Analysis of Vietnam as an Appropriate Production Site for Manufacturing Business

Vietnam is a Southeast Asia country that borders China to the North, Cambodia and Lao to the west, and the Pacific Ocean to the East. Despite being considered a poor state, the 103-million economy has made significant progress in recent years. Key achievements include raising the export turnovers, reducing poverty and raising living standards through impressive educational results, as well as increasing the value of the gross national products. Besides the social developments, the country has distinguished itself from the rest of countries with similar economic status. It has strategically positioned itself as the industrial hub of the Southeast Asia, and one of the destinations for foreign direct investments in Asia. The aspects will be the focus of the report, where the discussion will paint Vietnam as the most appropriate economy for overseas expansion of a manufacturing business. Besides the suitability, the analysis will present acquisition as the most effective diversification mode.

The Appropriateness of Vietnam for as a Production Site for a Manufacturing Business

a) Youthful population

One of the favouring elements is Vietnam's young population, which accounts for the most significant proportion in the demographic profile. The average national age is 32, and 55% of the residents are below 34 years (Hong Kong Trade Development Council (a), 2017). However, the most significant aspect is the fact that 70% of the population was born after 1975, and do not have lived experience of the war, something that is advantageous for economic development. The aspect remains one of the critical drivers to modernity, where unlike their parents who were fearful and suspicious of foreigners, the new generation is increasingly informed and exposed. According to Hjorth, King and Kataoka (2014, pp.99), youths do not consult narrative of the past in their desire for the new, an aspect that is best typified by the growing consumerism of Vietnamese. The population spirit has changed the prospects of the country from a struggling economy to a blossoming nation. The boosted national assets provide an economic pursuit to the manufacturing sector, where the key focus should be quenching the youthful spirits of materiality.

Vietnam is not only witnessing an economic transformation but also sociocultural changes. The conservatism is gradually weakening, an aspect that has changed the ambitions of the labour force. While the previous generations preferred working in the civil sector, young people prefer dynamic businesses. The demographic aspects make setting a plant in the country an exciting experience, as the young generation of workers who admire international lifestyle affirms minimal cultural shocks. The group is also talented and creative, thus, will inject innovativeness into the industrial processes. The demographic superiority is well noticed by manufacturers, where Vietnam has become an alternative production site for foreign investors (Hong Kong Trade Development Council (a), 2017).

b) Low labour cost advantages

Besides the readily available sizable labour force, the advisability of Vietnam as the best country for foreign expansion is the large pool of skilled workforce and cheap labour. The two are prerequisites for business expansion, as they make Vietnam not only a current go-to place for export manufacturing but also a future economic hub in Asia. Jennings (2017) elaborates on the human resource aspect, noting that the country has enjoyed a consistent growth rate of 6.2% since 2000. The prospects have made it a destination for firms in value-added exports as well as high-tech goods. An underlying aspect is the availability of cheap labour, where the minimum wage in Saigon and Hanoi, two of the most prominent hubs by industrial activities is $179 per month.

The low cost is an appeal for any business, especially in labour-intensive processing production. While the 2017 revision of the statutory minimum wage saw the level rise, the inclusion of social and unemployment benefits, as well as healthcare cover, did not shift the expedience of Vietnam. The labour cost per capita is still favourable when compared to other production sites. Hong Kong Trade Development Council (b) (2017) provides one of the most succinct outlooks, where the agency notes that labour costs in industrial parks like Haiphong ranges between US$200-250 per month. However, the level is US$300-350 per month areas with similar socioeconomic standing like western China. The analysis confirms the suggestion that labour cost advantages remain favourable in Vietnam.

c) The Giant ASEAN Market

Another aspect that makes Vietnam one of Asia’s economic darlings is the giant consumer market it serves. The country is a member of the 50 years old ASEAN bloc, which consists of Brunei, Thailand, Indonesia, the Philippines, Laos, Singapore, and, Cambodia, and Malaysia. The eight-member states have a population of 633 million people collectively, and is expected to hit 700, 000 million by 2030 (Darussalam, 2015). Settling in Vietnam will thus allow the firm to reach not only the self-satisfying ASEAN market but also other partners. The postulation is founded on the fact that the bloc has its free trade agreement (FTA), as well as neoliberal deals with other regions, which explains why Vietnam continues to lure more FDI. The ASEAN Trade in Goods Agreement (ATIGA) is one of the active commercial deals, as the 2010 pact has not only erased tariffs but also ameliorated non-tariff barriers. It has promoted movement of people and goods by enhancing customs co-operation, as well as fixed defragmented standards in the process for quarantines and sanitation. Under the ATIGA, Vietnam has removed all import tariffs for all goods coming from the ASEAN Economic Community, a policy move that has also been executed by other countries. Besides the ATIGA arrangements, ASEAN has existing FTAs with other regional powerhouses such as South Korea, Australia, Japan, New Zealand, China, and India.

