South korean firms’ operation in vietnam and some implications for expansion strategy

ĐẠI HỌC QUỐC GIA HÀ NỘI KHOA QUẢN TRỊ VÀ KINH DOANH - KIM WOOSEOK SOUTH KOREAN FIRMS’ OPERATION IN VIETNAM AND SOME IMPLICATIONS FOR EXPANSION STRATEGY HOẠT ĐỘNG CỦA CÁC CÔNG TY HÀN QUỐC TẠI VIỆT NAM VÀ MỘT SỐ GỢI Ý CHO CHIẾN LƯỢC MỞ RỘNG LUẬN VĂN THẠC SĨ QUẢN TRỊ KINH DOANH HÀ NỘI - 2019 ĐẠI HỌC QUỐC GIA HÀ NỘI KHOA QUẢN TRỊ VÀ KINH DOANH - KIM WOOSEOK SOUTH KOREAN FIRMS’ OPERATION IN VIETNAM AND SOME IMPLICATIONS FOR EXPANSION STRATEGY HOẠT ĐỘNG CỦA CÁC CÔNG TY HÀN QUỐC TẠI VIỆT NAM VÀ MỘT SỐ GỢI Ý CHO CHIẾN LƯỢC MỞ RỘNG Chuyên ngành: Quản trị kinh doanh Mã số: 60 34 01 02 LUẬN VĂN THẠC SĨ QUẢN TRỊ KINH DOANH NGƯỜI HƯỚNG DẪN KHOA HỌC: PGS.TS HỒNG ĐÌNH PHI HÀ NỘI - 2019 DECLARATION The author confirms that the research outcome in the thesis is the result of author‟s independent work during study and research period and it is not yet published in other‟s research and article The other‟s research result and documentation (extraction, table, figure, formula, and other document) used in the thesis are cited properly and the permission (if required) is given The author is responsible in front of the Thesis Assessment Committee, Hanoi School of Business and Management, and the laws for above-mentioned declaration ACKNOWLEDGEMENT Firstly, I would like to make the most of this opportunity to thank my company, IBK which has given me a lucky chance to study at HSB In addition, they have also reassured me all the time through their knowledge and experiences in order to accomplish this project Secondly, I would like to thank my wife who always supports me and takes care of children without my help in South Korea Thirdly, I would like to show my sincere gratitude to Assoc Prof Dr Hoang Dinh Phi for his enthusiastic support throughout the process of composing this project Without his valuable advices, I would not be able to accomplish the project with a clear orientation Lastly, big thanks to all my colleagues at work, all my friends at HSB, especially all HSB MBA15 classmates, who have supported me with laughter and joy, and comforted me when I was depressed Owing to the fact that limited time and ability so it can not avoid some mistakes in my research topic I look forward to receiving comments from lecturers and colleagues in order have more accomplished and better achieved of research result and application in my career Thank you again for those who have supported me, and best wishes to all TABLES OF CONTENTS LIST OF TABLES i LIST OF FIGURES ii ABSTRACT INTRODUCTION CHAPTER 1: FDI AND ANALYTICAL FRAMEWORK 1.1 Foreign Direct Investment 1.1.1 Concept of Foreign Direct Investment 1.1.2 Legal Framework of FDI in Vietnam 12 1.2 Analysis of FDI Firm‟s Operation 14 CHAPTER 2: CURRENT SITUATION OF SOUTH KOREAN FDI FIRMS‟ OPERATION 17 2.1 Vietnam‟s Economic Growth, FDI, Import and Export 17 2.2 Basic incentives for FDI in Vietnam 24 2.3 SWOT Aalysis of Vietnam‟s Investment Environment 30 2.4 Situation on Operation of Major industrial Investment from South Korea, USA and Japan 33 2.4.1 Situation of South Korea Investment in Vietnam 33 2.4.2 Situation of Japanese Investment in Vietnam 42 2.4.3 Situation of the United States Investment in Vietnam 48 2.5 Current operation of South Korea‟s FDI firms in Some Industries of Vietnam 52 2.5.1 Current operation of South Korea‟s FDI Firms in Electronic industry of Vietnam 53 2.5.2 Current operation of South Korea‟s FDI Firms in Textile & Garment Industry in Vietnam 55 2.5.3 Current operation of South Korea‟s FDI Firms in Automobile industry in Vietnam 57 2.6 The Response of Vietnamese Government 58 CHAPTER 3: IMPLICATIONS OF EXPANSION STRATEGY FOR SOUTH KOREA FIRMS IN VIETNAM 61 3.1 Lesson from other FDI from other countries 61 3.2 Lesson from South Korea FDI Firms‟ Operation in Vietnam 62 3.3 Some Forecast on Vietnam‟s Investment Environment during 2019-2025 64 3.4 Implications for Expansion Strategy for South Korea firms 67 CONCLUSION 70 REFERENCES 72 LIST OF TABLES Table 2.1 Major macroeconomic indicators in Vietnam (2008 - 15) 18 Table 2.2 Trend of FDI inducement by year (2009 - 15) in Vietnam 19 Table 2.3 Number and amount of investment by industry in major countries 20 Table 2.4 Vietnam‟s Export index, 2000~2015) 21 Table 2.5 Vietnam‟s import index, 2000~2015) 22 Table 2.6 World Bank‟s Doing Business ranking 2018 26 Table 2.7 Incentives in Vietnam example 28 Table 2.8 Taxation Policy across Asia compared 30 Table 2.9 SWOT Analysis of Vietnam investment enviornment 32 Table 2.10 Korean FDI in asia by countries, invested amount 39 Table 2.11 Japan industrial complex in Vietnam example 45 Table 2.12 Korea's Report on Investment in China and Vietnam 53 Table 2.13 Korean Electronics Company in Vietnam 54 Table 2.14 The annual auto sales trend in Vietnam 57 i LIST OF FIGURES Figure 2.1 USA Trends in Direct Investment in Southeast Asian Countries (2005-14) 23 Figure 2.2 Trends of FDI in Vietnam 33 Figure 2.3 South Korea FDI in Vietnam 35 Figure 2.4 Japan FDI in Vietnam 43 Figure 2.5 Strategy Flowchart of Japan‟s Anchor firms in Vietnam, Ⅰ 46 Figure 2.6 Strategy flowchart of Japan‟s Anchor firms in Vietnam, Ⅱ 47 Figure 