Central Institute for Economic Management (CIEM) Leibniz University of Hannover Institute of Economic and Cultural Geography Prof. Dr. Revilla Diez Le Viet Thai Faculty of International Economics Diplomatic Academy of Vietnam Dr. Dang Hoang Linh and Bui Thu Ha Doing Business in Vietnam from a German perspective preliminary findings MPI, VCCI, KinhBac City Development Holding Corp AHK, GIZ, German Embassy, GBA
Workshop: Doing Business in Vietnam a German perspective 9.00 Welcome address by Mr. Le Viet Thai and Prof. Dr. Javier Revilla Diez Framework conditions for FDI in Vietnam 9.15-9.35: Presentation by Kitty Krause and Ekaterina Engler 9.35-9.45: Discussion Motives for FDI s 9.45-10.05: Presentation by Laura Kleimann and Lena Jacob 10.05-10.15: Discussion 10.15-10.30 Coffee break Opportunities and Challenges in the Foreign Branch 10.30-10.50: Presentation by Christian Förster and Markus Pruys 10.50-11.00: Discussion Regional Economic Effects of FDI in Vietnam 11.00-11.20: Presentation by Christina Enders and Frank Suding 11.20-11.30: Discussion 11.30-11.45: Final discussion on future prospects of German FDI in Vietnam led by Le Viet Thai and Prof. Dr. Javier Revilla Diez Doing Business in Vietnam
Interviewed German Companies in Hanoi Haefele GmbH TÜV Rheinland Group Xella International GmbH Altus AG Van Laack GmbH Robert Bosch GmbH Andritz Hydro GmbH PPI Joint Stock Cooperation Thyssen Krupp Materials AG Rieckermann GmbH B.Braun Melsungen AG Thyssen Krupp Elevator AG Uni Credit Group Sartorius AG Spectos GmbH Hörmann KG Messer Industriegase GmbH Rohde & Schwarz GmbH & Co. KG gmp Architekten Wiha Werkzeuge GmbH Forest Finance Service GmbH Duc Viet Food JSC Gisa Solution Inc. Wagner Doan Co, Ltd. MHE Demag Pte. Ltd. Inros Lackner AG C. Illies & Co. Handelsgesellschaft mbh Doing Business in Vietnam
Introduction Kitty Krause / Ekaterina Engler 4 Introduction Kitty Krause & Ekaterina Engler
What is Economic Geography? Definition: Science of the spatial organization of the economy Function: Explain (theory), describe (empirics) and shape (policy) spatial structures and dynamics 5 Introduction Kitty Krause & Ekaterina Engler
FDI Factors in South East Asia Source: PWC, South East Asia: Investment Opportunities, Tax & other Incentives, 2012 6 Introduction Kitty Krause & Ekaterina Engler
FDI Factors South East Asia 7 Introduction Kitty Krause & Ekaterina Engler
FDI Factors in South East Asia 8 Introduction Kitty Krause & Ekaterina Engler
FDI Factors in South East Asia 9 Introduction Kitty Krause & Ekaterina Engler
FDI-Incentives in comparison FDI-Incentives Vietnam Thailand Myanmar Corporate income tax, in % 25 23 30 Minimum wage daily (in US $) Industrial parks/economic Zones 1,66 9,52 0,57 Yes Yes Yes Regional differentiation 15 (economic) 3 (high-tech) 3 1 Literacy rates, in % 94,1 92,6 89,9 Tax holiday Introduction 1-4 Years: no tax 5-13 Years: 5% 14-15 Years: 10% Onwards 16 Years: 25% 3-5 Years, following years (50%) To 3 Years Kitty Krause & Ekaterina Engler 10
Comparison with other countries 11 Introduction Kitty Krause & Ekaterina Engler
FDI in Vietnam 12 Introduction Kitty Krause & Ekaterina Engler
Qualitative Analysis Theoretical concepts and formulation of hypotheses Design survey (questionnaire) Identify german companies in Vietnam Conduct interviews with the companies Analyse results 13 Introduction Kitty Krause & Ekaterina Engler
Motives for FDI s Laura Kleimann / Lena Jacob 14 Motives for FDI s Laura Kleimann & Lena Jacob
Motives for FDI Enterprises follow different goals/motives Have a complex structure Motives are often interrelated Can be categorized in five areas: Market-, resource-, political-, efficiency- and strategic motives What are the important motives for FDI in Vietnam? 15 Motives for FDI s Laura Kleimann & Lena Jacob
Market seeking motives Aim: maximize the profit The investor wants to explore new markets and wants to increase his sales (through new services or products) Hypothesis: German companies are in Vietnam for increasing their market share or expand their markets 16 Motives for FDI s Laura Kleimann & Lena Jacob
