Vietnam is gearing up to join the Asian Tigers.
Business opportunities beckon yet foreign investors often still need to co-operate with local state-owned enterprises to gain access to crucial local resources. This creates unusual management challenges. Ha Thanh Nguyen and Klaus E Meyer outline some of the key challenges arising in such relationships and offer insight in how to manage them.
Vietnam has become the latest destination for multinational enterprises seeking to capitalise on the economic potential of emerging markets. They are attracted by economic growth of over seven per cent and by an educated and motivated workforce available at relatively low labour costs. Moreover, the prospect of Vietnam joining the WTO, possibly as early as 2005, generates more potential business.
Yet operating in Vietnam poses special challenges, as the institutional transformation towards a market economy is as yet partial. State-owned enterprises (SOEs) are still dominant players in the economy, especially in strategic and capital-intensive industries, such as telecoms, electronics, electrical engineering and cement. Therefore, many foreign investors find it necessary to operate in partnership with local SOEs, often in form of a joint venture (JV). Yet how can private, profit-oriented businesses manage a partnership with a state-owned firm in a country that still calls itself a “socialist republic”? In this article, we review the challenges encountered in these capitalist- socialist collaborations and offer some suggestions for how foreign investors may manage their JVs.
An enterprise survey undertaken in winter 2001/2002 illustrates the pattern of foreign direct investment (FDI) in Vietnam (Nguyen et al. 2004). In a representative sample of 171 foreign investment projects, 44 per cent are in the form of JVs. The majority are conventional JVs (“type I”) – a new firm established with contributions by both partners. However, 11 per cent of FDI projects are JVs “type II”, in which the local partner transfers its existing operation to the newly created entity. In these JVs, the local firm continues as a legal entity, yet primarily as a shell company owning shares in the JV. As acquisitions are still inhibited by legal constraints, the JV type II provides an organisational arrangement that in many ways resembles a partial acquisition.