2.7 Example of Japan‟s Anchor firms in Vietnam 47 Figure 2.8 U.S.A FDI in Vietnam 49 ii ABSTRACT During the global financial crisis, Vietnam experienced slowing growth Vietnam's growth potential is drawing attention as the external economic environment is becoming favorable, such as the recent increase in FDI inflows, the signing of bilateral and multilateral FTAs, and the establishment of the ASEAN Economic Community (AEC) Also, positive improvements in domestic conditions, such as political stability, abundant low-income labor, and a population of nearly 100 million, increased interest among major investors in Vietnam, and increased FDI inflows In particular, the FDI was introduced in 2015, the largest amount ever, and the economic growth rate was 6.68 percent, the level before the global financial crisis On the other hand, Vietnam's business environment is not only positive, considering that negative factors persist, such as corruption, lack of skilled manpower and inefficiency in state-run companies The Doing Business Assessment, which provides a comparative analysis of each country's business environment It ranked Vietnam‟s business environment at the top 90 out of 189 countries It should be noted, however, that Vietnam's investment environment has changed positively in recent years by improving the convenience of investment procedures and employment through the revision of the Investment and Labor Act Therefore, Korean companies also adopted Vietnam as a strategic production base and invested more than 40 percent of their investment in South East Asia It is time to review Korea's investment strategy in Vietnam as competition between major investment countries and Korean companies is expected to intensify in Vietnam The U.S and Japan, which are major investment countries, need to review their investment strategies in Vietnam and re-establish their investment strategies for Korean companies The economic growth and industrialization of Vietnam began in 1986 with the adoption of reform and opening routes After the U.S lifted economic sanctions in 1994, large-scale FDI was introduced to Vietnam Based on this, Vietnam was able to achieve industrialization and rapid economic growth In the 1990s, the FDI in Vietnam was largely invested in labor-intensive manufacturing in major Asian countries such as Japan, Korea and Taiwan Since the 2000s, however, the investment sector has changed from the current labor-intensive industries to the technology and capitalintensive industries such as machinery and electronics, and the industry structure has also gradually changed to the center of high value-added industries Korea's investment in Vietnam was largely dominated by laborintensive industries before the global financial crisis However, since the global financial crisis, investments by multinational corporations have been increasing with electricity and electronics Although Korea's investment in Vietnam has been high in initial investment, the share of additional investment has gradually increased since 2014 This study presents the following implications for our company through analysis of investment strategies by U.S and Japanese companies entering the Vietnam market First, the government should pay attention to the construction of industrial complexes so that Korean companies can advance into the cluster and draw the cooperation of the Vietnamese government as well as Korea's financial support Second, a 'compensation system for co-prosperity between new and emerging companies' should be developed to utilize the experiences of the newly developed entity and to compensate the newly developed entity for its support Third, it is required to support capacity enhancement of small and medium-sized enterprises that wish to enter Vietnam In particular, it is urgent to provide capacity support for the analysis of the local institutional and business environment in Vietnam Fourth, it is necessary to introduce a measure to share production facilities between companies in advance like a military activities in the South China Sea have prompted the United States to deploy U.S troops in Vietnam instead of lifting arms embargoes on Vietnam In addition to the differences in investment characteristics of major countries, the types of investments made by companies are different For example, it is easy for Japanese and Korean companies to enter and enter, but it is not easy to clearly identify the advantages of the U.S entity's entry into the market First, Japanese companies' entry into Vietnam is tailored to realize economies of scale through clusters, use of collective FDI, joint ventures, and start-ups such as Line Gari or Nokia The reason Japan can enjoy economies of scale through the cluster is probably because the ODA supports and utilizes the industrial complex in Vietnam U.S companies have invested in service industries based on individual companies rather than direct production lines in Vietnam, and they have recently increased their investment in R&D In addition, trade and investment will be strengthened after the TPP is ratified as the U.S and Vietnam have recently tried to strengthen bilateral relations to check China 3.2 Lesson from South