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 refer to unique competitive benefits that a firm possesses over local companies, enabling it to offset the extra expenses associated with setting up production facilities in foreign markets These advantages assist firms in overcoming the challenges they face compared to local competitors in international environments.
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 refer to the superior commercial benefits that firms gain by leveraging ownership-specific and location-specific advantages through controlled foreign affiliates, rather than engaging in transactions with unrelated companies in foreign markets This strategic approach enhances operational efficiency and maximizes profitability for businesses operating internationally.
The OLI model, also known as the eclectic paradigm and introduced by J.H Dunning in 1976, has been a crucial framework for analyzing the operations of transnational corporations (TNCs) and the economic rationale behind their international activities for several years This model highlights the key drivers of decision-making and growth that facilitate international production for firms, and it has been widely utilized in previous research to explain entry mode decisions, supported by numerous empirical studies.
(Zhao 2005) is also not totally accepted, and described as limited in its accuracy to extrapolate definite methods of international operations
Foreign Direct Investment (FDI) operations are influenced by various factors beyond the economic advantages outlined in the OLI framework The gravity model seeks to address the limitations of the eclectic paradigm by examining international production and trade, incorporating OLI variables Additionally, Dunning’s theory does not account for the differing motives for production across regions For instance, the factors driving foreign investment in coal or iron ore-rich regions of Africa differ significantly from those affecting car manufacturing investments in Asia.
The OLI framework effectively identifies the fundamental motives behind the international operations of transnational corporations (TNCs) and provides a solid foundation for research in international investment, business, and economics It serves as a valuable tool for categorizing numerous recent studies on foreign direct investment (FDI) Given our time constraints for this case study, we determined that the OLI paradigm is suitable for analyzing the motivations and determinants of Honda's FDI in Vietnam.
MOTIVATIONS FOR HONDA FDI
Ownership-specific advantages
Honda, a renowned multinational corporation from Japan, is celebrated for its high-quality products and services, reflecting the meticulousness and responsibility characteristic of Japanese culture The company's rigorous management practices ensure that every product released to the market meets exceptional standards In the United States, Honda ranks No 1 in owner loyalty within the automotive industry, as reported by R L Polk & Company Additionally, Honda enjoys a strong reputation and deep trust among Vietnamese consumers, who often refer to motorcycles generically as "Honda motorcycles," highlighting the brand's significant influence in Vietnam.
1.2 High-quality products with reasonable price
Honda motorcycles are renowned for their durability and affordability, making them a popular choice in Vietnam Unlike Vespa, which is considered a luxury brand accessible only to the wealthy, Honda offers a reliable alternative at a reasonable price While some Chinese motorcycles may be cheaper, they often lack quality and are prone to breakdowns Overall, Honda strikes the perfect balance between quality, service, and cost, making it a preferred option for Vietnamese consumers.
Honda Vietnam's launch of the affordable Wave Alpha motorcycle created a buzz among consumers who previously found Honda products unaffordable Priced at only VND 11 million (approximately $720), which is less than half the cost of the premium Super Dream model, the Wave Alpha quickly became a bestseller, flying off the shelves as fast as Honda could produce them.
1.3 Honda service and added in activities
Honda prioritizes customer experience with a widespread service team across the country dedicated to repairing Honda products Thanks to its qualified and enthusiastic employees, Honda has quickly established itself as the leading scooter brand in Vietnam.
Honda's slogan, "The Power of Dreams," embodies the belief that everyone has aspirations that bring joy and motivation to their lives, and the company aims to help fulfill those dreams globally Committed to societal engagement, Honda not only introduces innovative products but also provides essential training on travel laws and safety Campaigns like "Tôi yêu Việt Nam" highlight Honda's adaptability and dedication to the community In contrast to local Vietnamese enterprises, which often struggle with customer service and marketing strategies, Honda's strengths in these areas stand out significantly.
Honda's extensive experience in designing products tailored to diverse cultural tastes across Asia, Europe, and South America provides a significant competitive advantage In Vietnam, selecting a motorcycle design that appeals to the majority is challenging, but Honda's expertise in adapting product designs positions the company to meet the demands of these discerning customers effectively.