d) Viable Investment Opportunities

Besides the existence of cheap labour as well as market, Vietnam is an attractive investment destination with many opportunities for international trade (Raymond, Kim, and Shao, 2001, pp.5). The modern infrastructures, a rapidly expanding gross domestic product, as well as the dramatic increase in foreign direct investments, evidence the supposition. The country has emerged as a hotbed of small and medium-sized business as well as multinational corporations in recent years, an appealingness that has seen 13,544 foreign investments projects being registered since 1998. While the scenario is not unique considering some emerging Asian economies such as India, Dubai, Qatar, and Korea have recorded even higher growth, a notable aspect is the reorientation of Vietnam from a state-controlled to a market-oriented country. Global investors have exuded confidence in the economic prospects by directing US$213 billion into a state that was previously considered inward looking. The overseas investment sector currently occupies 43.4% of the industrial production value and 17% of the GDP. While the 2008 financial turmoil slowed down growth, the economy has returned to pre-crisis trends.

Vietnam is currently not only most preferred investment hub, but also the industrial nerve for the Association of Southeast Asian Nations (ASEAN). Setting the manufacturing business in the country will be timely decision to tap the opportunities that have been triggered by the demand for industrial products to sustain infrastructural development, tourism growths, expansion in the retail sector, as well as real estate explosion. Yee (2017) confirms the untapped opportunities in manufacturing, noting that Vietnam evidences the explosion of foreign direct investment in Southeast Asia. The country continues to record a steady flow of investment in industrial processing and manufacturing sectors, as seen in 2016 when the registered investment capital into Vietnam from ASEAN economies stood at $60 billion. The majority (60%) of the 3,127 investment projects were in manufacturing and processing sectors (www.vir.com, 2017). An underlying aspect in the optimism is the massive levels of infrastructure investment required in the country and across the region. Bermingham (2015) notes that ASEAN needs to double the budgetary allocation to infrastructure, an aspect that will attract US$106bn over the coming decade. The projects will require construction commodities such as coal and iron ore. The growing middle class also have a strong appetite for food materials, an aspect that is evidenced by the fact that ASEAN remains the largest market for agricultural produce from Australia and New Zealand. Setting plants will allow the business to exploit the emerging and futuristic opportunities as Vietnam asserts itself to become the manufacturing seat of the ASEAN Empire

e) Strategic Location

Setting a production site in Vietnam will also be a means of accessing the strategic importance of the country. Like China, the country position lies parallel to the greater seas trade routes of Asia. The geopolitical situation has been boosted by World conscious of the economy, an aspect that is rooted in rich history and success in wars of independence. The countries strategic importance continues to increase, owing to democratic transformations, foreign policy reorientations, and economic performance. The relevance of the nation in global affairs has been reinvigorated by three decades of broad-based opening and rapid economic growth, which has turned the nation into a major player in the regional financial and security affairs (Koike, 2010). While recent high profile meetings, including East Asian Summit and Summit of ASEAN defence ministers, evidence the criticality of Hanoi in Asian affairs, the most important gain has been on the trade interconnectivity. Vietnam is now part of the global supply chains. The economy is the locus of export and import activities, where primary products include shoes, clothes, furniture, and microchips. Currently, the trade turnover stands at 160% of GDP, statistics that confirm Vietnam as one of the most open economies. The status has resulted in a seamless flow of raw materials as well as the export of manufactured goods to the global market.

f) Productivity Improvement

One of the most liberating aspects in Vietnamese is Omni-directional foreign policies, formulations that have helped in reshaping methodologies of the society, civil liberations, as well as Vietnamese perceptions of the west. The country has moved by over a hundred positions to current 68 in ease of doing businesses. However, legal hurdles in applying for construction permits remain a disadvantaging factor, where it takes approximately 110 days to complete the eleven procedures for permit acquisition. An underlying aspect is the defragmentation, where one has to interact with different departments and multiple levels of authorities. As a foreign firm, the business will also face challenges in getting credit as Vietnam lacks a private credit bureau. The world bank also rates the country poorly in protecting investors, as Vietnam has a history of weak shareholder suits index and weak director liability index. When compared to the 209 average hours it takes to pay tax in Pacific and East Asia, the 872 hours needed to complete the process in Vietnam is considered burdensome. However, the country has a reliable power supply, a strong point that is further boosted by the fact that Vietnam has adopted Supervisory Control and Data Acquisition. The energy management system helps in monitoring power outages as well as restoration.

