Doing Business with Vietnam

Executive Summary

The Vietnam economy is a growing economy. The government has pledged its commitment towards market-oriented reforms, which represents a bold move away from the planned economy. Moreover, it has demonstrated its commitment towards international integration and economic liberalization through the implementation of structural reform programs with the intent of modernizing the economy. The current essay will attempt to delve into the trade approach of Vietnam using political, economic, social, and technological (PEST) analyses. Towards this end, the paper will evaluate the country for FDI and international trade. The essay will also carry out a firm and industry analysis with the intent of examining the country’s major economic activities, as well as the chief export industries. It will also identify the major companies that are involved in the generation of export turnover and the function of the government in enhancing the International Competitiveness of the industries and firms.

The economy of Vietnam has been on a rapid expansion especially with the shift from a planned economy to a market economy. During the 1980s, the Vietnam Communist Party moved away from socialist economic policies. It caused a sustained economic growth rate of about 5% for close to 15 years. Additionally, the number of foreign investors has been on the rise. In 2007, for example, Vietnam received FDI worth approximately $20 billion. In the same year, the country was admitted as a member of the World Trade Organization (WTO). In Vietnam, the Enterprise and Investment Laws govern investments. The country has embarked on a journey to institute an all-inclusive legal framework in conformity with the international standards to regulate FDI activities (Glewwe, Agrawal & Dollar, 2014). The government signed and then acceded to varied multilateral and bilateral agreements relating to the investment. Consequently, such agreements with forty-six territories and countries aim at protecting and promoting investments.

A PEST Analysis

A PEST analysis is the analysis of the external macro-environment of the organization – political, economic, and socio-cultural, as well as technological factors that affect organizational activities. A PEST analysis is important for environmental scanning purposes. It is a significant strategic tool. It bolsters comprehension of market growth and decline, the potential of economic activities, and business position. Again, it also helps in determining business prospects. For analysis purposes, it is overly significant to examine the attractiveness and other external macro-environmental factors of the Vietnam economy. A PEST analysis is important in showing that indeed, the economy has huge growth potential and Vietnam can become an emerging economic giant in Southeast Asia and even across the world.

Political Environment

Vietnam has a single-party – Communist Party. The party has embarked on a Doi Moi policy in 1986, which marked the impressive transformation from a planned economy towards a market-oriented economy. The policy culminated in high economic growth and lower inflation. It also gave incentives towards attracting FDIs and promoting international trade. Moreover, it saw a reduction in tariffs and lowered trade restriction barriers, as well as decreasing the surrender rates of foreign currency. Continually, Vietnam has been relatively politically stable bereft of violence. The movement away from the centralized economy has given organizations some sense of autonomy (Hayton, 2014).

In terms of political stability, Vietnam had a 0.32 index in terms of the absence of political stability. It saw the country rank 92nd out of the 210 countries studied in 2008. More importantly, the country faces no serious risks in terms of political stability. It has contributed to enhanced FDI attractiveness and improved international trade. Government policies and political factors encourage FDI and international trade (Fforde & De, 2013). However, investors must understand that there are some considerable limits in terms of free speech and political activities. For an organization to reduce political risk, it is important to establish and cultivate a good relationship with the government to ease business operations.

Economic Environment

The country has emerged as a recent Southeast Asia economic success story. Throughout the Southeast Asia region, Vietnam has the highest Gross Domestic Product (GDP) growth. Globally, it is the third in this category behind India and China. Due to the courtesy of the economic reforms, the country has transformed into a state with a very vibrant economy. Towards this end, the country is growing its economic powers. Due to the positive effect of the Doi Moi economic policy since 1986, the FDI in Vietnam has risen considerably to almost $11 billion by 2010 from a measly $0.32 billion in 1988. The annual economic growth has risen to 8% in the 2006-2013 periods. The inflation rate has also lowered in the last decade despite some fluctuations between 2003 and 2011. Through the Doi Moi, the free market economic system is the greatest visible attempt of the Vietnam government to increase International Competitiveness (Engholm, 2013).

