Assessing international joint ventures in Vietnam

ASSESSING INTERNATIONAL JOINT VENTURES IN VIETNAM by Lai Xuan Thuy A research study submitted in partial fulfillment of the requirements for the degree of Master of Business Administration Examination Committee: Dr. Fredric William Swierczek (Chairman) Dr. Truong Quang Dr. Bettina Buchel Nationality: Vietnamese Previous Degree: Bachelor of Science (Econ.) Economic University of Sofia, Bulgaria Bachelor of English Pedagogy University of Hue, Vietnam Scholarship Donor: The Government of Switzerland Asian Institute of Technology School of Management Bangkok, Thailand April 1999 ACKNOWLEDGEMENT The author would like to express his deepest acknowledgement to the research advisor, Dr. Fredric William Swierczek for his intensive supports, valuable suggestions, guidance and encouragement during the time of the study. Many sincere thanks are also due to Dr. Truong Quang and Dr. Bettina Buchel for their valuable time, comments, and advice. Their constructive suggestions were of great help in successfully completing this study. The author would like to express his sincere gratefulness to Mr. Nguyen Minh, General Director and Ms. Thu Nga, Director Assistant at HBC, Mr. Anh Hung, General Director, Ms. Marilyn Glorioso, Chief Financial Controller, Ms. Thu Hang, Executive Secretary and Mr. Le Bo, Human Resource Manager at Century Riverside Hotel, Mr. Nguyen Nam, Deputy Director and Ms. Lan Huong, Office Assistant at Luck Vaxi Vietnam, Mr. Christophe Kaczowski, Project Manager at Thyssen Ascenseurs, Mr. Dinh Khanh, Chief of the International Relations Department in the Planning and Investment Service of Thua Thien Hue Province, Ms. Thanh Hai Project Assistants at MASCED, Ms. Minh Chau, Senior Lecturer at HCMC Economic University, and others for their precious information related to the research. The author would like heartily to dedicate this study to his beloved parents, his wife, Minh Ly and his children, Little Mai and Bao Thai who have always sacrificed to encourage and support him in life. Lastly but not least the author would like to express his faithful thanks to the Director of SAV Program and the Government of Switzerland for giving him opportunity and financial supports so that he could successfully complete his MBA study. ABSTRACT Based on the information from the questionnaires and direct interviews with managers of the international joint ventures, this paper focussed on assessing the joint ventures performance in Vietnam. The research results indicated that the joint ventures performed rather well in behavioral and learning, satisfactorily in strategic, but rather poorly in economic perspectives. The analysis also found significant differences in partners’ perception on success performance. The five key dimensions in success perceptions of the joint venture managers have found to be Functional efficiency, Competitiveness, Effectiveness and efficiency, Equity, and External customer relations. There are significant correlations between success factors and the operational results as well as between success factors and input, process and output indicators. Important problems and issues in the joint venture relationships have also discovered in the interviews with the managers. TABLE OF CONTENTS CHAPTER TITLE PAGE Title Page i Acknowledgement ii Abstract iii Table of Contents iv List of Tables vi List of Figures vii Chapter 1. Introduction 1 1.1. Background and Rationale 1 1.2. Statement of the research problem 2 1.3. Research objectives 2 1.4. Scope of the study 3 1.5. Organization of the report 3 Chapter 2. Literature Review 4 2.3. Joint venture concepts 4 2.2. Advantages and disadvantages of the joint venture 5 2.3. Motivation of creating a joint venture 6 2.4. Basic types of joint ventures 7 2.5. Problems and Issues of International Joint Ventures 8 2.6. Measuring success in the Joint venture 12 5.1.1. Problems in measuring success of joint ventures 12 5.1.2. Theoretical aspects of measuring success in joint ventures 13 Chapter 3. Foreign Direct Investments In Vietnam 15 3.1. Foreign Direct investment 15 3.2. Important features of FDI in Vietnam in 1998 18 Chapter 4. Research Methodology 20 4.1. Analytical and Conceptual Framework 20 4.2. Assumption and Concept Explanation 22 4.3. Method of data collection 23 4.4. Method of data analysis 23 Chapter 5. Results Of the Survey 24 5.1. The Questionnaires Results 24 5.1.3. Joint venture objectives 24 5.1.2. Assessing Joint Venture Performance 26 5.1.3. Results of Factor analysis 32 5.1.4. Other issues of discussions 36 5.2. Interviews Results 38 5.2.1. Problems Resulted From Differing Basic Objectives 38 5.2.2. Differences in partner size 40 5.2.3. Ownership and Control of the joint venture 40 5.2.4. Technology transfer 41 5.2.5. Brand name 42 5.2.6. Cultural Problems 42 5.2.7. Management payment 43 5.2.8. Problems Related to