In contrast to some positive points above related to the legal system, Vietnam also has some weaknesses that a firm should be cautious when it starts doing business inVietnam. It was claimed that Vietnamese legal systems are insufficient, lack guidance and coherence. It is also supported that Vietnamese legal system has an issue of conflicts between the central authorities and the provincial governments. In some cases, some provincial authorities would pursue independent economic policies regarding the foreign investment, such as exceeding the authorities of a province. It could lead to confusion and unfairness for the investors because some of them may get more incentives than others.Another issue in Vietnamese legal system is that it is a bureaucracy in not only central Government but also provincial authorization agencies.
Followingthe Vietnamese Law on investment, the investment certification procedures officially take about 15 days after receiving registration document. However, due to bureaucracy of government, it often takes longer in setting up ventures or issuing the investment license. Therefore, it may increase cost of the firms because time is value for any firms. Moreover, in order to keep up with changes in global business environment, the Vietnamese regulations relating to business framework may be normally reformed or set every five years by the Party congress and adjusted twice a year by plenary meetings of the Central Committee. Therefore, a firm needs to take into account the changes and the time of the meetings of Party congress in order to reduce some unexpected risks from any changes of the regulations. Besides, having consultations with government agencies is necessary to comply with regulations.
In the current situation affected by the global crisis, Vietnam still has an impressive economic growthin recent past five years. According to World Bank statistics, the average economic growth of Vietnam in recent five years is 5.88%. Asian Development Bank (ADB, 2013) also forecast that Vietnam GDP growth is 5.2% in 2013, and picking up to 5.6% in 2014. In fact, one of many elements causing the impressive GDP growth in Vietnam is from foreign direct investment in Vietnam. It still attracts many multinational enterprises because of advantages of labour market and production cost that may make an economic growth of Vietnam.
Firstly, according to the research of ASEAN Secretariat in 2010, Vietnam’s population was over 90 million, which brings a large market for any firms. Additionally,the 20-54-age population (working age) was 50.9% and the population from 5 to19 years old accounted for 28.7%. Therefore, it is clear that Vietnam has a young population with ahuge and potential labour market for enterprises. Also, Vietnam labour market is not only large but also inexpensive. It is also supported that Vietnam labour force is relatively young and has lower costs than other countries in the Asian region. Based on JETRO’s 22nd surveyas below, it was pointed out that the cost of labour in the Vietnamis relatively lower than other countries in Asia and Europe as well
In the manufacturing industry, with the lower cost of labour force, a firm could take an advantage of a lower price. Moreover, the labour force inVietnam is fairly well-educated, with a literacy rate of 90%. This brings competitiveness to Vietnamese worker’s environment because the enterprises can not only use well-trained labours but also reduce the production cost (labour cost). According to statistics of Vietnam Foreign Investment Agency, a large number of the FDI companies are doing in the manufacturing industry inVietnam in order to take competitive advantage of cheap labour force inVietnam.
Table 1. FDI in Vietnam bytop 7 sectors
No. |
Sector |
Number of projects |
Registered capital (USD) |
1 |
Manufacturing and processing industry |
9207 |
131.645.680.262 |
2 |
Real Estate |
430 |
50.075.353.027 |
3 |
Accommodation and Food service |
353 |
11.024.644.824 |
4 |
Construction |
1119 |
10.843.478.198 |
5 |
Production, Distribution of electricity, gas, water and air, conditioning |
96 |
9.748.600.705 |
6 |
Information and telecommunication |
1024 |
4.072.337.569 |
7 |
Transportation and Storage |
417 |
3.659.179.774 |
Source: Vietnam Foreign InvestmentAgency, up to 8/2014.
In fact, many branded companies, such as Samsung, Toyota, and Intel already invested in Vietnam in order to use cheap labour to reduce cost of manufacturing.
Despite impressive economic growth in current years, Vietnam still has a problem pertaining to infrastructure. Actually, the infrastructure in Vietnam is underdeveloped and it is still in the process of upgrading and developing. Infrastructure in Vietnamis inadequate and leads to some difficulties in operating business, such as transportation.
For example, for a distance of 1750 km between Hanoi and Ho Chi Minh city, it normally takes around three to four days. Therefore, it may result in higher cost of logistics or transportation for a manufacturing firm when it transports its products to ports or other warehouses. Even, most of ports and terminals in Vietnam are poorly developed as it takes a manufacturing firm longer time to ship its goods to other countries or imports inputs of production. Although infrastructure in some big cities, such as Ha Noi, Ho Chi Minh and Da Nang, has been vastly changed and modernized, it is still unequal to infrastructure development in rural areas.
The outages of electricity or water stoppages are popular because the development of power sector does not keep up with the growth of power demand (World Bank, 2009). The firm needs to be aware of this,which may have interrupt its production and lead to negative effects on productivity and increase the production cost of a manufacturing firm. Although Vietnam government prioritizes the infrastructure development (ADB, 2013), it still takes a long time to build and develop the adequate infrastructure. Moreover, due to the limitation of government budgets,the investment in infrastructure is not enough and the government is nowcalling for investment from the private sector (ADB, 2013). It could affect negatively the infrastructure development in Vietnam in upcoming years.
Based on political economy and economic growth of Vietnam, this report identified some advantages and disadvantages of doing business in the manufacturing industry in Vietnam. The main findings are thatVietnam is considered as a potential market with many opportunities for foreign companies to do business. Vietnam has political stability with impressive economic growth. In addition, labormarket of Vietnam is large, cheap and well educated so that it is quite attractive and may help a firm to reduce cost of production. However, Vietnam regulations are inadequate and the government is still bureaucratic.
Inaddition, infrastructure in Vietnam is poor and underdeveloped. These weaknesses could increase a firm’s cost when it does business in Vietnam. Despite these disadvantages, Vietnam is still rising as an attractive and potential investment climate for foreign enterprises. The firm before doing business in Vietnam should consult with government agencies to comply with the regulations and policy framework. Additionally, it should cooperate with somelocal companies to do business in order to get more understandings of the local market and adapt with some new changes.
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