M&As in Vietnam:
Opportunities and Challenges for Multinational Corporations (MNCs)
Dr. Bao Hoang
Introduction
Vietnam is an emerging economy that has undergone structural changes in recent years. The market-based economic institutions have gradually replaced the centrally planned economic system. While there is some inertia in state-owned enterprises (SOEs), the private sector is dynamic and active in Vietnam. In addition, the country has a young population with a decent consumer market size and a skilled workforce. Being located in a strategic region makes the country an attractive destination for Foreign Direct Investment (FDI). As a result, Vietnam has been a dynamic market for mergers and acquisitions (M&A) activities in the last several years. Many of these M&As are enacted by MNCs so that they can quickly access the Vietnamese market. Given the many favorable conditions for MNCs entering the Vietnamese market via M&As, these firms will likely face numerous challenges in carrying out these M&A deals.
The most profound issue MNCs are likely to face in the M&A activities in Vietnam is the need for more market information in the pre-bidding period and the complexity of the post-M&A integration process. These two significant issues are rooted in the country’s economic institutions, socio-culture, and corporate governance practices. Indeed, these institutional factors significantly contribute to the lack of market information about the target firms in the country and the incongruency of corporate governance practices between the international acquirers and the targets in the post-M&A period.
In this article, I will carefully explain and detail both these opportunities and challenges the MNCs should be aware of when they decide to enter the Vietnamese market through M&As. Based on this knowledge, these firms can formulate more effective strategies to cope with these challenges. Additionally, this article provides information that can help Vietnam foster its strengths and improve its weakness to attract more FDI for economic development.
M&As in Vietnam: Opportunities for Multinational Corporations (MNC)
An Emerging Country Located in An Economically Vibrant Region
Vietnam enjoys a strategic location in the Asia-Pacific Region. It borders China from the North and is close to India from the West. These two countries have become the economic and technological centers in the world in recent years. Researchers and practitioners have called China the factory of the world, and the country has become the second-largest economy globally. The Indian economy has been proliferating, and the country soon becomes the third-largest economy in the world. India hosts some of the MNCs’ finest Research & Development (R&D) centers. From the South of Vietnam, the Southeast Asian countries have participated more in the global economy and trade among these countries is more active than ever. As a result, Indonesia and other nations in this region have economically transformed in the last two decades. Vietnam’s long coastal line borders the East Sea, the most strategic part of the Pacific Ocean. Indeed, approximately $ 5.3 trillion worth of goods is passed through this sea annually.
The combination of the populations of China, India, and Southeast Asian countries is approximately 3.5 billion, constituting almost half of the world’s population. While the annual income of the people in the area is much lower than that of people in the OECD countries, their incomes are expected to improve tremendously in the coming years, and their power will increase in the years to come. Also, the middle and upper-income classes are growing in some countries, including China, India, Indonesia, and others, resulting in an emerging consumerist market for standard and luxurious goods. As a result, MNCs have long-eyed and been interested in establishing their presence in this region.
These location advantages make Vietnam an ideal destination for foreign investments in the areas related to production and manufacturing. Firms can produce products in Vietnam and ship them to other major markets in the region where almost half the world’s population lives. In addition, the current global pandemic has exposed the pitfalls of concentrating production and supply chains in one country, China. The risk of putting all eggs in one basket has firms revamping their global production and supply chain strategies. These MNCs have come up with the “1+1” formula. Besides China, the firms will locate their production and supply chain in another country. Indeed, Vietnam seems to be the best “another country”. Both researchers and practitioners agree that Vietnam will be more critical in global production and supply chains shortly.
A Young and Educated Workforce
According to official statistics from international organizations, Vietnam’s population is around 98 million. More than half of Vietnamese are under 35 years old. In other words, Vietnam has quite a young labor force compared to other countries. Many people of the labor age make the country an attractive location for production and manufacturing in addition to the “1+1” strategy from the MNCs. In recent years, the country’s educational level has improved. Working hard on education is rooted in the Vietnamese tradition that bestows high social status upon highly-educated people. Confucianism might also influence this tradition. The number of young Vietnamese with college degrees has increased substantially in the past several years. Education in the STEM field is also the strength of the country. Vietnamese students are good at math and science, and many of them choose to pursue college programs in information technology and engineering when entering college. The emerging high-skill labor force makes the country an ideal investment location for manufacturing and high-tech sectors.
