Research Project Ph.D.

Program in Economics and Management University of Trento, Italy

1. Title of the Thesis: 2.

3.

Investment Behaviors of Multinational Corporations in Developing Countries: The Case of American Firms in Vietnam Dinh Thi Thanh Binh

Name of the Student Candidate: Abstract

Capital and technology have played an important role in industrialization and modernization of all countries. From the day of renovation out of the regime of a commanded economy (1986), Vietnam has been very active in calling and mobilizing investment in capital and technology from developed countries with a desire of further fostering the economic growth and overcoming poverty and backwardness of an economy with a very low beginning. Among multinational corporations (MNCs) running business in Vietnam, American MNCs are considered as potential investors in fields of finance, technology, distribution and services. However, investment of American MNCs in Vietnam up to now has been quite limited compared with other investors from other countries with lower economic powers. By June 20, 2005, America has 232 projects with total registered capital of USD 1347 million, in which only USD 722 million was disbursed, ranked 11 in 62 nations investing in Vietnam.1 This study firstly aims to specify the determinant factors of the investment mechanism and behavior of MNCs aboard. Then the study will analyze competitive advantages of American firms compared with other foreign companies investing in Vietnam, through which the study will provide confident foundations to forecast investment prospects of American firms into Vietnam in the coming years and how Vietnamese government should readjust the policies to attract more investment from nations in general and American firms in particular and how to manage them more effectively. 4. Problem Definitions Foreign Direct Investment (FDI) in Vietnam has experienced a euphoria period from 1988 until 1995 with very rapid growth in commitments and big projects. During the Asian financial crisis, FDI into Vietnam had been started to slowdown and dropped dramatically in the following years. In 1997, the committed capital was US$ 4.6 billion; in 1998 was US$ 3.8 billion (-17%), in 1999 US$ 1.5 billion only (-60%). Some 800 licensed projects have been withdrawn or revoked during this period, mostly from the crisis-hit Asian economies. However, the decline of FDI inflow into Vietnam could not totally charged by external factors like the impacts of the Asian financial crises. The decline of FDI in Vietnam was more pronounced compared to other ASEAN-economies, while the recovery of FDI in Vietnam was slow compared to ASEAN-economies and not steady, especially in 2001 and 2002. It is noteworthy that FDI inflow into China had increased during the years of the Asian crisis (US$ 41.7, 45.3, 45.5 billion in 1996, 1997, 1998, respectively). So, internal factors must be considered to explain this situation in Vietnam. In 2003 and 2004, together the developing orientation of FDI inflow in the world, FDI into Vietnam was growing. In 2004, FDI inflow into Vietnam was US$ 4.1 billion (the highest record in the past 7 years) showing the recovery of FDI into Vietnam. However, according to many analysts, the number of US$ 4.1 billion is under the real potential of Vietnamese economy (Le Dang Doanh, 2002). According to foreign investors, Vietnam has many competitive advantages and potentials to attract foreign investment such as a political and social stability; a large and dynamic population of more than 82 million people; young and fast learning relatively with other regional economies; a convenient geographic location and rich natural resources and active reforms of Vietnamese
1

Source: Vietnams Ministry of Planning and Investment Statistics

government in legal system. However, most foreign investors also commented that many of these potentials have just far remained unrealized, or are just beginning to be realized. Meanwhile, there are many disadvantages in business environment in Vietnam to be easily recognized by investors such as high costs of doing business, a poor level of physical infrastructure, high unit labor cost due to low productivity of labor forces, a fast changing, less predictable and less consistent legal regulations especially in tax, foreign exchange, labor regulation, land and jurisdiction. Moreover, red tape, bureaucracy, corruption and low transparency are the big weaknesses of the business environment in Vietnam: law enforcement is not consistent and uniform in the country; the law interpretation and enforcement depend too much on local agencies or lower ranking state officials. Intellectual property rights and trading rights are also a serious concern of foreign investors despite government efforts and commitments.2 Such an inconvenient business environment in Vietnam has created many constraints for foreign investors that get used to a transparency business environment. However, it seems that these are constraints that affect all investors doing business in Vietnam. So, a question is raised that why American firms that are the most competitive in technology, finance, experience and skills in management, product marketing and distribution and always account for a major percentage of 100 biggest MNCs in the world (28% in 2003)3 are not ranked in the top-ten list of nations investing in Vietnam (up to June 2005). Since the Bilateral Trade Agreement between Vietnam and America was signed in 2001, trade turnover between the two countries has increased sharply but US investment into Vietnam is still slow and limited. According to Vietnams Ministry of Planning and Investment Statistics, US companies direct investment at the end of 2004 was just over US$ 1.29 billion equal to 2.8% of total of FDI into Vietnam, ranked 11 in 69 nations and territories investing in Vietnam. Meanwhile only 4 nations and territories Singapore, Taiwan, Japan, and South Korea accounted for around 56% of total FDI inflowing into Vietnam in 2004. Although total investment of US in Vietnam has increased in recent years, but this capital is only equal to 0.72% of the total US investment in the region, equal to 28% of US investment in Thailand, 20% in Indonesia in 2003. It is noted that these 4 nations and territories are always ranked in the top-five foreign investors into Vietnam.4 In summary, external and internal factors affect FDI inflow into Vietnam. However, these factors cannot explain clearly and sufficiently investment behaviors of foreign firms, especially through the comparison investment of US firms with others into Vietnam. The answers to the question about US investment in Vietnam raised above will be very useful for policy makers in readjusting business environment to attract and manage more effectively US investment into Vietnam in the future. Objectives of the Study The main objective of the study is to understand why US MNCs have not invested much into Vietnam in compared to those from other countries. To meet this objective the study has to specify the determinant factors of the investment behaviors of MNCs in developing countries first. Regarding to US firms, the study has to point out which factors among strategic ones and constraints from the local business environment are most considered by US firms when they plan to invest into developing countries. Based on this result the study will identify investment behaviors of US firms in Vietnam through analyzing competitive advantages of US firms compared with other foreign investors doing business in Vietnam, predict investment prospects of American firms into Vietnam in the coming years, and
2