As an export-oriented economy, Vietnam’s economy accounts for close to 90% of its total GDP. In 2010, the major exports yielded $71.6 billion. It represented a 25.5% increase. By the turn of 2010, Vietnam’s exports to the European Union (EU) and the U.S. were 13.9% and 17.9% respectively. In 2010, Vietnam imported products worth $84 billion from the EU, ASEAN, Korea, Japan, and China. Joining the WTO enabled Vietnam to open its doors to more Multinational Corporations (MNCs) retail investment through permitting unhampered tax cuts and free trade (Lockhart, Duiker, & Duiker, 2013). Such policies demonstrate the Vietnam government’s attempt to enhance its International Competitiveness. The laissez-faire economic system enabled MNCs to start subsidiaries without corporation with any domestic partners. Such policies made Vietnam a very profitable retail market. There are many unexploited economic opportunities in Vietnam. The economic power of the country has skyrocketed to emerge as a top priority for international trade.

Social Environment

Currently, Vietnam has a young population and increasing household incomes that form a huge consumer base. With a 90 million population, Vietnam has a 70% of its people below 35 years. The literacy levels stand at 90%. It serves to show that education is an important aspect for the populace. This, combined with the work ethics rooted in Confucianism, creates a very capable workforce. An ordinary Vietnamese has a 71 years life expectancy (Vietnam & IMF, 2004). Vietnamese and English are the two widely spoken languages. The universality of English provides foreign investors with a convenient mode of communication. In the rural areas, there exist some Vietnamese traditional cultures such as the family role, as well as the face-saving perception within the society. However, with globalization, traditional cultures have been eroding. The growth of per capita income has increased the consumers’ demand for products and travel. Vietnam shares socio-cultural factors with Malaysia and Thailand as its neighbors. Daoism, Confucianism, and Mahayana Buddhism are the most dominant religions. The Vietnamese love their food, which they consider as a source of harmony and strong family relationships.

Technological Environment

With the advent of technology, the number of internet users as of 2010 was 24 million. It was roughly 27% of the 86 million population in 2010 (World Bank, 2013). Globally, Vietnam was seventh in the world rankings in terms of Internet usage. Huge investments in infrastructure coupled with huge tax cuts, land lease, as well as with the reduction of service and electricity prices, are an incentive to both foreign and domestic investors. In terms of telecommunication systems, Vietnam has over 60 million mobile subscribers. The infrastructure in the country has developed to attract huge FDIs. The well-developed rail and road infrastructure has also facilitated international trade and increased FDIs. The technological growth of Vietnam provides a business opportunity for investors. Such a conducive technological environment provides viable economic prospects for both domestic and international investors.

Industry and Firm Analysis

The economic reforms that came along with Doi Moi bolstered productivity across all economic sectors. The main economic activities in Vietnam are forestry, fishing, mining, and agriculture. In agriculture, the economic reforms culminated in high yields and Vietnam became the third biggest rice exporter in the world. The chief export industries in Vietnam are petroleum, crude, coal, tea, rubber, rice, and peanut industries. The main companies involved in generating export turnover are Vietnam National Petroleum Group (Petrolimex), Southern Seed, and Hoang Anh Gia Lai Group. The introduction of Doi Moi that ushered in a laissez-faire economic system is the greatest attempt of the government of Vietnam to increase its International Competitiveness. Huge investments in the education sector by the government also enhance the country’s International Competitiveness. It occurs because it has bolstered literacy levels. Most people possess competencies important in providing skilled and semi-skilled labor. Joining World Trade Organization (WTO) in January 2007 coupled with the laissez-faire economic system opened the country to running a business with large Multinational Corporations (MNCs). The economic policy on unhampered tax cuts also increased the International Competitiveness of the country.

Conclusion

The Vietnam economic success story is a product of political goodwill, economic reforms, positive socio-cultural factors, and enhanced technological developments. As such, the poverty index has been reducing significantly since the 1980s. There are many Vietnamese getting jobs due to FDI and international trade. It has immense and beneficial multiplier effects. The improved literacy rate provides investors with skilled and semi-skilled labor. Local managers can permit a foreign investor to market his/her products effectively. Investing in Vietnam provides investors with an opportunity to receive colossal profits. The policy reforms discussed in the current research paper represent the deliberate and concerted efforts by the Vietnam government to bolster its International Competitiveness. It is going to increase FDI and the level of international trade. The Doi Moi coupled with the entry of Vietnam into the WTO among other changes implemented by the government ensures that the country will become an economic giant not only in Southeast Asia but also across the world.