Despite challenges in the ease of doing business, the investment climate has improved significantly. One of the most critical productivity aspects has been educational reforms, where the government has been not only targeted the quantity goal of making the citizens literate but also value focus of formulating and adopting changes based on the requirement of modernisation and industrialisation. While only 9% of the population have university degrees, Vietnam’s willingness to focus on strengthening the country’s competitiveness through education has been crucial in enhancing the regional influence of the economy in the Southeast Asian region. The shortage of individuals holding degrees is compensated by the fact that 78% have vocational skills for industrial tasks. Unlike its neighbours, Vietnam continues to maintain a more significant proportion of low cost workforce, where it has proven it has the mettle to get people educated. According to Kinh and Chi, (2008), 98% of children attend primary schools, a development that has ensured a higher socio-economic status of Vietnamese when compared to rivalling neighbours such as China. The reforms have elevated the status of Vietnam as an open economy with immense investment opportunities and a country that can sustain businesses.

Entry Mode: Acquisition Strategy

The best approach of entering the foreign market is acquisition. The equity mode of entry is based on resource-based perspectives that are supported by synergy hypothesis is cross boarder-acquisition (Seth, Song, and Pettit (2002, pp.922; Brannen and Peterson, 2009, pp.468). According to the postulation, buying out an existing manufacturing business offers better cost-benefit results. It provides new financial and managerial resources, easing the burden of expanding to the overseas production sites (Brouthers and Brouthers, 2000, pp.90; Brouthers (b), 2013, pp.1). The robust transaction cost economics makes the expansion a value-creation move that seeks to exploit the desirability of the manufacturing enterprises in the region (Dunning, 2000, pp.164). One pull factor that has made Vietnam a preferred destination for foreign direct investments is the fact acquisition prices is within reasonable ranges, where the EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization) is 12 times in ASEAN, 2 points lower than the global benchmark of 14 (www.accenture.com, 2015). The aspect has made resource commitment possible, as the competitive acquisition prices make the investment in tangible and intangible dedicated assets more cost conscious (Hill, Hwang, and Kim, 1990, pp.119; Hennart and Reddy, 1997, pp.2; McGahan, 2005, pp.1186). The pricing also makes the entry strategy an exemplification of sound investment, as purchases take less time to be profitable. The diversification mode will allow the UK firm to quickly command a sizeable market share and take advantages of the current opportunities (Brouthers and Brouthers, 2000, pp.91).

The diversification mode is also supported by the need for positioning the manufacturing company in the global business environment (Ghemawat and Ghadar, 2000, pp.64). According to Harzing (2002, pp.212), the acquisition is an international corporate strategy that is highly effective in entering the global economy as well as creating and sustaining competitive advantage across national boundaries. The gain is evident in the case study, as cushiony from exploitative quotations will give the business strategic flexibility, including a long-term commitment to the market. However, the most significant strategic benefit will be using the saved resources to design a multi-domestic model, where the multifocal approach will allow the Vietnamese subsidiary to respond to local aspects such as customer taste and preferences and differentials in operating structures (Hill, Hwang, and Kim, 1990, pp.120; Harzing, 2000, pp.106). It will also allow the entity to formulate and respond to unique centralities in competition strategies (Villalonga and McGahan (2005, pp.1186; Dunning, 2000, pp.164). The geocentric move will allow the overseas production site to have its manufacturing facilities, attributes of the products, as well as adaptive marketing function based on the demands of consumers (Hill, Hwang, and Kim, 1990, pp.123; Raymond, Kim, and Shao, 2001, pp.6; Dyer, Kale, and Singh, 2001, pp.40). It will also promote localism, thus help the business avoid subjective accounts that have historically been associated with foreign-owned firms, especially on labour-related judgments such as favouritism (Brannen and Peterson, 2009, pp.469).

