Risk management in import and export trading of Vietnamese firms

ĐẠI HỌC MỞ TP. HỒ CHÍ MINH UNIVERSITÉ LIBRE DE BRUXELLES UNIVERSITE OUVERTE DE HCMV ECOLE DE COMMERCE SOLVAY MMVCFB PROGRAMME DE MAITRIES EN MANAGEMENT VIETNAM COMMUNAUTE FRANCAISE DE BELGIQUE BÙI NGỌC PHƯƠNG HUYỀN RISK MANAGEMENT IN IMPORT AND EXPORT TRADING OF VIETNAMESE FIRMS MASTER OF MANAGEMENT THESIS Ho Chi Minh City, Viet Nam 2006 i ACKNOWLEDGMENTS It is a rare pleasure for me to express my profound gratitude to Dr. Vo Thi Quy - Research advisor - for her valuable guidance, constructive comments, explicit direction and encouragement throughout the research period. My acknowledgements are due to MMVCFB – the Vietnamese and Belgium Master Program, Vietnamese Professors and Belgium Professors of the program from Solvay Business School and who gave me a great chance to obtain valuable knowledge and long term relations. My thanks are also extended to the companies and organizations in Vietnam and many executives of import and export firms in Vietnam for their help and cooperation during period of my data collection Thank all MMVCFB6 members and the faculty of the Hochiminh City Open University for their help and boundless inspiration Last, but no least, to all my lovely friends, I give my sincerest appreciation for their warm encouragement, friendship and help at all times, especially their motivation during my studying time. ii ABSTRACT International trading always contains implicit exposures to risk, especially in the trends of globalization of trade and production. That is why risk management has received increasing attention in recent years. Its interests for preventing and mitigating exposures to risk are easy to recognize and are recorded by organizations all over the world. However, in Vietnam, risk management has still been a new issue, at least in import and export activities of most small and medium-sized firms. As a result, risks in import and export trading of Vietnamese firms are likely to occur frequently and at more serious level. This research aims to identify potential risks in import and export trading of Vietnamese firms, the current situation in their risk management and factors influence to this process. Attempts are made to propose guidelines for Vietnamese firms in risk management. The research suggests that investors should keep in mind those exposures to risk in import and export activities seem more and more to increase due to the rise in uncertainty of the international market. However, knowing risk management and applying an appropriate risk management will help them in preventing and minimizing loss. iii TABLE OF CONTENTS ACKNOWLEDGMENTS I ABSTRACT II TABLE OF CONTENTS III ABBREVIATIONS VII LIST OF TABLES VIII LIST OF FIGURES X CHAPTER 1 INTRODUCTION 1.1 BACKGROUND 1 1.2 OBJECTIVES AND SCOPE OF THE STUDY 2 1.3 METHODOLOGY 2 1.4 RESEARCH FRAMEWORK 5 1.5 STRUCTURE OF STUDY 5 CHAPTER 2 LITERATURE REVIEW 2.1 IMPORT AND EXPORT TRADING 5 2.1.1 An introduction to import and export trading 5 2.1.2 Regulation of international trade 5 2.2 RISK MANAGEMENT 7 2.2.1 An introduction to risk and risk management 7 2.2.2 Risk Identification 7 2.2.2.1 Risk from Physical Environment 8 2.2.2.2 Risk from Social Environment 8 2.2.2.3 Risk from Operational Environment 8 iv 2.2.2.4 Risk from Political and Legal Environment 9 2.2.2.5 Risk from Economic Environment 10 2.2.2.6 Risk from Cognitive Environment 11 2.2.3 Risk measurement 11 2.2.3.1 Direct and Indirect Effects 12 2.2.3.2 Dimensions of Exposure to Risk 12 2.2.3.3 Probable Maximum Loss (PML) 13 2.2.4 Risk control 13 2.2.4.1 Risk avoidance 14 2.2.4.2 Loss Prevention and Loss Reduction 15 2.2.4.3 Information management 16 2.2.4.4 Risk transfer 16 2.2.5 Risk financing 17 2.2.5.1 Retention 18 2.2.5.2 Insurance Transfers 19 2.2.5.3 Non-insurance Risk Financing Transfers 20 2.2.5.4 Hedging 23 CHAPTER 3 RISK MANAGEMENT IN IMPORT AND EXPORT TRADING OF VIETNAMESE FIRMS 3.1 RISK FREQUENCY 27 3.1.1 General Assessment of Risk Frequency 27 3.1.2 Frequency of Natural Risk 29 3.1.3 Frequency of risk due to unreliability of transportation system 30 3.1.4 Frequency of risk in handling of goods 31 3.1.5 Frequency of risk due to nature of goods 33 v 3.1.6 Frequency of risk due to lacking of information, differences in culture and language 34 3.1.7 Frequency of political and legal policy risk 35 3.1.8 Frequency of economic risk 37 3.2 LOSS SEVERITY 40 3.2.1 General Assessment of Loss Severity 40 3.2.2 Loss Severity from Nature Force 43 3.2.3 Loss Severity due to problems in transportation 44 3.2.4 Loss severity due to handling of goods 46 3.2.5 Loss severity due to nature of goods 47 3.2.6 Loss severity due to lack of information, different culture and language 