Korea FDI Firms’ Operation in Vietnam The export of intermediate goods and capital goods is overwhelming, and the export of consumer goods is still insignificant Medium-good exports have been growing by more than 20 percent since 2015, and capital goods exports, which fell last year, have increased significantly in the first half of this year Between January and June 2017, capital goods exports such as equipment for manufacturing flat-panel displays, measuring control analyzer, and other machinery were marked Exports of consumer goods, which have grown at an annual rate of 21% over the past three years, have slowed down somewhat this year, with only 4.2% of the total exports 62 Korean electronics companies are establishing their own procurement system through co-prosperous and advanced foreign companies However, they import huge amounts of parts every year due to local supplies that are far short of demand The number of Samsung Electronics affiliates (including first and second suppliers of materials and materials) that have entered Vietnam is estimated to be around 300, but more than 60% of the demand for parts is dependent on imports Need to implement various win-win cooperation programs that can promote coexistence and development between companies in both countries, including technical cooperation and relocation between Korean parts and materials companies that are expected to advance or advance, technical education through cooperation with relevant local organizations, and matches between companies in both countries ◦ Projection expected to expand business activities in the central region Special economic zones and industrial parks are being formed by local governments to promote investment inducement and provide corporatefriendly incentives One high-tech industrial complex, four special economic zones, and 60 general industrial industrial complexes in 13 provinces and cities Labor-intensive industries are also promising due to low labor costs compared to the North and South, but logistics costs need to be checked with an outdated infrastructure The government-led KSP (Knowledge Sharing Program, Economic Development Sharing Project) is needed to find new overseas projects in Korea and to prepare various support projects to expand Korean companies' presence in Vietnam 63 The Vietnamese government's new and renewable energy projects are expected to be effective in sharing Korean experiences and know-how, joint research and technology development through KSP Support for system and policy preparation consulting for development of new and renewable energy industries, joint research to establish support system for development of related industries, and joint project to enhance technical capabilities of participating related agencies in Korea are expected to be specific business plans 3.3 Some Forecast on Vietnam’s Investment Environment during 20192025 Viet Nam‟s economy continued to perform strongly in the first half of 2018, although external and domestic challenges could affect the country‟s growth outlook for this year and next, says a new Asian Development Bank (ADB) report In an update of its flagship annual economic publication, Asian Development Outlook 2018, ADB forecasts Viet Nam‟s economic growth at 6.9% for 2018, slightly lower than 7.1% projected in April as exports, agriculture, construction, and mining are expected to moderate in the second half of the year ADB retains its 2019 growth forecast for Viet Nam at 6.8% The economic performance was broad-based, driven by vigorous manufacturing expansion, bumper agriculture production, robust performance of services sector, resilient domestic consumption, and strong investment fueled by FDI and domestic enterprises Economic growth will likely hold up well in the near term buoyed by resilient domestic demand, improved business conditions, and stable macroeconomic environment Anticipated increase in public capital expenditure in the second half of the year is expected to boost the growth in investment 64 Viet Nam‟s economy, however, remains vulnerable to external and domestic challenges Growth moderation in the major economies such as the People‟s Republic of China, European Union, and Japan may dampen aggregated demand of global trade The escalating trade frictions around the world could adversely impact the export performance and FDI inflows to Viet Nam Inflationary pressure is likely to persist over the near term because of increase in international oil prices and upsurge in food prices Therefore, ADB has revised Viet Nam‟s inflation to 4.0% in 2018 and 4.5% for 2019, up from the April estimates of 3.7% and 4.0%, respectively Vietnam has been successful in actively launching and benefitting from FDI over the last three decades Nevertheless, problems such as the lack of human resources with advanced technologies together with corruption remain in the Vietnamese economy and are perceived to be highly burdensome to foreign investors Although Korea‟s FDI in Vietnam is expected to continue with the ratification of the Korea-Vietnam FTA and the 2020 infrastructure-related FDI launching plan of the Vietnamese Government, Vietnam can enhance the FDI inflows further by