the Government policies 43 Chapter 6. Conclusion and Recommendations 46 6.1. Conclusion 46 6.1.1. Joint venture objectives 46 6.1.2. Joint venture performance 46 6.1.3. Problems in the joint venture relationships 50 6.2. Recommendations 50 6.2.1. Recommendations to the joint venture managements 50 6.2.2. Recommendations to the policy makers 52 6.3. Further research suggestion 52 References 53 Appendix 55 Appendix 1: A case of HBC 55 Appendix 2: Major Characteristics of the Respondents 58 Appendix 3: List of the International Joint Ventures 59 Appendix 4: The Survey Questionnaire 60 LIST OF TABLES TABLE TITLE Table 2.1. Major reasons for joint ventures Table 2.2. Basic types of joint ventures Table 2.3. Areas of Problems in the Joint Venture Table 3.1. Licensing new projects and capital raising in 1997-1998 Table 3.2. General information about FDI projects in 1998 Table 4.1. Framework for assessing joint ventures Table 5.1. Respondents’ perceptions on the joint venture objectives Table 5.2. Comparison between Vietnamese and foreign managers Table 5.3. Overall Performance of the Joint Ventures Table 5.4. Respondents’ Evaluation of the Joint Venture’s Performance Table 5.5. Comparison of the respondents’ evaluation on the JV’s performance Table 5.6. Partners’ Perceptions on the Input, Process, and Output Table 5.7. Correlation Matrix of Input, Process, and Output Table 5.8. Results of factor analysis Table 5.9. Factor Scores: Comparison between Vietnamese and Foreign Partners Table 5.10. Correlation Matrix of Success Factors and Operational Results Table 5.11. Regression analysis of Success Factors on Operational Results Table 5.12. Correlation Matrix of Factors and Input, Process, and Output Table 5.13. Regression analysis of Factors on Input, Process, and Output Table 5.14. Respondents’ views on decision-making, communication Table 5.15. Major areas of the joint venture problems and issues Table 5.16. Comparison between utility fees for SOEs and non-SOEs* Table 6.1. Ranking success factors by level of partner’s satisfaction  PAGE 6 7 9 17 19 21 24 25 26 27 29 31 31 32 33 34 34 35 35 36 38 44 48   LIST OF FIGURES FIGURE TITLE Figure 3.1. Trend of Foreign Direct Investment for the period 1988-1998 Figure 3.2. Foreign Direct Investment Structure by Sectors Figure 4.1. Analytical framework of the research  PAGE 15 16 20   Chapter 1 INTRODUCTION Background and Rationale Since 1988, Vietnam has been accelerating in the process of transformation from the centrally-planned as having been for more than forty years to a freer market-oriented economic mechanism and merging with the regional and global economies. The “Doi moi” policy of the Government has actually been effective in pushing the economic development of this planned-to-be-80-million-by-2000 nation. It has created more opportunities and favorable conditions for exploiting the internal and external development factors, encouraging investments of different forms, especially foreign direct investment under various modes, including joint venture as one of the most important cooperative strategies for companies to enter and win this rigorously competitive emerging market. According to the information of the Ministry of Planning and Investment, in 1998, more than 260 foreign direct investment projects were licensed with a total registered capital of US$4.06 billion. In addition, 133 projects were approved to increase their investment capital with the amount of US$769 million. Therefore, at the end of the year, a total of US$4.83 billion of direct foreign investment capital were registered. The investment of these projects come from 32 countries around the world, leading by Russia with one project of US$1.3 billion and Singapore with 36 projects and US$893.005 million. More than 70 percent of the projects are joint ventures. Although the renovation policy of the Government has created better environment for investment, a trend of reducing foreign direct investment has been observed during the last recent years. In comparison with 1997, the number of FDI projects licensed and newly registered capital in 1998 was reduced by 21.5 % and 10% respectively. The number of failed joint ventures has been growing, while others have been trying to change the ownership to wholly owned foreign companies. Investors may start to rethink and adjust their strategies to enter the Vietnamese market through joint venture. On the other part of the landscape, the situation is more optimistic. Many international joint ventures have actually found their position in this difficult market, namely Vinacpecial, Proconco, Mekong Concrete Mix, VN/CN Catering Service, and others (Phong, 1995). Some of the joint ventures are continuing to successfully expand the market share and realize benefits such as Telstra, Long An Mineral Co., Chinfon-Haiphong Co., and so on (MPI Report No. 11 BKK/KCN January 1, 