The country-specific legal, institutional, economic, political outlooks also support acquisition as a mode of market entry. The positive influence of the environmental variables is based on the idea that the firm is a late entrant in a region that has experienced consistent growth rates in recent years and few investment risks. In the last two decades, Vietnam has actively been recruiting investors from Asia, Europe, and continental America to invest in manufacturing and high-tech industries. The contract manufacturing deals entail generous tax regimes and investment incentives, an attractiveness that Seth, Song, and Pettit (2002, pp.922) point out that it leads to an influx of overseas firms. The favourable climate is evidenced by increased investment in the region, where firms want to achieve more significant economies of scale, expand their markets, and increase cross-border selling of products (Brouthers (b), 2013, pp.2). Recent years have also seen an expansion of over 200 Indonesian businesses dealing with tyres, hand tractors, coal, power tillers, industrial cables, cotton, iron and steel sandpaper, and gloves expand to Vietnam given the country has a stronger manufacturing base. Vietnam also has better interconnectivity, thus ease in cross-border trade. Despite the influx, there is still a room for growth. Brouthers and Brouthers (2000, pp.91) commend acquisition as the best approach to entering such a market, where the focus should be buying out entities that are struggling with the market conditions. The supposition is supported by the fact that the presence will not constrict opportunities, and thus existing players will not adopt any retaliatory interventions.

The entry mode is also founded on the fact that the firm lacks tacit expertise and market knowledge of the host country. The limited familiarity is a contextual disadvantage, where the company can face challenges in transferring the established domestic organisational routines and implanting specific technologies (Hill, Hwang, and Kim, 1990, pp.117; Brouthers and Brouthers, 2000, pp.90). Partial acquisition assures better performance where buying out the assets of an existing business reduces the dissemination risk. According to Villalonga and McGahan (2005, pp.1183), purchasing ensures greater interaction and allow the company to borrow the social norms. The UK entity lacks any proprietary knowledge on honesty and integrity demands in Vietnam, as well as cultural competence to guard its ventures against cross-border vulnerabilities in the overseas market. As Hennart and Zeng (2002, pp.700) indicate, coming from a different country is a critical concern, as will affect understanding and execution of all aspects, including communication strategies. For that reason, the firm cannot convey any of the advantages that have made it successful in the UK, as Vietnam is an economy with discrete cultural panorama. While the European market is founded on notions of democracy and individualism, Vietnam is a Confucius state, where the emphasis is on responsibility, relationships, and obligations. The society is collectivist, where community concerns always come before individual needs. However, acquisitions can tame such contretemps by preventing any detachment between the business and the ecology. The institutional attribute will allow the firm to realise its financial and non-financial goals (Brouthers (a), 2013, pp.15). The conformance to institutional and cultural pressures also creates behavioural certainty that minimises risks of unexpected occurrences and transaction cost that might lead to poor post-acquisition outcomes (Brouthers (b), 2013, pp.1; Vaara, Sarala, Stahl, and Björkman, 2012, pp.2).

Besides assuring better returns, the acquisition is an institutional isomorphism. The business will be mimicking a proven entry mode, where other overseas firms have been settling in the host country through acquisition. According to Brouthers (2013, pp.17), the entry strategy assures the subsidiary unit better chances of survival. The notions are founded on economic feasibility, less stringent legal barriers, and the need for managing cultural shocks, where the three factors make the mode of entry theory-driven pursuance (Brouthers (a), 2013, pp.16; Brouthers (b), 2013, pp.3). Partial acquisition cushions the firm against culture distance, as it entails aligning operations with the host market institutional environment (Kogut and Singh, 1988, pp.414).

Brouthers and Brouthers (2000, pp.91) indicate that cultural distance can be a favouring element in acquisitions. Hill, Hwang, Kim (1990, pp.18) echo the view, noting that transactional cost explanations cannot be relied upon in making entry mode, as any isolative decision overlooks the fact that expanding into another country is a multidimensional and complex subject that requires totality. While the sociocultural landscapes between the UK and Vietnam are uniquely different, the market-based orientation is a shared perspective. The neoliberal element ensures market harmony, where a British firm can smoothly expand its operations to the Southeast Asian economy with minimal managerial disconnections.

Conclusion

Settling in Vietnam is a strategic move that can allow the firm to benefit from the growing influence of the country in the region as well as in the global market. Other motivations include cheap labour as well as limited barriers because of favouring climate and less cultural shocks because of changing perceptions of foreigners. However, the manufacturing entity needs to adopt acquisition as a diversification mode to assert itself in the global business environment. The equity mode of entry will ensure smooth settling of the subsidiary and desirable post-acquisition outcomes.

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