Results: Market seeking motives New and big market (second largest growth rate) and in SEA To establish in the VN market and SEA Could chose their location freely Existing key industries Wider distribution of their products in the world National and international customers and clients Hypothesis: only for some sectors it can be affirmed (in service sectors e.g. trading companies) 17 Motives for FDI s Laura Kleimann & Lena Jacob
Resource seeking motives Important when resources in the domestic market are difficult and expensive to use Resources are: natural resources, primary products, cheap and high-qualified labour force Hypothesis: German enterprises invest in Vietnam to exploit resources 18 Motives for FDI s Laura Kleimann & Lena Jacob
Results: Resource seeking motives Huge labour force Highly motivated workers Natural resources Hypothesis: can be affirmed 19 Motives for FDI s Laura Kleimann & Lena Jacob
Political motives Financial support, tax advantages or investment support in the foreign market Hypothesis: German enterprises invest in VN because they have got some support by the government 20 Motives for FDI s Laura Kleimann & Lena Jacob
Results: Political motives WTO Entry Open government No restrictions from the government Some Companies got financial advantages Hypothesis: can be affirmed 21 Motives for FDI s Laura Kleimann & Lena Jacob
Efficiency seeking motives Aim: reduce costs in certain areas Play an important role in expensive productions Certain advantages like lower transport costs, communication costs, more/better human capital or resources as well as low trade barriers Good electricity prices Try to get synergy effects through international cooperations Hypothesis: German companies invest in VN in order to increase their efficiency 22 Motives for FDI s Laura Kleimann & Lena Jacob
Results: Efficiency seeking motives Short distances in Hanoi and surrounding areas Higher efficiency Lower travel costs for the employes low labour costs No competitors in the north, but cooperation partners Good examples: excellent conditions for renewable energies and software industry Hypothesis: can be partly affirmed 23 Motives for FDI s Laura Kleimann & Lena Jacob
Strategic asset seeking motives Are important when an investor wants to get advantages to his potential competitor Material and immaterial assets, like know-how, should be acquired Furthermore, so called "created assets like new knowledge in production technology, innovation or R&D are strategic motives Hypothesis: the German companies invest in VN to absorb local knowledge for own R&D activities 24 Motives for FDI s Laura Kleimann & Lena Jacob
Results: Strategic asset seeking motives Not mentioned Hypothesis: can be rejected because the R&D is done in Germany 25 Motives for FDI s Laura Kleimann & Lena Jacob
Expectations and facts Investments because of a huge labour force and low labour costs Labour force: yes, labour costs: no Day-to-day contracts or at least just short contracts are given to the workers Large amount of permanent contracts Only the formal requirements are provided A lot of amenities for the work force Investment decisions based on research and locational analysis (e.g. business reports) Existing networks or contacts Emotional commitment High closing down rates because of miserable electricity supply or other infrastructural bottlenecks Infrastructure investments Only exporting to the western markets Not only, also exports to SEA and Vietnamese markets 26 Motives for FDI s Laura Kleimann & Lena Jacob
Conclusion What are the important motives for FDI in Vietnam? No clear picture, motives vary between sectors Services: Most important: market seeking motives Non-relevant: all other motives Manufacturing Industry: Most important: resource, market and efficiency motives Non-relevant: strategic asset seeking and political motives Political motives didn t affect much enterprises decisions, because others factors prevail 27 Motives for FDI s Laura Kleimann & Lena Jacob
Opportunities and Challenges in the Subsidiaries Christian Förster / Markus Pruys 28 Opportunities and Challenges in the Foreign Branch Markus Pruys & Christian Förster
Expectations doing business starting a business dealing with constructing permits getting Electricity registering Property getting Credit protecting Investors paying Taxes trading Across Borders enforcing Contracts resolving Insolvency? communication problems language cultural features relationship headquarter in Germany. vs. branch in Vietnam working environment bureaucracy governmental restrictions environmental aspects fiscal, commercial regulations advancement opportunities domestic worker vs. foreign executives? educational achievement rank of education internal advanced training 29 Opportunities and Challenges in the Foreign Branch Markus Pruys & Christian Förster