48 3.2.7 Loss Severity due to political and legal policy 49 3.2.8 Loss severity due to economic issues 51 3.3 ASSESSING RISK MANAGEMENT OF VIETNAMESE FIRMS AND SOME EXTERNAL FACTORS INFLUENCING TO IT 53 3.3.1 Assessing Risk Management of Vietnamese firms 53 3.3.1.1 Risk Management Department or Risk Specialist in the organization 53 3.3.1.2 Information system for risk management 56 3.3.1.3 Training for staffs on risk management: 58 3.3.1.4 Buying insurance of Vietnamese import and export companies.59 3.3.1.5 Knowing and using hedging: forward and option contracts 61 3.3.2 External Influencing factors 63 3.3.2.1 Vietnamese legal system for import and export activities 63 3.3.2.2 Insurance market of import and export goods in Vietnam 63 vi 3.3.2.3 Development of some risk hedging instruments 66 CHAPTER 4 CONCLUSIONS AND RECOMMENDATIONS 4.1 CONCLUSIONS 69 4.2 RECOMMENDATIONS 72 4.2.1 For import and export firms 72 4.2.2 For the economy and government: 75 4.3 RECOMMENDATIONS FOR NEXT STUDIES 77 ANNEX 1 78 ANNEX 2 81 REFERENCES 97 vii ABBREVIATIONS AFTA : ASEAN Free Trade Area BIDV : Bank for Investment and Development of Vietnam CEO : Chief Executive Officer CIF : Cost, Insurance and Freight (Incoterm) EUR : The Official Currency of European Union member states (Euro) FDA : Food and Drug Association (of the United States) FOB : Free On Board (Incoterm) FTAA : Free Trade Area of the Americas Forex : Foreign Exchange Rate GATT : General Agreement on Tariffs and Trade GBP : Currency of Great Britain JPY : Currency of Japan (Yen) MAI : Multilateral Agreement on Investment NAFTA : North American Free Trade Agreement PML : Probable Maximum Loss USD : Currency of the United States. VND : Currency of Vietnam WTO : The World Wide Organization viii LIST OF TABLES Table 3-1: Statistical record of risk frequency based on Im- Export turnover 29 Table 3-2: Statistical record of loss severity based on Im- Export turnover 43 Table 3-3: Opinions on necessity of buying insurance in the import and export trading 61 Table A2-1: Statistical record of risk frequency for group of exposures 82 Table A2-2: Statistical record of risk frequency based on company size 82 Table A2-3: Statistical record of risk frequency based on company type 82 Table A2-4: Statistical record of risk frequency based on im- export turnover 83 Table A2-5: Statistical record of risk frequency due to natural force 83 Table A2-6 Statistical record of risk frequency due to problems in transportation 83 Table A2-7 Statistical record of risk frequency due to handling of goods 83 Table A2-8 Statistical record of risk frequency due to nature of goods 84 Table A2-9 Statistical record of risk frequency due to lacking of information, difference of culture, language 84 Table A2-10 Statistical record of risk frequency due to political/ legal policy 84 Table A2-11 Statistical record of risk frequency due to economic issues 85 Table A2-12 Statistical record of risk frequency for all exposures to risk 85 Table A2-13: Statistical record of loss severity for group of exposures 86 Table A2-14: Statistical record of loss severity based on company size 87 Table A2-15: Statistical record of loss severity based on company type 87 Table A2-16: Statistical record of loss severity based on im-export turnover 87 Table A2-17: Statistical record of loss severity due to natural force 87 Table A2-18: Statistical record of loss severity due to transport problems 88 ix Table A2-19: Statistical record of loss severity due to handling of goods 88 Table A2-20: Statistical record of loss severity due to nature of goods 88 Table A2-21: Statistical record of loss severity due to lack of information, difference in culture, language 88 Table A2-22: Statistical record of loss severity due to political/legal policy 89 Table A2-23: Statistical record of loss severity due to economic policy 89 Table A2-24: Statistical record of loss severity for all exposures to risk 89 Table A2-25: The presence of risk specialist/risk department in the firms 90 Table A2-26: Statistics of the answer of the necessity of risk specialist/risk department in the firms 91 Table A2-27: Statistics of the answer of risk management training 92 Table A2-28: Statistics of the answer of risk handling in the organization 92 Table A2-29: Statistics of the answer of risk report in 93 Table A2-30: Statistics of the answer of information update 93 Table A2-31: Statistics of the answer of Buying Insurance and its necessity 94 Table A2-32: Statistics of the answer of the necessity of buying Insurance 94 Table A2-33: Statistics of the answer of knowing forward contracts 94 Table A2-34: Statistics of the answer of using hedging contracts 95 Table A2-35: Statistics of the answer of knowing option contracts 95 Table A2-36: Statistics of the answer of using option contracts 96 [...]