Figure 1: Some of Honda’s products
Strong business relationships are crucial for new ventures, particularly for Honda, which depends significantly on its extensive procurement network across the globe This global reach, spanning from America to Asia, facilitates the efficient transportation of accessories, resulting in reduced transportation and R&D costs Additionally, the shared preferences among consumers in nearby regions further enhance Honda's operational efficiency.
Honda, as an Asian company, possesses a deep understanding of the habits and interests prevalent in the Asian region, which facilitates their connection with the Vietnamese market Satoshi Toshida emphasized that the community spirit and cultural obligations inherent in Asian culture foster a strong affinity with the Vietnamese people, contributing to their confidence in successfully investing in Vietnam.
Honda motorcycles feature a pushrod overhead valve (OHV) air-cooled four-stroke single-cylinder engine that significantly reduces fuel consumption and minimizes exhaust emissions, helping riders save on fuel costs while complying with global emission standards In comparison to two-stroke engines from brands like Yamaha and Suzuki, the four-stroke engine is preferred in the Vietnamese market for its comfort and elegant design, making it an appealing choice for riders.
These advantages make Honda overcome all the disadvantages when approaching Vietnam market, so which kind of entry mode did Honda choose to approach Vietnam market?
Honda Motor Corporation is strategically positioned to leverage its advantages for international expansion through various methods such as export, licensing, franchising, or foreign direct investment (FDI) options like joint ventures and subsidiaries Each approach presents unique benefits and challenges influenced by regulations, market conditions, and trade barriers in both the host and home countries Ultimately, Honda opted for internalizing FDI through a joint venture with Vietnam Engine and Agricultural Machinery Corporation (VEAM), with Honda Group holding 70% of the legal capital—42% from Honda Motor Co., Ltd and 28% from Asian Honda Motor Co., Ltd., while VEAM contributes the remaining 30% This decision was primarily driven by market imperfections, necessitating a collaborative approach to navigate the complexities of the Vietnamese market.
Honda faces significant challenges in exporting motorcycles to Vietnam due to government-imposed regulatory barriers, specifically a 60 percent tariff on imported complete motorcycles aimed at protecting the local market This high tariff has led to domestic prices being approximately 1.5 times higher than similar models in Thailand, making them unaffordable for the majority of the middle-income population in Vietnam Despite Honda's attempts to export motorcycles to Vietnam, both before and after establishing a local presence, the limited quantities exported highlight that relying on exports as a primary strategy for entering the Vietnamese market is not a viable solution.
If Honda opts for licensing or franchising in Vietnam, it may struggle to find a suitable local partner due to factors such as limited technology and manufacturing capabilities Maintaining high production quality is crucial for Honda to uphold its reputation, and technology plays a vital role in achieving product quality and cost control While standard motorcycle models may not require advanced technology, the essential technological know-how, managerial expertise, and practical experience are necessary to ensure consistent high quality and reliability.
Honda chose to internalize its operations by investing in foreign affiliates under its control instead of engaging in transactions with unrelated overseas firms This strategy allows Honda to leverage both ownership-specific and location-specific advantages, which will be explored in the following sections.
Honda has opted to form a joint venture with the Vietnam Engine and Agricultural Machinery Corporation (VEAM), despite having the capability to establish a wholly owned subsidiary in Vietnam VEAM's primary function in this partnership is limited to assisting Honda with land ownership and constructing the headquarters for the joint venture, rather than contributing technological expertise This is evident from the failure of VEAM's 15 subsidiaries to supply components for the collaboration with Honda.
In the early 1990s, concerns among communist conservatives arose regarding the ability of domestic companies to compete, leading to fears that they would swiftly go out of business This apprehension created a risk in attracting foreign investors and companies Initially, few foreign direct investments (FDIs) were permitted as 100% foreign-owned in the motorcycle industry; consequently, Honda's only viable option became forming joint ventures with Vietnamese enterprises.