Doing business in Vietnam Report by World Bank Focus: small and medium businesses Measures and tracks changes in regulations in 10 business areas in 185 countries How Vietnam and comparator economies rank on the ease of doing business Source: Doing business database. Doing business 2013, 7. 30 Opportunities and Challenges in the Foreign Branch Markus Pruys & Christian Förster
Doing Business Report 31 Opportunities and Challenges in the Foreign Branch Markus Pruys & Christian Förster
Opportunities & Challenges Starting Period Operation Period Requirements Human Resources (HR) Characteristics (HR) Relationship: Headquarter- subsidiary Further Training (HR) Promotion prospects (HR) General framework conditions Country specifica Demographics, politics Economical & financial situation Infrastructure Bureaucracy Source: Worldbank 2013: Doing business; own compilation 32 Opportunities and Challenges in the Foreign Branch Markus Pruys & Christian Förster
Empirical results 33 Opportunities and Challenges in the Foreign Branch Markus Pruys & Christian Förster
Employees requirements language acceptable qualification loyalty: 10%- 15% turnover (challenge: english necessary, but rarly available) (challenge: missing work experience) (differences between Rep. Office and production) characteristics of vietnamese worker opportunity: hardworking, flexible, fast learning challenge: punctual, missing loyalty, unreliable, taking of responsibility in general no problem of finding suitable worker weak point: education (challenge: no experiences, teacher-centred teaching; opportunity: training on the job increase loyalty) 34 Opportunities and Challenges in the Foreign Branch Markus Pruys & Christian Förster
Employees Gender: women are more motivated, working more efficinet and more willingly Men are drinking and woman are working! further training mostly english and soft skill training (opportunity: increase the loyalty to the firm) in most cases still in construction or implementation less cooperation with vocational and training institutes (opportunity) promotion prospects still less experience in general equal chances 35 Opportunities and Challenges in the Foreign Branch Markus Pruys & Christian Förster
Infrastructure traffic problem of being in time (challenge) communication good and cheap (opportunity) energy satisfying situation for Rep. Offices problems with energy cuts in production companies (opportunity) (challenge) education basic knowledge okay engineers well educated missing practical experience (opportunity) (opportunity) (challenge) 36 Opportunities and Challenges in the Foreign Branch Markus Pruys & Christian Förster
Relation between headquarter and subsidiary strategic decisions at the headquarter free hand for local decisions (Rep. Offices are working strictly on plan) branches operate freely to reach objectives (opportunity) (opportunity) Bureaucracy large problem with corruption!!! (challenge) branches assign service provider to deal with the local authorities I was grown up here and I know what we can do or not! contact to AHK or GBA to communicate the problems Opportunities and Challenges in the Foreign Branch (opportunity) Markus Pruys & Christian Förster 37
Recommendations Education expand cooperation with research institutions, universities and vocational and training institutions german model of two tears education Infrastructure companies should invest in industrial parks or economic zones better infrastructur (e.g. energy) help with burocratic procedures Bureaucracy make use of service providers 38 Opportunities and Challenges in the Foreign Branch Markus Pruys & Christian Förster
Regional Economic Effects of FDI in Vietnam Christina Enders / Frank Suding 39 Regional Economic Effects of FDI in Vietnam Christina Enders & Frank Suding
Possible effects of FDI 40 Regional Economic Effects of FDI in Vietnam Christina Enders & Frank Suding