... review of import and export trading and risk management theories ̇ Chapter 3: Assessments of risk management in import and export trading of Vietnamese firms and influencing factors ̇ Chapter 4: Conclusions and recommendations to help Vietnamese firms have more solutions for risk management 5 CHAPTER 2 LITERATURE REVIEW 2.1 IMPORT AND EXPORT TRADING 2.1.1 An introduction to import and export trading Import. .. activity with its trends and regulations in international trade 3 - Risk management in identification, assessment, some methods for preventing and minimizing risk, including: risk control and risk financing 2 Survey risks in import and export activities of Vietnamese firms: To indentify risk Vietnamese firms in international trading and evaluate the current situation of their risk management, the study... 3-20: Average % of answer of necessity of having risk specialist 55 xi Figure 3-21: Average % of firms making reports on risk incidents .57 Figure 3-22: Frequency of update relating information for im- export trading activities 58 Figure 3-23: Average % of firms provides risk training to their staffs 59 Figure 3-24: Frequency of buying insurance in import export trading of firms. 60 Figure... increase in many import and export activities of the country, especially when Vietnam integrates more deeply with the global economy The objectives of this research are: Identify risks of Vietnamese firms in the import and export trading through assessment of risk frequency and loss severity Assess the risk management in import and export activities of Vietnamese firms and factors that may influence... to indentify risks that Vietnamese firms frequently face in the international trading, their risk management and influencing factors From that, some recommendations for the improvement in risk management is given 1.2 OBJECTIVES AND SCOPE OF THE STUDY Although Vietnamese firms have experienced and paid further attention to risk management in the international trading, exposures to risk are likely to increase... territories in the world2 Although obtaining remarkable improvement in turnover and market for international trading, Vietnamese firms have faced a number of problems in their activities The reason is that they have not got accustomed with the international custom, practices, regulations and law systems, lacking of information and knowledge of risk management Therefore, risk in import and export activities... trading of firms. 60 Figure 3-25: Average % of answer “yes” on knowing forwards and options 61 Figure 3-26: The frequency of using forward and option transactions in import and export trading of Vietnamese firms 62 Figure 4-1: Combination of risk frequency and risk severity 73 1 CHAPTER 1 INTRODUCTION 1.1 BACKGROUND In the process of integration with the international economy, Vietnam government... criteria applying generally to nearly all areas of management activity including risk management: a balancing of benefits against costs In some instances, external influences such as state and federal governments may mandate the use of risk 14 control methods or provide other incentives affecting the use of risk control This statement is based on three considerations: (1) The cost of risk financing commonly... with risk control Risk financing techniques are reactive in the sense that they are activated only after a loss occurs This is not to say that risk financing strategies and activities are unplanned The risk assessment process plays an important role in helping to plan and implement a rational risk financing program However, losses must occur before the financing mechanism comes into play Risk financing... active in reinsurance markets (reinsurance is coverage written between insurers rather than with the ultimate consumers of insurance) 2.2.5.2 Insurance Transfers: Insurance is an important part of risk management programs for organizations and individuals Insurance is a risk financing transfer under which an insurer agrees to accept financial burdens arising from loss More formally, insurance can be defined . literature review of import and export trading and risk management theories. ̇ Chapter 3: Assessments of risk management in import and export trading of Vietnamese firms and influencing factors 2.1 IMPORT AND EXPORT TRADING 5 2.1.1 An introduction to import and export trading 5 2.1.2 Regulation of international trade 5 2.2 RISK MANAGEMENT 7 2.2.1 An introduction to risk and risk management. Survey risks in import and export activities of Vietnamese firms: To indentify risk Vietnamese firms in international trading and evaluate the current situation of their risk management, the