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 are crucial for transnational corporations (TNCs) like Honda when making market entry decisions In entering the Vietnamese market, Honda aims to achieve multiple objectives, including market-seeking, resource-seeking, and efficiency-seeking However, the primary motivation driving Honda's strategy in Vietnam 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 economy of Vietnam, coupled with rising incomes among residents, has significantly increased the demand for motorbikes in recent years According to the Transportation Police Bureau, the number of registered motorbikes grew by approximately 12% annually from 1995 to 1999 By the end of 1999, Vietnam's population of 77 million included around 20 million bicycles and 5.6 million motorbikes In 2000, motorbike sales reached 1.4 million units, while annual bicycle sales were estimated between 700,000 and 1 million units With motorcycles as the primary mode of transportation, Vietnam presents a highly attractive market for motorbike manufacturers.
Figure 2: Vietnam population by Statical Publishing House 2008
In Vietnam, road transportation dominates the traffic structure, accounting for 82.2%, with motorbikes representing 61% of all vehicles As living standards rise, there is an increasing demand for modern transportation solutions that are compatible with the country’s unique conditions, including narrow roads, low income levels, and an underdeveloped transportation management system.
Vietnamese consumers often prefer foreign products, particularly Japanese goods, due to a perception that these items are of superior quality This mindset positions users of foreign goods as discerning connoisseurs, reflecting a broader cultural appreciation for international brands.
Vietnamese customers seek a flexible and user-friendly mode of transportation that allows for easy maintenance through accessible components While higher-income individuals often prefer to purchase new bikes regularly, the majority of the population tends to make a one-time purchase, focusing on self-repair or utilizing local motorbike repair shops.
To maintain Honda's market presence and secure a competitive edge, the new Honda project must deliver not only fully assembled bikes but also a consistent and easily accessible supply of components for the repair and maintenance of all models.
In response to the growing demand for motorcycles, numerous suppliers have entered the Vietnamese market in recent years Renowned global manufacturers like Honda, SYM, Suzuki, and Yamaha have formed joint ventures with local companies to produce and supply motorcycles for Vietnamese consumers Additionally, the motorcycle market has become increasingly diverse over the past five years, with the influx of Chinese motorcycles being imported and mass-produced within Vietnam.
Honda faces significant costs in implementing advanced robotic systems from its Japanese factories in other countries Consequently, the company carefully evaluates the labor force in potential host nations Vietnam has proven to be an excellent match for Honda's labor requirements.
Vietnamese employees possess strong technical skills and can rapidly acquire essential assembly techniques, supported by the straightforward production methods implemented by Honda.
Vietnamese workers earn significantly lower wages compared to their Japanese counterparts, allowing Honda to maintain high-quality production at reduced costs With 60% of its population under the age of 30, Vietnam boasts one of the youngest demographics in Asia Additionally, 94% of the population is literate, demonstrating a strong work ethic and high productivity levels Labor costs in Vietnam are remarkably low, averaging between $55 and $110 per month.
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 labor costs and the quality of human resources are crucial for attracting foreign direct investment (FDI), alongside the necessity for a recruitment-friendly system and opportunities to enhance workforce skills (Bui Anh Tuan, 1991) Transnational corporations (TNCs) are particularly drawn to countries that prioritize human resource development, a significant concern in Vietnam where labor skills and productivity require substantial improvement The Vietnamese government is actively addressing these challenges, as highlighted in a MOLISA policy document (Paper No 18-MOLISA), which emphasizes the ongoing evolution of FDI laws to foster a favorable labor market environment 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 imported as Completely Built Units (CBU) face a tax rate of 30-40%, while those assembled from imported components incur a tax rate of 20-25% This tax structure gives locally manufactured vehicles a competitive edge in pricing, particularly in the moderately priced segment of the market.
- 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
Vietnam is actively promoting foreign investment by ensuring the protection of ownership and rights for international investors In recent years, the country has implemented a range of revised policies, including changes to tax, tariffs, monetary regulations, and land use, aimed at enhancing the overall investment climate.
- All of the assets of foreign investors have been strictly protected in Vietnamese territory
+ 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.
Vietnam's legal framework has undergone numerous amendments aimed at fostering an appealing environment for foreign investors and boosting the competitiveness of its investment landscape compared to other regional nations.
The Vietnam-Japan Co-operation Initiative has enabled Honda to broaden its market presence, thanks to a mutual commitment to long-term development Additionally, the initiative has effectively addressed regulations concerning the protection of intellectual property for foreign investors, ensuring diligent efforts are made for successful implementation.