FOREIGN TRADE UNIVERSITY

FACULTY OF INTERNATIONAL ECONOMICS

GROUP PROJECT

Subject: International Investment

CASE STUDIES ON THE MOTIVATIONS, SELECTION

OF ENTRY MODES OF CERTAIN TNCS IN VIETNAM

THE CASE OF HONDA MOTOR CORPORATION

Group: 10
Class: K53CLC2
Class ID: 07
Supervisor: Pham Thi Mai Khanh

Ho Chi Minh City, April 5, 2016

 GROUP LIST
No. Student ID Full name Note
1 1401015591 Trình Thị Thu Trâm
2 1401015597 Trần Nguyễn Minh Trân Group leader
3 1401015599 Cái Thùy Trang
4 1401015615 Phạm Thị Ngọc Trang
5 1401015617 Võ Thị Thiên Trang
6 1401015621 Lê Văn Triết
 1

TABLE OF CONTENT

LIST OF FIGURES................................................................................................iii
LIST OF ABBREVIATION...................................................................................iv
INTRODUCTION....................................................................................................1
CHAPTER 1: THEORETICAL FRAMEWORK.................................................3
1. The OLI paradigm...........................................................................................3
CHAPTER 2: MOTIVATIONS FOR HONDA FDI.............................................5
IN VIETNAM...........................................................................................................5
1. Ownership-specific advantages.......................................................................5
1.1. Brand..........................................................................................................5
1.2. High-quality products with reasonable price.........................................5
1.3. Honda service and added in activities.....................................................6
1.4. Diversification of products design...........................................................6
1.5. Business relations and networking..........................................................8
1.6. ASIAN market understanding.................................................................8
1.7. Unique technology.....................................................................................8
2. Internalization advantages..............................................................................9
3. Location-specific advantage..........................................................................11
3.1. Economic determinants..........................................................................11
3.1.1. Market-seeking:................................................................................11
3.1.2. Resource-seeking..............................................................................13
3.1.3. Efficiency-seeking.............................................................................16
3.2. Policy framework....................................................................................17
3.3. Business facilitation.................................................................................19
3.3.1. Investment Agreement.....................................................................19
3.3.2. Trading and distribution rights......................................................21
3.3.3. Inflation and exchange rate.............................................................22
 2

3.3.4. Industry specific institution.............................................................22

COMMENTS..........................................................................................................23
CONCLUSION.......................................................................................................25
BIBLIOGRAPHY..................................................................................................26
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LIST OF FIGURES

Figure 1: Some of Honda’s products..........................................................................7

Figure 2: Vietnam population by Statical Publishing House 2008..........................12
Figure 3: Population Structure by ages in Vietnam 1979-2007 by Population and
Housing Census 2007...............................................................................................15
Figure 4: Workers’ average basic salary in some cities in the world.......................16
 4

LIST OF ABBREVIATION

AFTA Asean Free Trade Area

APEC Asia-Pacific Enterprise Cooperation
BTA Bilateral Trade Agreement
CBU Complete Built Up
CEPT Common Effective Preferential Tariff
CIL Customary International Law
FDI Foreign Direct Investment
FIC Foreign Invested Company
FTA Free Trade Agreement
GATS General Agreement on Trade and Services
IMF International Monetary Fund
JICA Japan International Cooperation Agency
MFN Most-Favored Nation
MOLISA Ministry of Labour, Invalids and Social Affairs
ODA Official Development Assistance
OHV Overhead Value
R&D Research and Development
TEL Temporary Exclusion List
TNC Transnational Corporation
TPP Trans-Pacific Partnership
TRIMS Trade Related Investment Measures
TRIPS Trade Related aspect of Intellectual Property Rights
VEAM Vietnam Engine and Agricultural Machinery
WTO World Trade Organization
 1

