Toyota, as one of the world’s leading automotive manufacturers, has made significant investments in various countries, including Vietnam, to tap into emerging markets and capitalize on their growth potential. This research paper is conducted with a view to examing the motivations behind Toyota’s FDI in Vietnam, assessing the impacts and achievements of this investment on Toyota’s growth. Moreover, the paper also analyzes the drawbacks of Toyota in Vietnam. Using the qualitative method, this study reveals several insights. Firstly, Toyota’s decision to invest in Vietnam is driven by such factors as market potential, political stability, and its location advantage, which will be digged further under OLI paradigm. In addition, Toyota’s FDI has played a crucial role in the development of Vietnamese automotive industry, contributing to technological transfer, job creation, and so on. The paper also identifies challenges and potential risks associated with Toyota’s FDI in Vietnam, such as intense market competition with SWOT analysis. Overall, the findings contribute to the existing literature on FDI in emerging economies and offer practical implications for other multinational companies considering investments in Vietnam’s automotive sector. Keywords: FDI, Toyota, Vietnam
FOREIGN TRADE UNIVERSITY FACULTY OF ENGLISH FOR INTERNATIONAL BUSINESS RESEARCH PAPER ANALYSIS OF TOYOTA’S FOREIGN DIRECT INVESTMENT IN VIETNAM Student group Topic Class Module Instructor : : : : Foreign Direct Investment ESP231 M.A Phan Kim Thoa Ha Noi, May 2023 Analysis of Toyota’s Foreign Direct Investment in Vietnam School of Economics and International Business, Foreign Trade University Faculty of International Economics, Foreign Trade University ESP231: English for Specific Purposes M.A Phan Kim Thoa Ha Noi, May 2023 ABSTRACT Toyota, as one of the world’s leading automotive manufacturers, has made significant investments in various countries, including Vietnam, to tap into emerging markets and capitalize on their growth potential This research paper is conducted with a view to examing the motivations behind Toyota’s FDI in Vietnam, assessing the impacts and achievements of this investment on Toyota’s growth Moreover, the paper also analyzes the drawbacks of Toyota in Vietnam Using the qualitative method, this study reveals several insights Firstly, Toyota’s decision to invest in Vietnam is driven by such factors as market potential, political stability, and its location advantage, which will be digged further under OLI paradigm In addition, Toyota’s FDI has played a crucial role in the development of Vietnamese automotive industry, contributing to technological transfer, job creation, and so on The paper also identifies challenges and potential risks associated with Toyota’s FDI in Vietnam, such as intense market competition with SWOT analysis Overall, the findings contribute to the existing literature on FDI in emerging economies and offer practical implications for other multinational companies considering investments in Vietnam’s automotive sector Keywords: FDI, Toyota, Vietnam INTRODUCTION Currently, the key to success for developing and least developed countries is to attract foreign direct investment (FDI) FDI is a form of exchange and combination of the comparative advantages of the parties involved In recent years, Vietnam is increasingly proving that this is a potential market that international investors seek, because of its political stability as well as its high growth rate and high remuneration being lower than other countries in the region The automotive industry is a new industry among industries in Vietnam Although new, this industry has been playing an important role in the development of the industry in general and the economic development of Vietnam in particular This is also one of the major FDI attraction industries in Vietnam One of the first foreign-invested enterprises present in the auto industry in the country is Toyota (TMV) Toyota has been presented in Vietnam since the automotive industry in the country was still young Since then, Toyota has achieved many remarkable achievements, contributing to the development of Vietnam's automotive industry Today, in Vietnam, although there are many foreign-invested automotive enterprises present, Toyota still asserts its No position in the Vietnamese market In this report, we used qualitative methods to analyze the topic “Analysis of Toyota’s Foreign Direct Investment in Vietnam” The research paper is organized as follows: SECTION 1: LITERATURE REVIEW SECTION 2: THEORETICAL FRAMEWORK SECTION 3: ANALYSIS AND FINDINGS SECTION 4: EVALUATIONS During the process of making this research paper, due to some certain limits in understanding and data collecting, despite all the efforts, the report may hardly avoid mistakes We are more than willing to receive your comments so that our group can improve and complete this paper LITERATURE REVIEW Previous Research The influence of foreign direct investment (FDI) on host countries has been extensively studied in many literature reviews In terms of job creation, economic efficiency, and access to foreign markets, many academics think that FDI has enormously favorable effects for the host countries (Sachs & Bajpai 2000) FDI creates technology transfer for developing countries, assists human capital formation, contributes to international trade integration and particularly exports, helps create a more competitive business environment, and improves the efficiency of resource use (OECD 2002) The Japanese are among the most well-known investors in the world According to Kanungo, A K., and Mahajan (2013), Japanese FDI has been biased toward high technology industries