Market entry strategy for foreign investors in Vietnam
Market entry strategy is one important factor to bring success to international business. Coade (1997, 31) emphasizes the importance of market entry strategy that “The market entry strategy is crucial to the success of every international business; if you get it wrong it may be difficult to recover your market position. The popularity of each market entry strategy seems to vary from one particular market to another.” “Executives constantly look at new market entry opportunities as a way of generating rapid growth, diversifying their portfolios, and (occasionally) secretly satisfying their entrepreneurial spirit. New market entry strategies enable companies to improve their revenue base by entering into new geographies, to solidify relationships with existing customers by extending their product offerings, and to diversify their customer base by targeting different customer segments.”
There are many choices for market entry. The crucial thing is to make the best choice among those. It is very interesting that in his book, Coade (1997) compares market entry choice in business development with the weapon choice of a military person. He says that “The market entry strategy will be successful only if you choose the right weapon to match your overall strategy”. Meyer (2008) also agrees that “The design of an entry strategy is a creative process of integrating many interdependent elements. Various scenarios may be explored to decide over a wide range of issues.” The choices of entry strategy are raised in questions in his article.
There are many choices or alternatives or scenarios for market entry. It can be exporting, manufacturing, joint venture, direct investment, strategic alliances, licensing, franchising or consortia (Coade, 1997).
Based on these main foreign market entry modes, Driscoll (1995) also analyzed characteristics of these modes following five assessment criteria including control; dissemination risk; resource commitment; flexibility and ownership. Control means the magnitude of the company in managing the production process, performance activities, sales and marketing plan, logistic plan, etc. Dissemination risk is the company’s awareness of the expropriation caused by a contractual partner. Resource commitment means the company should make sure that they can bring into the target market sufficient resources including financial, physical and human resources. Flexibility assesses that whether a firm can change the entry modes quickly and with low cost in the face of evolving circumstances. Ownership refers to the equity participation of the company. The characteristics of the defined entry modes are explained in the table below:
It can be seen that the export mode has the lowest potentiality among the three, and investment is the highest possible choice for entering a foreign market. The reason is that by choosing this mode, the company has the whole or part control of their business depending on the equity proportion they have. The risk of dissemination is low because they can control their business. The resource commitment is high due to the conditions to set up their subsidiary or make joint venture or apply M&A mode. The ownership is of course high. Only flexibility is low because unlike the exporting mode, they cannot switch their business easily to another market, or customers, they are bound by several constraints in the host market. However, this is the mode that is used mostly nowadays by companies thank to its advantages.
What are the most important factors that a company can rely on to make the best entry mode choice? Driscoll (1995) also built several factors that have the most influence on choosing entry mode.
I suggest the investment entry mode for Finnish companies to penetrate to the Vietnamese market. The suggestion then brings us back to the questions raised by Meyer (2008) in Chapter 1: “Should we go alone or should we share with a local partner?”
“Joint ventures may provide your company with an easy way of gaining market access to what may traditionally have been difficult to operate in. This market access may be provided by the fact that you are now part of a joint venture, or it could be that because of the unity of your company competencies you can successfully gain market access to a previously difficult market.” (Coade 1997, 39.) In some cases, joint venture mode is a must because “the government of the target market may have legislated to prevent you entering the market unless you have commenced a joint venture agreement with a country home-based company” (Coade 1997, 39). According to Coade (1997), there are some advantages of joint ventures. Firstly, the combined competencies of the joint venture formed by partners will be stronger and makes it possible to easily access the market. Secondly, your risks will be shared. “The sharing of risks is included in the concern not only for operational or marketing cost but also for the sharing of research and development costs” (Coade, 1997). In addition, joint ventures “increase the awareness of the market place and the company credibility in the market” (Coade, 1997).
“Foreign direct investment (FDI) is the direct ownership of facilities in the target country. It involves the transfer of resources including capital, technology, and personnel. Direct foreign investment may be made through the acquisition of an existing entity or the establishment of a new enterprise. Direct ownership provides a high degree of control in the operations and the ability to better know the consumers and competitive environment. However, it requires a high level of resources and a high degree of commitment.” (http://www.quickmba.com/strategy/global/marketentry/)
“Businesses usually like to be in control of their operations. Control facilitates the effective management of knowledge, avoids dependencies on external partners, and allows reacting flexibly to new market opportunities. If an entrant has (or has access to) all the resources required for a new operation, and if no legal requirements mandate local ownership, then foreign investors would normally prefer to establish a wholly owned subsidiary to attain full control over the operation.” (Meyer, 2008.)
“The State of the Socialist Republic of Vietnam encourages foreign investors to invest in Vietnam on the basis of respect for the independence and sovereignty of Vietnam, observance of its law, equality and mutual benefit” (Law on Foreign Investment in Vietnam). This will be explained in detail in Section 4.4.1 Entry requirements for foreign directed investment (FDI) in Vietnam. Legally, there are three forms for foreign investment in Vietnam: Business Corporate Contract (BCC), Joint Venture (JV), and 100% foreign invested company.
Depending on the specific business of investors, we will recommend suitable mode of entry. If you have any question, don’t hesitate to send us a request. We will help you.
More information can be found from my book
By Hang Do