INTRODUCTION

Nowadays, the terms FDI – Foreign Direct Investment and TNCs – Transnational
Corporations are not unfamiliar terms anymore to all of us. We can easily find an
Apple factory in China, Toyota in the United States, Samsung in Russia, and
everywhere all over the world. Pick up any newspapers or research papers in the
library, it is not hard to find an article telling about the long-history success of these
TNCs, which strategies they chose to win the market, how they contributed to the
society. However, within this research, we do not mention much about that. We
concentrate on providing the reader about what factors lie behind the decision of
FDI of TNCs, or determinants of FDI, and why they choose a country to invest in,
not other countries. These motivations and selection of entry mode into a certain
country are of essential decisions as they affect the success of the TNCs in the
long-run.

In this research, we choose the case of Honda Motor Company when they entered
Vietnam in 1996 to analyze the motives and determinants of entering Vietnam,
based on OLI paradigm (Dunning, 1993a). Honda is a Japanese transnational
corporation known as a manufacturer of automobiles, motorcycles and power
equipment. Before Vietnam, Honda had assembly plants around the globe: China,
the United States, Thailand, Malaysia, Indonesia,.. Since the 1960s, Honda’s
products in Vietnam came mainly from imports. Honda had a good reputation in
Vietnam market, even when it came to motorcycles, Vietnamese often called them
as “Honda motorcycles” regardless of what motorcycle brands they were. In 1995,
Honda decided to establish company in Vietnam, with the most important goal is to
 2

seek for market. So why did they choose Vietnam? What were their competitive
advantages then to enter Vietnam? Why didn’t they keep exporting motocycles to
Vietnam, or licensed to an existing entity in Vietnam instead of establishing a
subsidiary there? Let’s go find the answer for these questions, about the
motivations and determinants of FDI of Honda in Vietnam.
 3

CHAPTER 1: THEORETICAL FRAMEWORK

1. The OLI paradigm

The OLI paradigm is a widely used theory to explain FDI. It states that FDI
happens when these three determining factors exist simultaneously:

Ownership-specific advantages: firm-specific competitive advantages compared

with local firms that can compensate for the additional costs of establishing
production facilities in a foreign environment and help firms overcome their
disadvantages compared with local firms in foreign countries.

Location-specific advantages: country-specific advantages that firms can combine

with their firm-specific competitive advantages by establishing production facilities
in foreign countries.

Internalization advantages: presence of superior commercial benefits for firms

resulting from the exploitation of ownership-specific and location-specific
advantages by investing in foreign affiliates that they control, rather than through
transactions with unrelated firms located abroad.

For a couple of years, the OLI model has remained the significant framework for
analyzing the activities of transnational corporations (TNCs) and the economic
rationale behind their international operations. This model also referred to as the
eclectic paradigm proposed by J.H. Dunning was first postulated in 1976. It
elaborates the decision and growth drivers that enable firms operate in international
production (Stefanovic 2008). The paradigm which has been broadly applied in the
past to explain entry mode decisions and supported by several empirical studies
 4

(Zhao 2005) is also not totally accepted, and described as limited in its accuracy to
extrapolate definite methods of international operations.

There is a heightened consciousness that FDI operations are also determined by

other factors beyond the economic advantages of the OLI framework. The gravity-
model is one of the models which attempt to modify the limitations of the eclectic
paradigm; it explores the process of international production and trade, inclusive of
the OLI variables (Mateev 2008). Also in view is the fact that the underlying
motives for production vary between regions which Dunning’s theory failed to
consider. A typical case to illustrate this is the fact that factors which influence
foreign investment in a coal or Iron ore abundant region in Africa is likely to differ
from those influencing investment by a car manufacturing company in Asia.

