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Memo
To:
From:
Date: 3 March 2017
Subject: Vietnam Analysis
Attached is the country analysis report for Vietnam. The country offers many benefits including
cheap labor compared to China, enticing tax breaks, and cheap labor. However due to the high
rates of corruption, uneasy relationship with China, and prevalence of the informal sector, I do
not recommend that MBarQ conduct business within Vietnam.
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Introduction
Vietnam has emerged as a lower middle income (LMC) country. Coupled with cheap
labor and a young workforce, multination corporations (MNCs) should consider locating within
the country. Vietnam can be analyzed through its external environment, relationship with
international institutions, status of foreign direct investment, and climate for multinational
corporations.
External Environmental Profile
Economic Profile
Overall poverty in the country has fallen dramatically. The percentage of those living in
extreme poverty has dropped from 58 percent to less than 10 percent. Vietnam’s goal is to reduce
this number to 3 percent by 2030 (Trotsenburg 2013). Alex Trotsenburg (2013) of The World
Bank suggests that in order to reach this 3 percent mark, more jobs will have to become
available. The current workplace is shifting from a desire for manual labor to seeking out those
that have critical thinking and teamwork based skills.
Since the country currently does not have enough skilled labor jobs available, citizens
often turn to the informal sector for employment. The informal sector of commerce is not
regulated or registered by the government, and for the most part, not counted in GDP. In two
major cities in Vietnam, Hanoi, which is the capital, and Ho Chi Minh (HCMC), the informal
sector has been flourishing. The informal sector is the leading provider of jobs in both Hanoi
with 32% of total employment, and 34% in HCMC (Dynamics of the Informal). These numbers
are only going to grow because from 2007 to 2009, Hanoi had an increase of 6% in informal
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jobs, whereas HCMC had a staggering 19% (Dynamics of the Informal). Apart from a few recent
surveys in order to gather a baseline, the informal sector is “largely ignored by the authorities”
(Dynamics of the Informal). In order to get a full picture of the size of the informal sector, the
surveys have to have high consistency between them to get an accurate representation of total
GDP.
One interesting change that should benefit multinationals looking to enter the country is
the transition from a centrally controlled price to a market controlled price policy for
commodities, these include electricity and natural gas (Gottlieb 2015). Any shift towards a
market based system can help a multinational by allowing the market forces of supply and
demand to reach an equilibrium. This will help limit the number of shortages and surpluses
caused by government intervention and inefficiencies.
Two areas of growth that are helping the economy are the hotel and restaurant sectors.
The growth in these sectors has led to an increase in the banking and finance sector, which is up
by 6.9% (Gottlieb 2015). Although Vietnam’s banking sector is improving, currently it is vastly
underdeveloped. The majority is under the control of four “State-Owned Commercial Banks
(SOCBs) [that account] for about 70 per cent of the total assets in the system” (Banking Sector
2002). The remainder is comprised of a few Joint Venture Banks (JVB) and Microfinance
Institutions (MFI) One of the four major banks is Agribank, which is comprised of 2,400
branches. Agribank alone provided 70% of the loans in the agricultural sector (Tran 2015). A
small number of foreign banks have found their way into the country. Banks such as ANZ Bank
of Australia and Shinhan Bank are bringing in large profits “due to high demand by foreign
investors to open bank accounts with these banks for trade finance and foreign exchange
purposes” (Tran 2015). The vast majority of these banks cater to businesses; this is in part due to
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only 20% of the population having a bank account (Tran 2015). To increase the customer base of
the public, local banks are starting to introduce online banking and attempting to increase
availability to customers.
One way banks are reaching out to locals is through the use of more than 60 non-
government organization (NGO) microfinance programs (Nghiem 2005). Before these options
were available, the informal sector was the main source of credit to families in Vietnam, in 1992
it was estimated that “73% of rural credit was provided by the informal sector” (Nghiem 2005).
The informal sector mainly consisted of moneylenders, rotating savings and credit associations
and intra-family schemes. There is also strong evidence that citizens want access to some form of
banking, a study done by The University of Queensland revealed that if a microfinance option
was available in a nearby area, 99% of the participants would be interested in participating
(Nghiem 2005). The reasons those surveyed would go to a NGO- sponsored microfinance
institution is for the quick loan application and flexibility in payments. One downside mentioned
was the size of loans available, 42% of those surveyed believed the loans were too small
(Nghiem 2005). Of the enterprises in Vietnam, about a third are state owned; state owned
enterprises (SOE) are businesses owned or partially owned by the government (Structural
Policy). Currently SOEs are the source of favoritism from the government. This favoritism is
demonstrated as SOEs are more likely to receive bailouts, debt forgiveness and other favors on
behalf of the government. Government involvement decreases innovation and competition in the
market.