overcoming the remaining problems in its economy, strengthening the level of human capital and sustaining its investor-friendly policies □ Mid and long-term infrastructure development plan by Vietnamese sector ◦ (Road) Vietnamese Transportation Department has road infrastructure through 2020 Vietnamese highway master plan Announcement of $48 billion investment plan for construction - Only about 30 percent of the government's funds are available, and it is inevitable to revitalize investment development through the Public-Private Partnership (PPP) 65 - Highway routes will be 1,814km on the south-east axis, 1,269km on the south-west axis, 1,368km in the north, 264km in the central and mid-central regions, 983km in the south, 426km in the Hanoi suburb and 287km in the Ho Chi Minh area, and a total of 48 roads will be constructed ◦ (Railroad) Vietnamese Prime Minister approved 'railroad transport comprehensive development plan 2020' in August 2015 with a plan to modernize railways worth $9.1 billion - Construction of a 200km-per-hour double track railway on the 1,726km-long Hanoi-Hochimin section by 2020 aims to push for the 350kmper-hour inter-Korean high-speed railway project by 2050 - $17.4 billion will be invested in the old Hanoi-Hochimin railway bridge replacement project * Total sections by 2020 and 11 sections will be completed by 2030 - Hanoi and Ho Chi Minh City Railway are under way and will construct 10 Hanoi lines and lines in Ho Chi Minh by 2030 ◦ (Power) The Vietnamese government established the '7th Power Development Master Plan' in 2011 and announced the revision in 2016 - There are 16 power projects expected to operate between 2016 and 2020, with a total power capacity of 7,209MW (power 5,054MW, water power of 2,155MW) The current total power output in the hydropower sector is 17,000MW, which the Vietnamese government plans to increase to 27,800MW by 2030 * Water power plant construction has been delayed and canceled from 2014 to 2016 after the development plan was announced - In 2030, Vietnam's electricity production targets include coal fuel (53%), gas and oil (17%), hydroelectric power (12%), renewable energy (11%), nuclear power (6%), and imports (1%) 66 ◦ (New and Renewable Energy) Vietnamese Ministry of Trade, Industry and Energy (MOIT) announces strategies for developing 2030 new and renewable energy to increase the share of renewable energy and reduce greenhouse gas emissions - Plan to reduce greenhouse gas emissions by 5% by 2020 and 25% by 2030 and 45% by 2050 and greatly reduce reliance on imports of coal and oil - Wind power generation plans to increase power production from 140MW by 2030 and solar power from 850MW (0.5% of all power generation) to 12,000MW (3.3%) by 2030 3.4 Implications for Expansion Strategy for South Korea firms The analysis of Korea's direct investment in Vietnam has shown that the two countries have increased their economic and industrial cooperation and interdependence South Korea's investment in Vietnam has been shifting from the light industry center of textile manufacturing to the electronics assembly industry since the mid-2000s These large-scale investments have a significant impact on Vietnam's industrial structure and regional change Korea and Vietnam are complementary relations in the industrial structure and production network, and this relationship is expected to continue in the future In the above research, I would like to present the following points and implications for Korea-Vietnam economic cooperation First, in general, the biggest benefits of Vietnam investment are known for its abundant labor and low labor costs But, of course, low wages remain relatively low compared to Korea, but there is a sharp rise in labor costs the Korean flag The areas around Hanoi and Ho Chi Minh, where many businesses have advanced, have higher wages and are increasing faster than in other regions While many labor forces in these areas are in favor of corporate positions, many companies are likely to focus on high-quality manpower or rising wages Second, simple labor-oriented businesses have traditionally been 67 established, pointing out the problem of the shortage of skilled high-quality workers in the process of upgrading these industries As we saw earlier, the ratio of educated and trained workers is about 20 percent, and the gap between large cities and rural areas such as Hanoi and Ho Chi Minh is also huge Currently, the high value-added technology industry such as electronics and electronics is concentrated in Vietnam, which requires the reinforcement of manpower in order to go beyond simple assembly Third, attention should be paid to the lack of Vietnam's infrastructure and the problems of procuring raw materials accordingly Japan's Trade Promotion Agency (JETRO) found that only 28 percent of parts and raw material procurement in Vietnam is very low compared to Indonesia (43 percent) and Thailand (53 percent) (KOTRA,2014b) The parts and materials industry in Vietnam is often small and cheap, which could pose problems for the development of manufacturing and investment growth of multinational companies Korean conglomerates like Samsung and LG are also struggling with the low