However, the OLI framework has proven to be helpful in determining the basic
motives that guide the international operations of TNCs and has set a well-informed
ground work for studies in international investment, business and economics. It is a
helpful framework for classifying a good number of recent FDI researches. With
the limited time to do this case study, we found that OLI is an appropriate paradigm
for us to achieve our research’s goal: analyze the motivations and determinants of
FDI of Honda in Vietnam.
 5

CHAPTER 2: MOTIVATIONS FOR HONDA FDI

IN VIETNAM

1. Ownership-specific advantages
1.1. Brand
Honda has been a well-known multinational corporation in the world coming from
Japan, a country which is famous for qualified products and services. With the
characteristics of carefulness and responsibility of Japanese, the strict management
from the office to factories in the checking process makes every product going to
market completely perfect ones. In the United States, according to R. L. Polk &
Company, a provider of automotive information and marketing solutions to the
automotive industry, Honda has ranked No. 1 in owner loyalty in its industry. Not
only having good reputation all over the world, Honda also gains the trust and
admiration in the hearts of most Vietnamese. Vietnamese people easily put their
belief on Honda due to its home country and it’s brand. In Vietnam, people even
use the word “Honda motorcycles” to imply motorcycles in general, regardless of
which brands they are.

1.2. High-quality products with reasonable price

Honda motorcycle is famous for its high quality for long time use and reasonable
price. Compared with products of some others famous brands such as Vespa from
Italy, only rich people can afford a Vespa in Vietnam. Also, some Chinese
motorcycle have low prices and Vietnamese can easily buy one. However, the
quality is not high and the machine often breaks down. Compared to these
 6

motorcycles about quality and price, Honda is acceptable for Vietnamese people to
consider about the quality and service they can receive from a motorcycle and also
the price they have to pay.

In fact, when Honda Vietnam introduced its low-price Wave Alpha, it caused a
sensation among consumers for whom a Honda had previously been out of reach.
Priced at just VND 11m (Dollars 720) - less than half the price of the more up-
market Super Dream model - Wave Alphas sold as fast as Honda could make them.

1.3. Honda service and added in activities

Honda focuses strongly on the customer experiences, there are a lot of service team
around the country to repair Honda products. With qualified and enthusiastic
employees, Honda rapidly become the best scooter brand in Vietnam.

Honda’s slogan is: “The power of dream”, which means everyone has a dream, a
thing makes them happy and gives them motivations in their life, and Honda want
to bring that dream to all people in the world. Honda focuses on society activities.
Not only product introduction but also training about traveling laws, how to be safe
when traveling… With many campaigns such as “Tôi yêu Việt Nam” later which
can prove the variable aspect of Honda. In comparison with local Vietnamese
enterprises with poor experiences in customer services and marketing strategies, the
aforementioned advantages are most-striking strengths of Honda.

1.4. Diversification of products design

The experience in designing its products suitable and fitting the taste of consumers
in different cultures that Honda gained from running business Asia, Europe, South
America was also a competitive advantage of Honda. Choosing a motorcycle
design model is never easy to satisfy the majority of Vietnamese. They judge the
 7

Honda motorcycles in Indonesia or Malaysia as unfashionable and not trendy. So

the Honda’s experiences in varying the product designs would help Honda satisfy
these difficult customers.

Figure 1: Some of Honda’s products

 8

1.5. Business relations and networking

Business relations are also vital for the new venture. The operation of Honda relies
heavily on the Honda procurement-network in the region. With the wide network
all over the world, ranging from America to Asia, the transportation of the
accessories has been made easier for Honda. This helps Honda save transportation
cost as well as R&D cost, since people in nearby regions often share the same
tastes.

1.6. ASIAN market understanding

Being an Asian company, Honda have good understandings about Asian region’s
habit and interest, so they easily understand Vietnamese. ‘Asian culture is based on
a community spirit and obligation. Our cultural affinity to the Vietnamese was a
reason for our confidence in making our investment into Vietnam a success’.
(Satoshi Toshida, 2008).

1.7. Unique technology

With the pushrod overhead valve (OHV) air-cooled four stroke single cylinder
engine, Honda motorcycle uses less gas and less exhausted fume to environment,
enabling people to save fuel cost, and also meeting emission standards of most
countries. Compared with the two stroke engine of other brands such as Yamaha,
Suzuki, and other European and Chinese ones, the four stroke engine is more
favorable in Vietnam market. They told that the air-cooled four stroke single
cylinder engine makes them feel comfortable when riding and look more elegant.