1999), despite the current financial crisis in the region. In 1998, the Government awarded certificates of merit (CM) to four foreign invested enterprises: Ajinomoto Monosodium Glutamate (Japan), Vedan MSG (Taiwan), CP Vietnam (Thailand) and Proconco Animal Feed (France) for their outstanding achievements in business activities and implementing social programs for the community. Then, what is actually the situation of the joint ventures in Vietnam? Have the joint ventures been running well? And do they have a future? Many of recent research concentrated on the legal, cross-cultural, compatibility, and conflict aspects of the joint ventures to identify factors for more effective foundation and operation of the joint venture. This study is focusing on assessing the joint venture’s performance with the major objective to help the joint venture partners as well as the potential investors to have an insight into the current situations of the joint ventures in Vietnam and adjust their corporate strategies. Statement of the research problem Knowing how well a joint venture is running is practically important for the managers and participants in the venture to adjust and develop their business strategies. Based on the information from the questionnaires and in-depth interviews with the joint venture managers, this paper is focused on evaluating the performance of the joint ventures in Vietnam. The major problem of the research is therefore to clarify the current performance of the joint ventures, that is, to answer the question of how well the joint ventures have been performed in Vietnam and what problems they meet in their operations. Research objectives The general objective of the research is to help understand the current performance situation of the joint ventures in Vietnam, their achievements and future position in this newly emerging market. Based on the systems analysis approach, an extensive literature review, and in-depth situational analysis, the research would provide useful information for the current joint venture managers to understand the actual situation of the joint ventures and have necessary strategic adjustments. The research also helps potential investors to have more objective views on the situations of the international joint ventures in Vietnam, which would be useful for them in preparing and adjusting their entry strategies into the country. For the policy makers, the research would be an important source of information to give them an insight into the current performance of the joint ventures to have necessary policies for supporting the foreign direct investment companies in general and joint ventures in particular to achieve their goals. Specific objectives of the research can be stated as follows: To develop an analytical framework for evaluating joint ventures; Based on the survey, to evaluate the joint venture performance; To identify the major success factors and how they affect the operational performance of the joint venture; and To make important recommendations for the joint venture managers, potential investors, and policy makers in making necessary adjustments on the strategies and policies. The author would also make a suggestion of further research in the fields of interest for a deeper and more complete assessment of the joint ventures in the country. Scope of the study The study was focused only on the joint ventures in the Central part of Vietnam, mainly Thua-Thien-Hue and Danang, the two major economic centers in the region. So it limits the generality of the research findings. The research did not deal with the issues of partner selection, negotiation, and termination phases of the joint ventures. Instead, the study was focusing only on the joint venture operational performance, based on the interviews and questionnaire data from the managers, currently working in the joint ventures. Therefore, it limits the wholeness of the finding information. Organization of the report The report is divided into six chapters. As principle, the first Chapter is an introduction to the research study. The second Chapter is an extended literature review on the issues of joint venture and joint venture success measuring. Understanding the joint venture and problems related to its assessing would help easier understand the finding information. In Chapter 3, an overview of the foreign direct investment in Vietnam is made to provide an insight into the situations, in which international joint ventures are operating. Occupying about 70% of FDI projects, the joint ventures have actually played important roles in the economic development of the country. Chapter 4 deals with the issues of the research methodology. Conceptual and analytical frameworks are built to guide the research and support understanding the research results. Chapter 5 is the research result. It is subdivided into three sections. In the first