like automotive, electronics, electrical equipment, and industrial machinery The Japanese investment market has found the automotive industry to be the most appealing The outcomes of two major automakers like Toyota and Suzuki engaging in India's automotive sector are crucial for the Asian nation (SHRESTHA, S 2014) The FDI not only establishes a foundation for the domestic industry, but it also accelerates its rate of growth Another example is Toyota's investment in Mississippi, which also benefits the local economy (Cardamone, C 2017) Over a six-year period, the investment generated thousands of jobs for the people, stimulating the economy Because of how simple it is to penetrate the market, Vietnam is also a desirable location for Japanese automakers like Toyota to make FDI (Dang Viet Dung) The government views this sector as a pillar, which is why there are incentives for international investors Research gap The previous studies illustrate FDI in automotive industry in host countries, but they lack of specific FDI method to analyze as well as consideration for the advantages from the investors THEORETICAL FRAMEWORK Overview of Foreign Direct Investment (FDI) Definition of Foreign Direct Investment (FDI) Foreign Direct Investment (FDI) is an ownership stake in a foreign company or project made by an investor, company, or government from another country Generally, the term is used to describe a business decision to acquire a substantial stake in a foreign business or to buy it outright to expand operations to a new region It involves the acquisition or establishment of long-term assets, such as physical infrastructure, productive facilities, or equity ownership, with the intention of gaining influence or control over the management and operations of a company or enterprise in the host country FDI goes beyond passive investment, as it typically requires active participation, technology transfer, knowledge sharing, and strategic decision-making by the foreign investor in the host country In the context of Foreign Direct Investment (FDI), the term ‘home country’ and ‘host country’ refer to the countries involved in the investment process Home country is defined as the country from which the foreign investor originates or where the investing company is headquartered It is the country where the investing entity has its primary operations, management, and legal jurisdiction The home country is the source of FDI and is typically the country that provides the capital, technology, and expertise for the investment Host country is defined as the country that receives the foreign investment or where the investment is made It is the country where the foreign investor establishes or acquires assets, such as physical infrastructure, facilities, or equity ownership in local companies The host country provides the platform and environment for the foreign investors to conduct business operations and realize the benefits of the investment Home country and host country have distinct roles in the FDI process While the home country is responsible for providing the capital, technology, and resources necessary for the investment, the host country offers the market opportunities, resources, infrastructure, and regulatory framework to attract and accommodate the foreign investment Sources of control Foreign Direct Investment (FDI) control through ownership refers to the level of ownership and control that foreign entities have over businesses or assets in a particular country The ownership of at least 10% of the voting power, representing the influence by the investors, is the basic criterion used Hence, control by the foreign investor (ownership of more than 50% of the voting power) is not required Different countries have different approaches to FDI control Some nations may have restrictions on foreign ownership in certain industries, such as telecommunication, or critical infrastructure, to maintain control and protect national security In such cases, governments often require local ownership or limit the percentage of foreign ownership On the other hand, some countries adopt more open policies, allowing investors to have significant ownership and control over businesses These nations see FDI as an opportunity for economic growth, job creation, and technology transfer Foreign Direct Investment (FDI) control through agreements refers to the mechanisms and agreements that host countries establish to regulate and control FDI These agreements are typically bilateral or multilateral treaties, investment promotion and protection agreements, or international trade agreements Characteristics of FDI Management control Foreign direct investment involves a long-term relationship between an investor and a business Therefore, under FDI, the investors hold a certain degree of control over managing the enterprise where the investment is being made For an investment to be regarded as an FDI, the parent firm needs to have at least 10% of the ordinary shares of its foreign affiliates, but the investing firm may also qualify for an FDI if it holds the voting power in a business enterprise operating in a foreign country (Sharma and Gani, 2004) Vietnam Investment Law (2020) does not have a specific regulation regarding the proportion of equity stake that foreign investors have to contribute Technology transfer One of the superior advantages of FDI, when compared to other types of international investment, is technology transfer from a home country into a host country Technology transfer refers to any process by which a party in one country gains access to the technical information of a foreign party and successfully absorbs it into its production process FDI investors