These advantages make Honda overcome all the disadvantages when approaching
Vietnam market, so which kind of entry mode did Honda choose to approach
Vietnam market?
 9

2. Internalization advantages
According to the previous advantages, Honda Motor Corporation can consider
leveraging these advantages abroad. There are two main different options for them
to expand their operation: export, licensing, franchising; or FDI forms such as
associate and subsidiaries. Each option has its own advantages and barriers for
every TNC, which depend on both the host-country and home-country regulations,
potential partners, product markets, government or non-government trade
barriers,... However, Honda Motor Co., Ltd. chose internalizing FDI via joint-
venture with Vietnam Engine and Agricultural Machinery Corperation (VEAM).
Which Honda Group contributes 70 percent of the legal capital (Honda Motor Co.,
Ltd contributes 42 percent and Asian Honda Motor Co., Ltd contributes 28 percent)
and VEAM contribute 30 percent of the legal captital. So why did they make such
decision? This is mainly because the imperfection of the markets.

First, Honda cannot choose to export a large number of motorcycles into Vietnam
due to the regulatory barrier from the government. Vietnamese government applied
a 60 percent tariff rate on imported complete motorcycles in order to protect the
local market. The industry has been protected by a high tariff on motorcycle
imports that, until 2000, the domestic price had been at about 1.5 times higher than
the price of similar models in Thailand, the price that Vietnamese people can hardly
afford as most of them are in the middle-income class. In fact, before and even after
establishing a company in Vietnam, Honda had exported motorcycles to Vietnam
market, but only in a small number due to the barrier. Therefore, choosing export as
a main approach to the Vietnam market is proved to be an inappropriate solution.
 10

Second, if Honda chose licensing or franchising, the corporation could find it hard
to look for a Vietnamese company to corporate with due to some factors like the
low-level of technology, the manufacturing capabilities, meanwhile Honda wanted
to maintain the production quality to keep their reputation. Technology helps to
attain product quality, as well as cost control. Even though there is nothing
advanced in the technology to make standard motorcycle models, technological
know-how, managerial know-how, and practical experience are needed to obtain a
consistent level of high quality and reliability.

Therefore, Honda decided to internalize their operation, that is, investing in foreign
affiliates that they control, rather than through transactions with unrelated firms
located abroad. This internalization practice helps the firm to exploit ownership-
specific advantages and also location-specific advantages that will be discussed in
the next sections.

Honda chose to establish a joint-venture with Vietnam Engine and Agricultural

Machinery Corporation (VEAM), while with the experiences and skills, they
actually could open a 100 percent wholly own subsidiary and operate it on their
own in Vietnam. In fact, instead of contributing to the technology, the primary role
of this VEAM is merely to support Honda in land ownership and building
headquarters for the joint venture. This is clear from the fact of the 15 subsidiaries
of VEAM are failed to become suppliers of components for the joint venture with
Honda.

The reason is that as many communist conservatives feared that domestic

companies would not be able to compete and would quickly go out of business, so
the attraction of foreign investors and companies was a risk. In the early 1990s,
 11

with the government objective of attracting foreign investors into the automobile
and motorcycle industry, few FDIs were allowed to take the form of 100 per cent
foreign-owned. Later on, joint venture with Vietnamese enterprises was effectively
the only choice for Honda in this sector.

As soon as Honda Motor Co., Ltd. gained the ownership and internalization
advantages, it had to choose the country to invest in. So at that time, why did
Honda invest in Vietnam?

3. Location-specific advantage
The location-specific advantage, also known as unique advantages of host country,
is extremely important factor to determine which country is the destination of
TNCs.

