached 1.4 million sets Annual sales of bicycles in recent years is estimated as of from 700.000 to 1 million units (Le Anh Tuan, 2001; Ministry of Industry, 2007) and the motorcycle as the main transportation means, Vietnam was definitely an attractive market
Figure 2: Vietnam population by Statical Publishing House 2008
+ In the structure of traffic in Vietnam, 82.2% is road (table 2), 61% vehicle is motorbike With the improvement of standards of living of the Vietnamese people, the demand for a more modern mode of transportation increased, but it needed to be suitable to the Vietnamese transportation conditions, with its narrow streets, often very crowded pavements and roads, numerous small ‘on the street’ traders, low incomes and a weak management system for transportation
+ Due to the psychology of Vietnamese, they have tendency to use foreign goods, especially Japanese goods In their minds, all foreign goods are high quality and users of foreign goods is considered connoisseurs.
+ Vietnamese customers wanted a flexible and easy to use form of transport that was also easily maintained through the access to components Whilst the high income levels preferred to regularly buy a new bike, the vast majority of the population would make a single purchase which they then focused on repairing themselves or at any local motorbike repair shop (Nguyen Duc Tiep, 2007;
Mishima, 2005) To sustain the market for Honda bikes and to establish a dominant competitive advantage, the new Honda project needed to ensure that it not only provided the complete bike, but also provided a constant and readily accessible supply of components for repairing and maintaining all models.
Recognizing the huge demand for such motorcycles, in recent years many suppliers on the motorcycle market enter Vietnam The famous motorcycle manufacturers in the world such as: Honda, SYM, Suzuki, Yamaha, have conducted joint ventures with Vietnam to manufacture and supply to consumers in Vietnam In addition, during the past 5 years, the motorcycle market has diversified even more diverse today by the Chinese bikes are imported as well as mass production in Vietnam.
It would be very costly for Honda to apply all the high-tech robot systems of their Japanese factories into another country Therefore, when entering into a country, they also paid great attention to the labor force in the host country And Vietnam have excellently met this demand of Honda.
+ Vietnamese employees are often endowed with good technical skills and are able to quickly learn the necessary assembly skills and this is also aided by the relatively simple production methods used by Honda
+ The Vietnamese worker still commanded only a fraction of the Japanese worker wage, ensuring that Honda company could still produce to the same high quality, but at a far lower cost radio In terms of human resources, Vietnam has 60% of the population under age 30 (table 3), one of the youngest populations in Asia, 94% of people know how to read, write, work very diligently and productivity The cost of labor in Vietnam is very low, averaging only from 55 USD to 110 USD / month (table 4 ).
Figure 3: Population Structure by ages in Vietnam 1979-2007 by Population and
Figure 4: Workers’ average basic salary in some cities in the world
Low labour costs and the quality of the human resources are still an indispensable factor in the attraction of FDI, coupled with the need for a system that allows easy recruitment of that labour and the opportunity to improve the technical skills of the labour force (Bui Anh Tuan, 1991) TNCs are attracted by countries that concentrate on development their human resources This has become a high priority issue in Vietnam where the skills levels and productivity of the labour force need a lot of improvement Nevertheless, the Government is trying to overcome these problems For example, a MOLISA policy document (Paper No.18-MOLISA- ‘Labour and Social Issues Emerging from Vietnam WTO Entry) notes how FDI Law has consistently developed to encourage a favourable labour market climate for investors.
Vietnam political stability creates security for investors when doing business in Vietnam.
- Motorcycle industry affected by the tax, commercial law, business law.
- Motorcycles CBU imported from abroad must bear the tax rate of 30-40%, the imported components are assembled in the country also suffered a 20-25% tax rate, the clear, localized cars will have significant advantages in terms of price competition, especially in moderately priced cars.
- Vietnam's law provisions at least 18 years old to use the motor as age restrictions on use of motorcycles
The two basic pillars of the policy on foreign direct investment in Vietnam are to protect and to encourage the foreign investors.
- After 1986, adopting economic innovation policies, Vietnam opened its door to global investors, and the National Assembly enacted the ‘Law on Foreign
Investment’ to encourage multinationals investing capitals and technologies in Vietnam, guaranteeing the ownership and rights of foreign investors in jure In the following years, a series of revised policies including tax and tariff, monetary, land, etc, have been put in place to improve the investment environment
- All of the assets of foreign investors have been strictly protected in
+ The Vietnamese government is committed to never nationalize the assets of the foreign investors and behave towards both domestic and foreign investors on an equal basis (NAV, 2005j).
+ The foreign investors have the right to transfer their lawful capital and assets abroad after completion of all financial rights for the Vietnamese government.
+ Law has been supplemented and amended several times, the main direction of these amendments is to create the attractive environment for foreign investors and to enhance the competitiveness of investment environment in Vietnam with the other regional countries
+ The Vietnam-Japan Co-operation Initiative has also provided Honda the opportunities to expand their market due to a commitment for long term development of both sides The regulations on protection of intellectual property of foreign investors have been addressed seriously and every effort made to execute it successfully.