local currency rate For instance, Samsung Electronics' local component procurement rate is only 36 percent, and most of them are sourced from domestic suppliers and foreign companies in Vietnam (Final News, 2015) Vietnam Joint efforts and investment by the Vietnamese government and large Korean companies are underway to strengthen the component and material industries of the U.S., which is expected to take some time to make progress Fourth, diversification of investment is needed in Vietnam In this analysis, Korean investment is the manufacturing sector, It was noted that the focus was on textiles and electronics It is necessary to enhance the industry in these areas, while expanding its advance into the service sector, including construction and wholesale and retail businesses In addition, interest in education, culture, and private exchanges should be increased In Japan, investment in education is also increasing, helping to 68 establish a Japanese-related college at the National Hanoi University Vietnam's president has also recently supported the establishment of the Vietnamese KIST (VKIST) in Hanoi to support economic growth through R&D Support through organizations such as KOICA Cooperation also needs to be strengthened Fifth, we need to analyze the characteristics of each region in Vietnam and diversify our investment areas through these results Although Vietnam's entry was strengthened as part of the Post-Cha or strategy, investment was limited to some big cities and their surrounding areas, and an in-depth analysis of Vietnam's various areas was not available Korean companies and organizations are building new factories and developing industrial complexes with interest in Vietnam's surrounding areas Investments are increasing in central Vietnam, but further efforts will be needed, including a substantial regional analysis In particular, China is making efforts to expand its logistics network linking Vietnam, Laos and Kambodia in southern China Analysis and preparation of this is necessary As we saw above, the increase in Korean companies' overseas direct investment has had a significant impact on the industrial structure and regional change of the country The share of electrical and electronic industries in the textile industry is increasing, and the concentration of multinational manufacturing plants in the region near Hanoi is typical of the economic structure centered on Ho Chi Minh 69 CONCLUSION The Vietnamese economy has shown very rapid economic growth since DoiMoi In the meantime, a huge amount of FDI has flowed into Vietnam Korea‟s FDI in Vietnam deserves attention in the sense that Korea is its leading investor The pre-eminence of Korean FDI in Vietnam has been the consequence of multiple events First, the policy changes in both governments promoting FDI inflows and allowing FDI since the late1980s have contributed to the surge of investment flows from Korea to Vietnam Second, Vietnam has provided an alternative to China, where the wage level has risen and related regulations have become stricter That is, Vietnam has been able to replace China partly through its cost-efficient labor force with a low wage and a high level of education Third, Vietnam‟s growing middle class due to its rapid economic growth has made the Vietnamese market more attractive to Korean investors Although the traditional motive of Korean firms was to take advantage of Vietnam‟s export incentives, investors‟ attention has been redirected towards targeting the local market of Vietnam Fourth, Vietnam has provided a developed infrastructure and tax incentives in its special zones, where Korea‟s FDI has mostly been located Vietnam‟s rapid economic growth can partly be attributed to FDI inflows, of which Korean FDI constitutes a large share The contribution of Korean firms to Vietnam‟s employment generation has been particularly large in light of the pre-eminent share of SMEs in Korea‟s FDI in Vietnam Although there are some remaining problems to overcome to maximize the technology spillover effect of FIEs, Korean firms appear to have contributed significantly by transferring advanced technology to Vietnam due to the particularly high level of technology transfers in the electronics and metal industries Korea‟s FDI in 70 Vietnam has also contributed to Vietnam‟s further industrial development from low-value-added to high-value-added industries Vietnam has been successful in actively launching and benefitting from FDI over the last three decades Nevertheless, problems such as the lack of human resources with advanced technologies together with corruption remain in the Vietnamese economy and are perceived to be highly burdensome to foreign investors Although Korea‟s FDI in Vietnam is expected to continue with the ratification of the Korea-Vietnam FTA and the 2020 infrastructure-related FDI launching plan of the Vietnamese Government, Vietnam can enhance the FDI inflows further by overcoming the remaining problems in its economy, strengthening the level of human capital and sustaining its investor-friendly policies 71 REFERENCES [1] Tien, Q.T (2008) Reforms in FDI Policy and the Investment 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