3.1. Economic determinants

Economic determinants play a vital and basic role when TNCs make the decision.
Honda has lots of targets when entering Vietnam market such as market-seeking,
resource-seeking, efficiency-seeking. Among these factors, as mentioned in
introduction part, the most important motivation as well as the target of Honda is
market-seeking.

3.1.1. Market-seeking:
The entry of Honda into Vietnam might be seen as a result of several forces, one of
which is the size of the Vietnamese market.

+ The booming Vietnam economy, which was matched by the rising incomes
of a vast section of Vietnamese residents and the new ability to purchase luxury
items with excess income, meant the demand for motorbikes consistently increased
 12

over the last few years. The Transportation Police Bureau-Vietnam declared the
number of registered motorbikes in the whole country increased by about 12 per
cent annually in the period of 1995-1999. By the end of 1999, in the 77-million
population (as in table 1) there were approximately 20 million bicycles and 5.6
million motorbikes. In the year 2000, total number of motorbikes sold by all
motorbike assemblers over the country reached 1.4 million sets. Annual sales of
bicycles in recent years is estimated as of from 700.000 to 1 million units (Le Anh
Tuan, 2001; Ministry of Industry, 2007) and the motorcycle as the main
transportation means, Vietnam was definitely an attractive market.

Figure 2: Vietnam population by Statical Publishing House 2008

+ In the structure of traffic in Vietnam, 82.2% is road (table 2), 61% vehicle
is motorbike. With the improvement of standards of living of the Vietnamese
people, the demand for a more modern mode of transportation increased, but it
needed to be suitable to the Vietnamese transportation conditions, with its narrow
 13

streets, often very crowded pavements and roads, numerous small ‘on the street’
traders, low incomes and a weak management system for transportation.

+ Due to the psychology of Vietnamese, they have tendency to use foreign

goods, especially Japanese goods. In their minds, all foreign goods are high quality
and users of foreign goods is considered connoisseurs.

+ Vietnamese customers wanted a flexible and easy to use form of transport

that was also easily maintained through the access to components. Whilst the high
income levels preferred to regularly buy a new bike, the vast majority of the
population would make a single purchase which they then focused on repairing
themselves or at any local motorbike repair shop (Nguyen Duc Tiep, 2007;
Mishima, 2005). To sustain the market for Honda bikes and to establish a dominant
competitive advantage, the new Honda project needed to ensure that it not
only provided the complete bike, but also provided a constant and readily
accessible supply of components for repairing and maintaining all models.

Recognizing the huge demand for such motorcycles, in recent years many suppliers
on the motorcycle market enter Vietnam. The famous motorcycle manufacturers in
the world such as: Honda, SYM, Suzuki, Yamaha,... have conducted joint ventures
with Vietnam to manufacture and supply to consumers in Vietnam. In addition,
during the past 5 years, the motorcycle market has diversified even more diverse
today by the Chinese bikes are imported as well as mass production in Vietnam.

3.1.2. Resource-seeking
It would be very costly for Honda to apply all the high-tech robot systems of their
Japanese factories into another country. Therefore, when entering into a country,
 14

they also paid great attention to the labor force in the host country. And Vietnam
have excellently met this demand of Honda.

+ Vietnamese employees are often endowed with good technical skills and are
able to quickly learn the necessary assembly skills and this is also aided by the
relatively simple production methods used by Honda.

+ The Vietnamese worker still commanded only a fraction of the Japanese

worker wage, ensuring that Honda company could still produce to the same high
quality, but at a far lower cost radio. In terms of human resources, Vietnam has
60% of the population under age 30 (table 3), one of the youngest populations in
Asia, 94% of people know how to read, write, work very diligently and
productivity. The cost of labor in Vietnam is very low, averaging only from 55 USD
to 110 USD / month (table 4 ).
 15