One strong area of growth in the industry sector is in oil and natural gas production.
Vietnam has become one of the largest producers in South-east Asia. However, Vietnam lacks
the refineries necessary to convert the abundance of crude oil into refined oil, because of this the
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country “is a net exporter of crude oil, but is a net importer of oil products” (Gottlieb 2015). To
increase oil production the country’s state-owned company, PetroVietnam, has joint ventures
with international oil companies (IOCs) such as ExxonMobil and Chevron. Dependency on IOCs
is sure to rise, as it is expected that the natural gas demand will pass the current supply. The
control of involvement for these companies is under PetroVietnam and the Prime Minister,
meaning while IOCs play an integral part of this venture, it is only to the approved extent.
Vietnam agricultural exports consist of “sugar cane, coconut, soy beans, silk, rubber,
coffee, and tea” (Gottlieb 2015). While Vietnam does export a fair amount of primary products,
the exports that bring in the most income are the merchandise products. The top imports of
Vietnamese products are purchasing broadcasting equipment ($23.8 billion), computers ($7.9
billion), and crude oil $(6.7 billion) (Vietnam Visualization). With the top exports being
processed products, the lion’s share of income goes to the industry sector rather than the
agricultural sector even though Vietnam is one of the top exporters of rice, there isn’t as much of
a profit return for agriculture.
Political profile
The Socialist Republic of Vietnam (Vietnam) is a one-party communist state. Currently
the political system is primarily controlled by the President, Tran Dai Quang, the secretary
general, Nguyen Phu Trong, and the prime minister, Nguyen Xuan Phuc (Vietnam Country
Profile). The majority of political power lies with secretary general, Nguyen Phu Trong who is
the leader of the Communist Party. The Communist Party is made up of fourteen members
whose role is to approve and implement general policy changes. Another governing body is the
National Assembly, one of the highest civil bodies in the political system. The National
Assembly has been heavily criticized for failing to bring about meaningful positive change.
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Gottlieb (2015) mentions that the National Assembly “has hardly contributed to greater
transparency in Vietnam” or has “improved Vietnam’s abysmal human rights record” (Gottlieb
2015). One main contribution the National Assembly provides is the election of the President,
this occurs every five years.
In terms of political uneasiness and altercations, Vietnam has had a wavering relationship
with China for quite some time now. The heart of the problem lies within the Spratly Islands
which are located in South China’s sea. Both China and Vietnam have argued over who has
control over the area (Gottlieb 2015). China’s argument is that the islands were zoned within its
territory for so long that they should be under their control. Vietnam stated that they have ruled
the islands for centuries and based on that account, the islands should fall under their control.
The most recent incident between the two was when China was attempting to set up an oil rig
200 kilometers from Vietnams border, leading to water cannons being used and Chinese naval
ships ramming into Vietnamese ones.
Legal Profile
The legal system is based on the Soviet Union’s. There is civil law, however, it has been
criticized heavily as being inefficient and unenforced.
One of the first frameworks of corporate governance for Vietnam was the Law on
Enterprise of 2005. This law was revamped in 2015 in order for the country to improve
restrictions and transparency. The International Finance Corporation (2015) details two changes
that were made. The first change includes introducing a ten-year maximum for chairmen, board
of directors, and similar positions. Previously the law did not have a time limitation for holding
positions. Another restriction is that previously only companies of the same type were allowed to
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merge, now companies of different industries can be merged together (International Finance
Corporation 2015).
One aspect of Vietnamese business tradition that is lawfully ambiguous is the presence of
bribing and gift giving in the workplace. In a study done by The World Bank Group (2016), of
the enterprises surveyed, 48% have seen other organizations use gifts to influence the outcome of
a decision (World Bank Group 2016). The World Bank Group (2016) goes on to state that gift
giving has become “a rule of the game”, and that “enterprises give gifts in order to avoid
discrimination” while workers give gifts as a sign of respect. Another concerning fact is that of
the companies bidding for a government contract, “only 35% agreed bidding was objective and
transparent” whereas almost 50% thought there was some sort of bias (World Bank Group 2016).
When it comes to hiring and promotions, government positions desire employees who are trained
