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Vietnam's FDI: Unlocking The Keys To A Successful Market Entry

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In approaching a new market, particularly a frontier market such as Vietnam, there are several considerations that are necessary to take in mind to ensure a successful market entry. Taking the following factors into account as opposed to thinking linearly in your approach will make for a dynamic and well-rounded market entry.

 

1. Business Models

There are a variety of models for structuring a market entry into Vietnam. Choosing the right model geared toward your objectives is essential in the early stages of planning.

Partnership: A partnership is a business owned by two or more people, with each partner having unlimited liability for the debts incurred by the business. There are two typical classifications of partnerships:

Partnerships: These may consist of unlimited and/or limited partners. There must be at least two unlimited partners that share equal rights and responsibilities in the management of the business. Of note, partnerships cannot issue any type of securities.

Limited liability partnerships: Partners are liable only for company debts to the amount they contributed.

Important to note is that a successful partnership is not necessarily determined by the amount of capital involved. A well-capitalized partnership entering a saturated market faces a difficult road to success. Likewise, timing is important, as developing economies such as Vietnam are often subject to significant economic volatility, so be sure to do your homework.

Production Sharing Contract (PSC): A PSC is a type of contract often signed between a government and a resource extraction company concerning the amount of a given resource that is extracted from the country and how it is divided. This type of contract generally pertains to oil operations. 

Joint Venture: A joint venture is a business arrangement in which two or more parties agree to pool their resources in order to accomplish a specific task. Each participant is responsible for any profits, losses and costs associated with the venture.

Joint Operations Contract (JOC): In a JOC, one company will act as the operating partner for the other companies. The operating partner provides shared services on a contract basis. Secondary partners often contribute facilities, equipment, cash, or similarly add value to the operating partner. Within a JOC, no third-party joint venture is created.

Public-Private Investment Partnership (PPIP): A PPIP is a business linked with the government to invest in infrastructure. PPIP regulations are based on the government’s plans to realize its infrastructure investment ambitions. Investors still need to comply with all relevant investment regulations, including any foreign ownership restrictions. 

2. Three Key Structures

There are more factors to take into account after selecting one of the business models mentioned above. In Vietnam, there are three ways to structure your business.

Resident Representative Office (RO): The Vietnamese government allows foreign investors to establish a legal presence in the simplest form through a RO. It allows a foreign entity to facilitate the promotion of products or services.

Branch: A branch office is a component of a foreign entity that is permitted to conduct commercial activities for the purposes of making a profit, as governed by various international treaties signed between Vietnam and other countries.

Foreign Contractor: This business structure is popular amongst foreign organizations and individuals carrying out business short term, without intention to establish a long-term presence.

3. Special Economic Zones

Vietnam is divided into various economic zones, or designated economic spaces conducive for different types of business or economic activities.

Industrial Zone (IZ): An area specializing in the production of industrial goods and manufacturing with defined geographical boundaries.

Export Processing Zone (EPZ): An industrial zone with defined geographical boundaries specializing in manufacturing exports and performing services for export activities.

Hi-Tech Zone (HTZ): An area that specializes in research, development, the application of technology, the development of hi-tech businesses, training in hi-tech industries and manufacturing and trading hi-tech products.

There are many advantages of these zones. All offer foreign enterprises self-contained industrial estates with completed infrastructure facilities including water, warehouses, showrooms, etc. They are also in close proximity to main roads, ports and airports. While much of the country lacks basic infrastructure, these zones have become attractive to foreign investors, particularly those in the manufacturing and export sectors. In addition, some incentives are sometimes given to companies in these zones and the usual intensive administrative processes are significantly reduced. Another factor to take into account is the potential advantage of signing a lease agreement within an economic zone. Whether through a sub-lease, or taking over the lease of a tenant moving out prematurely, there is great potential for finding an economical solution.

4. Royalties, Cost and Pricing Models

So you’ve made it this far. You’ve selected the right business model, have carefully chosen a plan to pursue and settled on an economic zone conducive to your business needs. Now, it’s time to get down to the purpose of all of this, making money. As with every factor outlined, there are specific matters to take into account for “making money” in Vietnam.

Royalties: There are currently no regulations in terms of royalties related to franchising. There is however, legislation surrounding natural resource royalties. Companies or individuals extracting natural resources from the country are required to pay royalties based on the quantity, weight or volume of the resource extracted.

Cost: The cost of capital in Vietnam is extremely high relative to other countries, driving most foreign investors into utilizing offshore funds. As for the cost of debt, borrowing money often comes at a high risk. Bad loans are a common occurrence, leaving a negative impression on the economy.

Pricing: As with any market, there are a variety of pricing options available when establishing a new product or service. Many firms take advantage of hourly pricing, flat pricing or variable pricing, which a firm will arrange on a case-by-case basis. Naturally, the objective is to find the equilibrium point where supply and demand come together. Determining a pricing strategy will also be dependent on various macro-level economic, political and social factors. Competition and the originality of the product or service are key considerations. 

5. Economic Goodwill

In a 1983 letter to Berkshire Hathaway shareholders, Warren Buffett famously defined a term now well known to value investors worldwide as, “Economic Goodwill.”

Buffett explained that, “businesses logically are worth far more than net tangible assets when they can be expected to produce earnings on such assets considerably in excess of market rates of return. The capitalized value of this excess return is Economic Goodwill.”

What’s in a name? Well, according to Warren Buffett, potentially a tremendous amount. Think about it. When someone says the word “soda” what do you think of? Coca Cola perhaps? This is brand loyalty and it allows firms to generate high returns on capital with little additional ongoing investment. Companies with a long well established history and a reputation for high quality products generate a sizeable amount of Economic Goodwill. A worthy and attainable objective if you carefully consider this guide upon entering a new market. You too could soon be generating more Economic Goodwill than you may know what to do with.

Source: forbes.com

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