Figure 3: Population Structure by ages in Vietnam 1979-2007 by Population and

Housing Census 2007
 16

Figure 4: Workers’ average basic salary in some cities in the world

3.1.3. Efficiency-seeking
Low labour costs and the quality of the human resources are still an indispensable
factor in the attraction of FDI, coupled with the need for a system that allows easy
recruitment of that labour and the opportunity to improve the technical skills of the
labour force (Bui Anh Tuan, 1991). TNCs are attracted by countries that
concentrate on development their human resources. This has become a high
priority issue in Vietnam where the skills levels and productivity of the labour
force need a lot of improvement. Nevertheless, the Government is trying to
overcome these problems. For example, a MOLISA policy document (Paper No.18-
MOLISA- ‘Labour and Social Issues Emerging from Vietnam WTO Entry) notes
how FDI Law has consistently developed to encourage a favourable labour market
climate for investors.
 17

3.2. Policy framework

Vietnam political stability creates security for investors when doing business in
Vietnam.

- Motorcycle industry affected by the tax, commercial law, business law.

- Motorcycles CBU imported from abroad must bear the tax rate of 30-40%, the
imported components are assembled in the country also suffered a 20-25% tax rate,
the clear, localized cars will have significant advantages in terms of price
competition, especially in moderately priced cars.

- Vietnam's law provisions at least 18 years old to use the motor as age restrictions
on use of motorcycles.

The two basic pillars of the policy on foreign direct investment in Vietnam are to
protect and to encourage the foreign investors.

* For the first pillar:

- After 1986, adopting economic innovation policies, Vietnam opened its door to
global investors, and the National Assembly enacted the ‘Law on Foreign
Investment’ to encourage multinationals investing capitals and technologies in
Vietnam, guaranteeing the ownership and rights of foreign investors in jure. In the
following years, a series of revised policies including tax and tariff, monetary, land,
etc, have been put in place to improve the investment environment.

- All of the assets of foreign investors have been strictly protected in

Vietnamese territory
 18

+ The Vietnamese government is committed to never nationalize the assets of the

foreign investors and behave towards both domestic and foreign investors on an
equal basis (NAV, 2005j).

+ The foreign investors have the right to transfer their lawful capital and assets
abroad after completion of all financial rights for the Vietnamese government.

+ Law has been supplemented and amended several times, the main direction of
these amendments is to create the attractive environment for foreign investors and
to enhance the competitiveness of investment environment in Vietnam with the
other regional countries.

+ The Vietnam-Japan Co-operation Initiative has also provided Honda the

opportunities to expand their market due to a commitment for long term
development of both sides. The regulations on protection of intellectual property of
foreign investors have been addressed seriously and every effort made to execute it
successfully.

* For the second pillar:

+ The foreign investors have been allowed to take many incentives from
investment policies for their investment in Vietnam in terms of land clearance, tax
refunds and exemptions. The Law on Foreign Investment in Vietnam stipulated the
highest level of corporate income tax at 25 per cent and then to increase this to 28
per cent in the following years, in order to harmonise with the tax levied on the
domestic enterprises of 30 per cent (Pham Duy Nghia, 2006). However, from 2007,
the tax was again decreased to the 25 per cent level (‘Tax reform’ Vietnam News,
Dec. 2007). The withholding tax levied on foreign invested enterprises for their
 19

profit transfer out of Vietnam to home countries has been reduced from the 7 per
cent level to zero.

+ The foreign investors have been also treated as the same to that of domestic
investors in accordance with WTO principles. Advantages from a friendly
relationship between Vietnamese and Japanese governments, especially as Japan is
the main donor of ODA for Vietnam. In fact, the majority of ODA of Japan
provided to Vietnam flows in the improvement of infrastructure for smooth
circulation of the transportation and means it thus directly impacts on the future
prosperity of Honda motorbikes. The strategic economic partnership built by high-
ranking officers of Vietnam and Japan is a politically favorable environment for
long- term investment of Honda in Vietnam (Ohno, 2003).