3 4

Source: The talk of US Secretary of Commerce, Carlos M. Gutierrez, with Vietnam Investment Review http://www.vir.com.vn/Client/VIR/index.asp?url=content.asp&doc=7610 Source: World Investment Report 2003 Source: The talk of Ambassador of Vietnam to the USA, Nguyen Tam Chien, with Vietnam Investment Review http://www.vir.com.vn/Client/VIR/index.asp?url=content.asp&doc=7610 Vietnam Trade Office in the US of America http://www.vietnam-ustrade.org/nhaptin/anmviewer.asp?a=171&z=4 Vietnams Ministry of Planning and Investment Statistics

suggest policies that the Vietnamese government should take into account to attract more FDI in general and from American firms in particular. 5. Scientific Relevances of the Study and Innovative Aspects Literatures on FDI show that investment decisions and strategies abroad of a firm depend on factors of business environment in the host countries and the internal factors of that firm. According to Dunning (1993), FDI takes place when three sets of determining factors exist simultaneously: the presence of ownership specific competitive advantages of a multinational, the presence of location advantages (comparative advantages of host countries) and the presence of superior commercial benefits in an intra-firm as against an arms-length relationship between investors and recipients (internalization). Ownership, if exploited optimally, gives the investor specific advantages over local producers due to specific knowledge, proprietary technology, reputation, brand name, management skills. These advantages help enterprises compensate additional costs of setting up subsidiaries in a foreign environment and overcome disadvantages compared with local firms (differences in culture, language, law, local taste, marketing). Internalization means that a company including its subsidiaries in foreign countries should implement and control the whole production process of a product from raw material inputs to sales stage. This will give assurance and more profit for the firm. Location motivation gives answers for the question why a firm chooses this country to invest but others. Dunning gives five factors that affect location decisions of a multinational: resources seeking, market seeking, efficiency seeking, strategic asset or capability seeking and insurance seeking or diversification. As the world economy becomes more open to international business transaction, countries have to compete to mobilize FDI. How to strengthen competitive advantages is a big question not only for a firm, a sector but also for a nation. According to Porter (2000), competitive capability of a nation is a sustainable growth of GDP and is determined by productivity of factors (capital, labor forces and natural resources). According to World Economic Forum 1997, competitive capability of a nation is to achieve and maintain a high growth based on relatively sustainable policies, institutions and other economic environment factors. Meanwhile, US Committee of Industrial Competition defines that competitive capability of a nation is a level at which, under the condition of a free and equal market, a nation can produce goods and services satisfying demands to requirements of international markets and improving real income of the people. At the sector level, Markusen (1992) showed that an industrial sector is considered to have competitive capability if its unit cost is equal to or lower than the unit cost of the similar sector in the world. And in the scope of a firm, competitive capability is to provide consumers with qualified products at reasonable prices. At the firm level, according to Markusen, there are 4 factors affecting investment behaviors and investment decisions of a firm aboard (form of investment, level of investment etc.) because these factors will define competitive capability of a firm in the host country. The first factor is quality, supplying capability and professional level of inputs such as labor forces (training standard, supplying ability etc.), investment capital (banking system, security market etc.), physical infrastructure, administrative system of the host country, and level on science, technology and natural resources. The second factor is supporting clusters in providing supplementary products or services such as services on transportation, construction, installation etc. The third factor is demands of consumers to products and services of the firm as well as their requirements to the product qualify. The forth factor is the level of competition in the business field of the firm, its potential in capital and technology, its experience in marketing and product distribution, the price and qualify of the products, its social behaviors and relations with the governmental authorities.