Topics of our Research Selected Effects Development of Human Capital Development of Infrastructure Integration of Vietnam into the global value chain Important Regional Effects in Hanoi and surrounding Area Effects of German FDI 41 Regional Economic Effects of FDI in Vietnam Christina Enders & Frank Suding
Development of Human Capital Expected Effects Multinational Companies need skilled workforce Education and training in the companies Modern methods in production and management But: Basic Education of the population is necessary 42 Regional Economic Effects of FDI in Vietnam Christina Enders & Frank Suding
Development of Human Capital Findings Education in the Company Production Representative Offices Education in the Headquarter Promotion Possibilities Cooperation with Universities Role of Women Vietnamese Education System is seen very critically by German companies practical competences missing Regional Economic Effects of FDI in Vietnam Christina Enders & Frank Suding 43
Development of Infrastructure Expected Effects Physical Infrastructure Regards to Supply, Distribution, Produtcion Basicaly all Parts of the Business activity Important is a secure supply Institutional Infrastructure Legal certainty Efficient administration Public Authorities are interested in good conditions 44 Regional Economic Effects of FDI in Vietnam Christina Enders & Frank Suding
Development of Infrastructure Physical Infrastructure no active role by German Companies Institutional Infrastructure - Framework conditions Incentives for special sectors (i.a. IT, Food) Little restrictions Easier for small and medium Companies Inflation 45 Regional Economic Effects of FDI in Vietnam Christina Enders & Frank Suding
Development of Infrastructure Institutional Infrastructure - Public Authoroties Past: very slow, very complicated, very corrupt Today: more flexible but not efficent, time-consuming, nontransparent Institutional Infrastructure Legislation Law constantly changing Non-detailed laws Scope for interpretation and corruption 46 Regional Economic Effects of FDI in Vietnam Christina Enders & Frank Suding
Integration of Vietnam in the global value chain Expected Effects Multinational Enterprises effect the local companies Integration in the global value chain Development of Networks between multinational and local Companies (supporting industries) Possibility of Cumulative Effects 47 Regional Economic Effects of FDI in Vietnam Christina Enders & Frank Suding
Findings - Integration of Vietnam in the global value chain Findings Mixed results with regard the integration into global value chains Effects differs regarding to production or Rep. Office Requirements to suppliers Quality, Reliability, Price, Safety Satisfaction with suppliers Need of supervision then satisfying 48 Regional Economic Effects of FDI in Vietnam Christina Enders & Frank Suding
Findings - Integration of Vietnam in the global value chain Findings Forms of Cooperation Suppliers, Consulting, Sales, (Subcontractors) Cooperation with R&D Institutions Less demand of R&D, more Education and Recruiting of staff 49 Regional Economic Effects of FDI in Vietnam Christina Enders & Frank Suding
Summary and Political Implications Summary Effects by German companies small Practical competences of workforce are missing Integration in value chain varying results Political Implications (inter alia) Human Capital Formation of practical skills Infrastructure Reliability of Legal System Integration Target incentives on supporting Industries General Evaluation of FDI Policy Regional Economic Effects of FDI in Vietnam Christina Enders & Frank Suding 50
Expiriences up to now 51 Regional Economic Effects of FDI in Vietnam Christina Enders & Frank Suding
Final discussion on future prospects of German FDI in Vietnam Doing Business in Vietnam 52
Recommendations For the German companies: take your time and prepare yourself Use service providers Industrial Parks and Economic Zones as location better infrastructure and help Expand cooperation with research institutions, universities, and vocational and training institutions For the Vietnamese authorities Human capital formation practical skills Institutional infrastructure reliability of the legal system Upgrading domestic companies target incentives on supporting industries Evaluation of FDI policy Opportunities and Challenges in the Foreign Branch Markus Pruys & Christian Förster 53