+ The institutional environment for Honda Vietnam Company has also been
surrounded by comprehensive interactions of several supranational Japanese
agencies such as JICA, JBIC and other intelligent economic units of the motorbike
manufacturers. These agencies become the ‘antennas’ to provide Honda ‘just-in-
time’ and all-around sources of information in the motorbike market, thus enabling
Honda to remain ahead of the competition.

3.3. Business facilitation

3.3.1. Investment Agreement
After that Doi Moi policy in 1986, immediately in 1991, Congress had stated their
intention to "diversify" and "multilateralisation" of economic relations with other
countries, creating favorable environment to attract foreign investment,
participation in organizations, other international associations as necessary and
conditional.
 20

Vietnam became an official member of ASEAN since 1995. Vietnam participated

Common Effective Preferential Tariff (CEPT) under the framework of ASEAN
AFTA Vietnam in 1996. But the only real tariff cuts since 1999 when the first group
of items from the temporary exclusion list (TEL) was transferred to the tariff
reductions under the CEPT. Under the provisions of the CEPT Agreement,
Vietnam's items are divided into two main groups: Group items of reduce and
eliminate tariffs and sensitive agricultural products group.

These government policy create the opportunity for Honda entry to Vietnam market
easier, especially after two countries establish FTA relationship from 2003 and sign
the FTA agreement in 2006.

These Vietnamese government ‘s actions lead to expectation of more open policy

for foreigner in the future.

In fact, Vietnam’s entry into APEC, AFTA, WTO and numerous bilateral
commercial agreements indicates the government’s commitment to development of
investment policies after joining in ASEAN.

Vietnam became a member of the WTO in January 2007. It is a signatory to the

General Agreement on Trade and Services (GATS), WTO’s Trade-Related Aspects
of Intellectual Property Rights (TRIPS) and Trade-Related Investment Measures
(TRIMS) agreements. Vietnam did not sign up to WTO’s optional Agreement on
Government Procurement.

Under the WTO rules, Vietnam must extend national treatment to the projects of
investors from WTO member countries. This means that Vietnamese and foreign
invested projects like projects from Japan should be treated equally. In fact, this
 21

principle has been reflected in the CIL and the Government is reviewing a range of
legislation to ensure that national treatment extends to all business regulations.

Vietnam has bilateral investment agreements with Japan. In 2016, negotiations of a

Trans-Pacific Partnership trade agreement (TPP), in which the both the Japan and
Vietnam participate, address investment issues. With TPP, tax will be completely
eliminated.

The tax on remittances of investment-earned profits abroad was decreased until

eliminated in 2004.

3.3.2. Trading and distribution rights

The Vietnamese Commercial Law (2005) has been significantly amended,
establishing a new legal framework for foreign participation in the import and
distribution sector. While previously foreign investors could only conduct
commercial activities from representative offices and branches, the new
Commercial Law allows foreign invested enterprises to independently conduct
commercial activities (NAV, 2005c). In accordance with market access
commitments contained in international treaties to which Vietnam is a signatory,
the Decree No. 23/2007/ND- CP dated 12 February 2007 of the Government
provides the legal basis for foreign-invested companies (FICs) to engage in trading
and distribution activities (NAV, 2007a). This bring more advantage for Honda to
conduct their own commercial activities.

Vietnam also gives MFN status to investors from Japan. However, before enjoying
BTA trading and distribution rights, an existing manufacturer must first amend its
license through application subject to government approval. Thus, Japanese
enterprises would not automatically enjoy trading rights and distribution rights
 22

under BTA without going through further legal mechanisms of approval (Kurtz,
2004; Seow and Ching, 2008 p.1-30).

3.3.3. Inflation and exchange rate

Government launches policies reducing inflation rate to create an investment
environment with less risk.