section, the questionnaire results are discussed to give an overall landscape of the joint venture performance, based on the subjective information from the questionnaires. In the second section, factor analysis was employed to find key success indicators and how they affect operational results of the joint venture. And the last section is the interviews result of selected managers from the joint ventures to address the operational problems related to the joint venture performance. In Chapter 6, important conclusions about the research finding are made to give an extracted summary on the problems studied. Appropriate recommendations are also made for both policy makers and businessmen interested in the joint venture and its issues. The author also makes suggestions for further research. Additional issues of decision making, communication, and conflict solving approaches are also discussed in Chapter 6 to make clearer picture of the joint venture situations. Especially, a real case of financial performance in a joint venture was also discussed additionally in the appendix section as an illustration of the findings (see Appendix 1). Chapter 2 LITERATURE REVIEW Joint Venture Concepts According to Thorelli, a well-known specialist in International joint ventures issues, in a rapidly changing world environment, firms should build networks “with a vast hierarchy of subordinate, crisscrossing relations” (Thorelli, 1986). An important feature of the global firm’s network is that partners may develop relationships between themselves and collaborate with the market leaders. Alliances thus formed are seen as part of a process of strengthen the firm’s position in an industry and are essential for its survival (Hakansson and Johanson, 1988). A joint venture is formed when two or more firms form a third entity to carry out a productive economic activity (Harrigan, 1985). A joint venture has also been defined as an equity arrangement between two or more independent firms. This definition includes equity alliances between two firms to organize production and marketing on a regional rather than a country level. Joint ventures have increased in various forms and have become more strategic rather than tactical in nature. According to Czinkota, Rivoli, and Ronkainen (1989) joint ventures can be defined as “the participation of two or more companies jointly participating in an enterprise in which each party contribute assets, owns the entity to some degree, and shares risks.” For many developing countries, joint venture is a very important method of technology transfer to acquire and build necessary technological capability for the national industries. One of the most important reasons for forming joint venture companies is to reduce the exposure to risk associated with the development of new products and technologies (Harrison, 1987). Many researchers have emphasized the importance of the joint venture as an appropriate entry strategy to go abroad. For the purpose of evaluating the international joint venture, the definition of Zeira and Shenkar (1990) is suitable because it encompasses the unique characteristics consistent with most other definitions. According to the authors, an international joint venture is “a separate legal organizational entity representing the partial holdings of two or more parent firms in which the headquarters of at least one is located outside the country of operation of the joint venture”. And this entity “is subject to the joint-control of its parent firms, each of which is economically and legally independent of the others”. According to Lane and Beamish (1990), a successful joint venture is a stable, healthy, and profitable business relationship based on cooperation and two-way communication that meets the needs of both partners over a long term, mutual condition. Buchel and other authors (Buchel et al., 1998) argue that joint ventures “are clearly becoming more popular as a form of cooperative arrangement, not only between partners from different countries but also between companies operating in the same business area”. According to the authors, joint ventures “are a form of cooperation, which stand between the traditional mechanisms of economic coordination, that is market and hierarchy”. Researchers have tried to categorize the various kinds of cooperative arrangement between companies. The first important distinction to be made among the different kinds of cooperative arrangement is between contractual arrangements and cooperative arrangements, which involve exchange or contribution of capital, that is equity arrangements. Among the later, a distinction may be made between cooperative arrangements, which lead to the creation of a new entity and arrangements, which involve equity swaps. The extreme form of equity swaps is where the cooperating companies are combined by means of merger and acquisition (Bu