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Emerging Market Analysis: Doing Business in Vietnam

Updated May 2, 2022
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Emerging Market Analysis: Doing Business in Vietnam essay

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In the late 1990’s and early 2000’s business freedom in Vietnam was repressed and not conducive to a developing economy. Between 2005 and 2006 there was a noticeable increase in business freedom almost matching the average worldwide index value (The Heritage Foundation, 2019). While this could have been attributed to several factors, one particular point to note is the shift in the Vietnam National Assembly’s ability to draft legislation. In 2005, the National Assembly was approved to draft legislation rather than amending laws put forth by the executive branch (Freedom House, 2006). With much of Vietnam wanting to move towards a market-oriented economy, this was a crucial step in the right direction.

It is evident in Chart 1.1 that Vietnam has been making substantial progress to increase business freedom to reach their goal of becoming a market-based economy. In 2019, it is reported that Vietnam has met the world average of 63.5% in the business freedom index. This is classified by the Index as “Moderately Free.”

The increase business freedom in Vietnam is a strong indicator that it would be a considerable opportunity to invest or partner with an existing firm to build and grow a market in the international economy.

Labor freedom is certainly something of value to any firm trying to compete in the international market. With limited knowledge of the Vietnam labor force, it is important to analyze trends and the current regulatory climate surrounding the labor force. Chart 2.1 portrays the labor freedom in Vietnam over the last fourteen years. While the labor freedom may be higher than that of the world average, this is something that requires careful attention and evaluation. One of the reasons Vietnam has scored highly in this area is due to its loose restrictions on child labor. However, the Vietnam Prime Minister enacted a 5-year program beginning in 2016 to minimize child labor (Zeldin, 2016). This commitment to fair labor standards also demonstrates their commitment to cultural and social responsibility.

Another important component to labor freedom is current unemployment rates. At 2.053% unemployment, this poses both risks and rewards to an organization looking to do business in Vietnam. Depending on the skilled labor force, this could pose a challenge to replace skills workers needed in certain industries. This also poses challenges to a business trying to open operations in Vietnam with little human capital available to support an international venture.

From 2014 to 2017, GDP has been steadily increased in Vietnam by 26.13%, with an annualized growth rate of 6.812%. This is another demonstration by Vietnam that it is committed to its goal of becoming a market-oriented economy. Chart 3.1 portrays the steady growth of the Vietnam GDP over the four year time period, a good predictor that GDP will continue to grow.

GDP composition is another factor to consider for potential venture capitalists. Chart 3.2 shows the make-up of Vietnam GDP, made of mostly services and industry. Agriculture and manufacturing services make up a smaller portion, yet still notable for interested businesses.

Monetary Freedom is “a measure of price stability with an assessment of price controls” (The Heritage Foundation, 2019). Additionally, monetary freedom is based on the weighted average inflation rate for a three-year time period, and price controls in a specific economy. Ideally, in a free economy, there is high monetary freedom.

Vietnam, while not far below world-wide average, has had a significantly unstable monetary freedom index over the past two decades. Chart 4.1 shows the instability surrounding inflation and price controls in the region, a serious concern for a potential foreign investor or business venture.

This instability in price inflation and price controls in Vietnam pose significant challenges to new ventures or partner relationships with existing businesses. It would be important to evaluate what industry and do a further analysis on specific price controls and inflation prices to that specific industry.

Vietnam was ranking a “B” for the risk of investment in the region. Figure 5.1 shows the scale rating, and while it is considered “acceptable risk”, there may be countries with less risk that are able to provide an organization the same benefits.

The limited economic freedom in the region is a major contributor to the risk of a joint or international venture in Vietnam. Vietnam received a 55.3 score out of 100, where 100 represents the greatest economic freedom. When considering all of the factors of economic freedom, Vietnam is below the world average on the economic freedom index. Chart 5.1 shows the increase in overall economic freedom in Vietnam over the past few decades; however they still rank 5.5 percentage points below the world average.

It is no surprise that Vietnam has had challenges with corruption and governmental integrity. This is not an uncommon factor in many developing countries; however, is something to be cautious of when considering to enter an international joint venture. This can impact an organization’s brand and overall message if they are found guilty of corruption in foreign countries. There are also United States legal ramifications to consider including the Foreign Corrupt Practices Act (FCPA) enacted to prevent corporations from bribing government officials in other countries.

Chart 6.1 shows the government integrity of Vietnam from 1995 to 2019, and it is evident they have been making strides in the right direction. However, they also took a severe dip in their index value in 2017 that could be of concern given how recent it occurred, and the continued scrutiny on corporations to act in ethical and moral ways to be not only profitable, but also environmentally and socially conscious.

Duong Nguyen described in great detail the political challenges of doing business in Vietnam, one of which was the corruption and bureaucracy. He specifically noted that project timelines often extend far past their projected dates, and this could be a significant cost increase for an organization trying to conduct business in Vietnam (Nguyen, 2019).

When evaluating these same factors in Malaysia, it is evident they are further ahead than Vietnam in several business-related venture decision factors. For example, Business Freedom is 20.4 percentage points ahead of Vietnam in 2019, a clear indicator of their commitment to freedom of individual businesses to achieve success with little government intervention.

Labor freedoms are also significantly higher than that of Vietnam, with Malaysia having a 74.4% index rating for labor freedom. However, in the same scenario as Vietnam, an organization would need to evaluate why this might be. Child labor would not reflect well on an organization based in the United States; however, the common debate is whether it is more ethical to deny children the ability to work who have to support their family, or is it more ethical to give them a job with fair working conditions and pay them a fair wage. This is also a concept of culture and whether or not it is considered acceptable to allow children to work to learn certain values that employment portrays on an individual.

The overall country risk rating of Malaysia is also one that prospers well for an American-based corporation looking to outsource. Figure 7.1 shows the country risk rating for Malaysia as an A3, two classifications lower than Vietnam.

Overall economic freedom in Malaysia is 18.7 percentage points greater than that of Vietnam, making it more sound investment for an American company looking to branch out into the international venture. Further analysis would need to be conducted to evaluate the importing and exporting of goods related to price and transportation methods. Duong Nguyen spoke about this and how critical it is to consider the transportation abilities in Vietnam. Individuals had very limited methods of personal transportation, and this could be an indicator of their industrial transportation methods including air, train, and sea (Nguyen, 2019).

In conclusion, while business factors in Vietnam may be moving in the right direction, there are other countries that may pose a better foundation for an organization looking to branch into the international market for the first time. Malaysia is less of a risk and scores higher on several key index values for an organizational looking to conduct business around the world.

Emerging Market Analysis: Doing Business in Vietnam essay

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Emerging Market Analysis: Doing Business in Vietnam. (2022, Apr 30). Retrieved from https://samploon.com/emerging-market-analysis-doing-business-in-vietnam/

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