Exchange Rate: A relative depreciation of the host country’s currency results in

increasing FDI inflow to Vietnam. Depreciation of exchange rate strengthens host
market’s competitiveness due to lower cost of manufacturing assets and natural
source, and therefore more FDI are injected into Vietnam market. It is also
supported by Vietnam’s frequent going-down exchange rate regulation in practice,
annual depreciation rate of 426%, from 166.73 to 17065.1 VND against 1 USD
during the last 25 years

3.3.4. Industry specific institution

In the case of Vietnam automotive represents a positive influence of industrial
policy. In fact, the automotive policy may have been absolutely critical for the
establishment of export-oriented automotive components industry. A key element
of this policy has been a tariff regime for imports of cars and components based on
local contents with import-export complementation. Local content is measured on a
“net foreign exchange usage” basis, which allows export revenues to be deducted
from the value of imports on which tariffs were to be paid. Local content
requirements have encouraged the development of local supplier network serving
Honda’s motorcycle manufacture in Vietnam, where Japanese foreign investors
have established some key suppliers.[Sau04]
 23

COMMENTS

Another approach to explain Honda FDI in Vietnam is using the Product Life-Cycle
Theory.

International product life-cycle theory provides a theoretical explanation for both

trade and FDI. The theory, developed by Raymond Vernon, explains why U.S.
manufacturers shift from exporting to FDI. The manufacturers initially gain a
monopolistic export advantage from product innovations developed for the U.S.
market. In the new product stage, production continues to be concentrated in the
United States even though production costs in some foreign countries may be
lower. When the product becomes standardized in its growth product stage, the U.S.
manufacturer has an incentive to invest abroad to exploit lower manufacturing costs
and to prevent the loss of the export market to local producers. The U.S.
manufacturer’s first investment will be made in another industrial country where
export sales are large enough to support economies of scale in local production. In
the mature product stage, cost competition among all producers, including imitating
foreign firms, intensifies. At this stage, the U.S. manufacturer may also shift
production from the country of the initial FDI to a lower-cost country, sustaining
the old subsidiary with new products.

The first complete motorcycle, with both the frame and engine made by Honda,
was the 1949 D-Type, the first Honda to go by the name Dream. Over the next few
decades, Honda worked to expand its product line and expanded operations and
exports to numerous countries around the world. This is Honda’s initial stage
according to the production life-cycle theory. Honda Motor Company grew in a
 24

short time to become the world's largest manufacturer of motorcycles. After the
standardization of products in the growth stage, Honda started to conduct local
motorcycles production through many joint-ventures or wholly owned subsidiaries
in the United States (1959), Thailand (1965), Canada (1969), Philippines (1976),
India (1995), China (1996), and Vietnam (1996) was also among this trend of
Honda. Honda had exported Honda Cub, Honda Dream to Vietnam since its initial
stage of life-cycle since 1960s. However, until its growth stage, Honda decided to
establish company in Vietnam in 1996 as Vietnam motorcycle market at that time
was still new, Vietnamese people were in high demand of motorcycles then and
there was not a lot competitors in the market.

In fact, prior to Vietnam, Honda had exploited all the potential emerging markets
from North America to Asia, and the timing of entry into Vietnam was relatively
late compared with other Honda’s entries. However, so as to make a decision
whether to enter Vietnam or not, Honda still had to consider many motivations and
determinants of FDI as presented in detailed in the previous part, which follows the
eclectic theory of Dunning.

On undertaking FDI in Vietnam, Honda faces a lot of problem from the government
policies, the market, the competitors,... However, Honda has been successful in
dealing with those obstacles to have the biggest market share of Vietnam
motorcycle industry with 65 percent, and 640 authorized resellers (HEAD),
produces 2.5 million motorcycles per year, and has 3 factories after 20 years in
Vietnam.
 25

CONCLUSION

This case study has demonstrated the reasons why Honda choose to undertake FDI
in Vietnam, based on some theories of foreign direct investment. On doing this
research about the case of Honda, our group has the opportunity to understand
more about FDI, the FDI theories and about TNCs, what are their motivations and
what factors affect their decision when choosing to go abroad and invest in a
country. Moreover, we notice that our country – Vietnam has a lot of location
advantages that need to be developed more to increase our global competitiveness
in attracting FDI.
 26

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