In fact, investment behaviors of a firm depend much on strategies and objectives of each investor. According to Ferdows (1997), decisions of setting up the form of a foreign subsidiary aboard depend on its current roles and expected roles. Considering the primary strategic reasons for a factorys location and the scope of its current and expected future activities, Ferdows divides subsidiaries into six categories included offshore factory, source factory, server factory, contributor factory, outpost factory and lead factory. However, a factorys role can be changed due to internal events (firms strategy), external factors (production costs, tariff barrier, changes in local markets and business environments). The author gives the example of European and U.S. electronics manufacturers turning some offshore factories in Malaysia into servers due to increasing in Malaysias wages and growing local demand. Ferdows also showed that if a firm wants to upgrade its subsidiary position in the network of that firm as well as its position in the host country, that firm needs to have competitive strategies in order to exploit and create competitive advantages for the subsidiary such as expand market share, to occupy consumers from competitors etc. According to adaptable competitive strategies of Miles and Snow (1978), firms will use these strategies to adapt a changeable competitive environment included offensive strategy (a firm always has to invent new products and exploit new chances), defensive strategy (a firm will seek sustainability of market by producing only some products to supply a fragment of the common market, analyzing strategy (a firm has to analyze all new business strategies before jumping into a market) and reacting strategy (a firm will readjust its business strategies due to changes of business environment). However, general competitive strategies of Porter (1980) are well known and popularly used in studies on competitive strategies. These strategies can be applied in all kinds and scales of firms in any sectors. They are overall cost strategy, differentiation strategy and focus strategy. According to Porter, if a firm wants to stay on the top position, it needs to reduce its cost at the lowest level and creates a differentiation of the product. However, according to Ferdows, creating competitive advantages of a firm has to be taken step by step and requires more resources. Ferdows gives an example of Hewlett-Packards upgrading the strategic role of its factory in Singapore. To move from offshore position up to lead position, it took this factory nearly twenty years. It had to redesign the products to reduce 50% of cost. Its success created a strong competitive advantage for the whole company. In addition, Mintzberg (1995) showed that the basis for a firm to build up a competitive strategy is to analyze sector structure. As sector structure has an important effect on playing rules and strategies of that firm. In many cases, government is a determinant factor in sector competitive strategies due to its roles in issuing policies affecting the whole business environment. Innovative Aspects of the Study Compared with any countries in the region, investments of foreign companies into Vietnam are still very fresh (it is really started after five years from the day of issuing Law on Investment in 1987). So far, there have not been any systematic studies on investment behaviors of foreign investors in Vietnam. American firms have just particularly paid attention to Vietnam since the normalization of relationship between US and Vietnam was established in 1995. Studies on investment behaviors of American firms, especially studies on their competitive advantages compared with those of other foreign investors in Vietnam have not been implemented scientifically and systematically up to now. So this study will contribute to bring out a better systematic access to investment behaviors of foreign investors in general and of American investors in particular into Vietnam. 6. The Scope of Research The study will basically focus on analyzing competitive advantages of American firms in Vietnam. These analyses will determine strength, weakness and investment strategies of American firms compared with those of other foreign investors in Vietnam, especially big investors. The study will analyze competitive advantages of American firms in comparison with those of Japanese, Singaporean and French firms. This choice is based on the reasons that Japan, Singapore

and France are always the biggest investors in Vietnam. As a developing country, Singapore is always the biggest investor in Vietnam. Among developed countries investing in Vietnam, Japan is the only nation to be often ranked in the top-five list of the biggest investors in Vietnam. Compared with Japan and Singapore, investment of France into Vietnam is fewer but it is the biggest compared with other European countries investing in Vietnam. The period in which the competitive advantages of American firms are analyzed will be from 1987 to the present. 7. Research Methods and Data Sources Firstly the study will analyze theories and approaches specifying the determinant factors of the investment behavior of MNCs abroad. The theories and approaches of Dunning, Ferdows, Markusen, Porter, Miles and Snow will be specially considered. Methods to analyze competitive advantages of American firms are SWOT (the method will analyze strengths - weaknesses - opportunities - threats of American firms compared with those of the Japanese, Singaporean and French firms investing in Vietnam); GAP (the method will compare the level of factors affecting competitive advantages of American firms with the level of the similar factors affecting competitive advantages of the Japanese, Singaporean and French firms investing in Vietnam); Value Chain (this method will consider the value added in each chain of production and distribution of products/ services in the firm through which the firm will show which chain creates value added and affects loss and benefit of the firm); Porter Diamond (this method will detailedly analyze key factors creating competitive capability of a firm in a changeable business environment included competitive strategies, production conditions, demand conditions and supporting clusters). The data for the study will be gathered from the secondary sources such as Vietnam Statistic Bureau, Vietnams Ministry of Planning and Investment, IMF, World Bank, World Economic Forum and governments authorities and research institutes. The primary sources of data will be collected from the answers to the questionnaire provided by experts and managers of some big firms of USA, Japan, Singapore and France that are investing in Vietnam. 8. Expected Publications Ph.D. thesis and 2 articles (profile journals: Review of Development Economics, Journal of Development Economics, or Organization Science). 9. Research Plan The starting date: July, 2007; 18 months
Tasks 1-2 Comprehensive literatures Methodologies Preliminary analysis First workshop Improvement and survey Fieldwork Analysis from field work Second workshop Writing thesis Writing 1st article Writing 2nd article Revised thesis Final examination 3-4 5-6 7-8 Months 9-10 11-12 13-14 15-16 17-18

References
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