are either transnational corporations (TNCs) or multinational corporations (MNCs) with advanced levels of management, production, and technology When making FDI investments, they introduce to the host countries superior expertise and know-how Both the affiliates and the domestic firms competing with them try to adopt the new technologies, leading to an improvement in the technological level of the whole economy However, in some cases, FDI investors transfer either outdated technology or too sophisticated one which the domestic workforce is unable to absorb yet In both scenarios, the host country barely gains benefits from technology transfer It is concluded that technology transfer can not be expected to happen automatically but is also determined by factors such as quality of labor, the set-up of the FDI project, and the type of technology introduced It is undeniable that technological advancement plays an important role in achieving sustainable development Therefore, governments of developing countries, including Vietnam, tend to put efforts into attracting FDI inflows as a means of promoting technology transfer Transfer pricing According to Garrison, Noreen, and Brewer (2010, 558), “a transfer price is the price charged when one segment of a company provides goods and services to another segment of the same company” So, in the context of international investment, transfer pricing is the pricing by TNCs of intra-firm transactions across national boundaries Transfer pricing has two main objectives: measuring the division’s performance and determining the optimal tax burden However, it is mainly used for tax planning purposes rather than for measuring performance purposes Price transferring allows TNCs to shift their profits from nations with high to low corporate income taxes to minimize tax obligations or escape other restrictions on repatriating profits This affects the amount of profit reported in host countries by corporations, which in turn affects the tax revenues of both host and home countries In Vietnam, inspections by the Vietnamese tax authorities found that “the most common trick played by the FDI enterprises to evade taxes was hiking up prices of input materials and lowering export prices to make losses or reduce profits in books” If violating the regulations, transfer pricing has detrimental effects on the host country’s market such as fluctuations in capital flows and national budget deficit Types of FDI By linkages Theoretically, there are types of FDI categorized by linkages First, horizontal FDI arises when a firm duplicates its home country-based activities at the same value chain stage in a host country through FDI Second, vertical FDI takes place when a firm through FDI moves upstream or downstream in different value chains Third, conglomerate FDI is when a firm invests in a business that is unrelated to their present company By perspective of host country There are types of FDI categorized by perspective of host country First, import- substituting FDI is based on the premise that a country should attempt to reduce its foreign dependency through the local production of industrialized products A kind of alternative method with import is FDI Second, export-substituting FDI arises when a country has trade and economic policies aiming to speed up the industrialization process of the country by exporting goods OLI paradigm – John Dunning’s Theory OLI theory is known as the ownership advantage, location, and internalization It is a three-tiered evaluation framework that companies can follow when attempting to determine if it is beneficial to pursue foreign direct investment (FDI) The diagram provides a strategy for operation expansion through FDI which exhibits potential OLI paradigm suggests that O and I advantages are possessed by firms and firms exploit the merits of L in home country Ownership advantages – the first consideration, includes information and various ownership rights of a company It may consist of technology, brand name, managerial and marketing expertise, firm size, economies of scale, and market power These advantages are typically considered to be intangible which gives a competitive advantage against potential foreign competitors, such as reputation for reliability This value can be replicated among different countries and transferred within firms without transaction costs Location advantage is considered by FDIs when numerous competitive advantages are being presented It concentrates on the geographic advantages of the host country in which firms can benefit from the resource-seeking (ocean for sea freight, natural resources, terrain for building factories…) Besides, producing in the host country also means producing close to final consumers Other location advantages can labor resources (low-cost and well-trained labor force), market demand, political (trade policy for foreign investors, tariffs…), and social advantages Should the mentioned above advantages exist, the companies can consider taking on FDI Economic determinants Resource-seeking: exploiting natural resources by bringing projects to raw materials endowments and on world commodity prices - Availability of raw materials and natural resources: - Cost of raw materials - Physical infrastructure (ports, roads, railways, power, telecom) - Availability and cost of skilled labor Market-seeking: the size of the market and potential growth is very important - Market size and per capita income - Market growth - Access to regional and global markets - Country-specific consumer preferences - Structure of markets Efficiency seeking: - Low-cost unskilled labor or skilled labor force - Cost of resources and labor adjusted for productivity