In the past ten years, the young Vietnamese established dozens of well-known tech firms such as Kyanon Digital, SotaTek JSC, Beetsoft, and others. These techs have rapidly grown in size, reaching 1000 employees. These firms usually focus on software development, internet services, and business analytics, serving domestic and international markets. This indicates that the Vietnamese labor workforce has become more tech-savvy. This creates a fertile avenue for MNCs investing in Vietnam to harness the host country’s technology expertise and know-how. Indeed, MNCs have carried out some M&As in Vietnam in the past several years, and many of these M&As happen in the tech sector. This trend will continue and increase soon, making Vietnam a vibrant market for M&As in high-tech and other sectors.
Vietnam is one country that sends many students to the U.S., Canada, Australia, Britain, and other European countries for education. Many of these students have returned to Vietnam to build their careers in recent years. Their education and knowledge are likely to enrich the Vietnamese workforce. In addition, there is a returnee movement in many emerging countries. Some people born and raised abroad prefer to return to their homeland, look for opportunities, and further their career paths. Some Vietnamese expatriates return to their home country after finishing their tenures abroad. These talents bring their skills, expertise, and managerial capabilities back to Vietnam, enhancing the country’s labor force, which is vital in attracting foreign investments.
An Emerging Consumer Market and Tech Adoption
Vietnam is still a country at the middle-income level. Still, the fast-economic growth in the last two decades has expanded the middle and upper-income classes, increasing consumer goods and products. Given that the country’s population is approximately 98 million, a decent proportion of this population in the upper-income level constitutes a sizable consumer market for luxurious goods and products. Indeed, quite many few luxury brands have entered the Vietnamese market in the last several years. These luxury goods are available for a wide range of industries. High-end vehicles such as Lamborghini and Porsche have been present in Vietnam. World-well-known fashion brands, including Tiffany & Co, Montblanc, & Christian Louboutin, have entered the country’s market to serve the increasing appetite for high-class fashion items. The country’s burgeoning of the middle and upper-income classes would attract other high-end goods makers to enter the Vietnamese market, and the entry modes are likely through M&As.
In addition to luxurious goods and products, Vietnamese are early adopters of social platforms, including Facebook, Instagram, and others. Almost 80% of Vietnamese people use Facebook, and this number is surprisingly high for a country at the middle-income level. The Vietnamese people use this social platform in a pretty innovative way. Indeed, many small business owners and farmers have used this social platform to advertise their goods, products, and services and reach out to their potential customers, usually their relatives, friends, or people in their communities. The majority of Vietnamese use smartphones with internet connections. The Vietnamese have shown their good knowledge of digital literacy that was beyond the people’s imaginations about ten years ago. Even Vietnamese farmers can do mobile banking and other financial transactions. Online purchasing has also been popular in recent years in the country.
The country’s digital ecosystem development has attracted numerous M&As by MNCs recently. In 2017, Evolable Asia, a Japanese IT firm, acquired Mag2. Co with ¥ 800 million. Two years later, an American tech firm, MPOS, acquired VIMO with a $ 30-million deal. These are just some instances of M&A activities initiated by MNCs to enter or expand their current market presence in Vietnam in the last several years. The global pandemic has made people worldwide switch to different online platforms. This trend even makes the digital ecosystem in Vietnam more vibrant, which will likely attract more entry from MNCs into the Vietnamese market to access the country’s digital market.
Government Policies Conducive to Foreign Direct Investment
Since pursuing the “Doi Moi” policy in 1986, the Vietnamese government has always believed that FDI is a vital source of capital to foster the country’s economic development. As a result, the government has issued different laws and regulations aiming to attract and regulate FDI. Because M&As are the most popular tool MNCs use to enter Vietnam, these laws and regulations have many provisions related to M&A activities. Given that the Vietnamese laws related to FDI and M&As still have some significant issues that need to be addressed, the government policies are generally conducive to M&A activities. The administrative procedures for M&As enacted by MNCs have been simplified, and most M&A deals are approved promptly.
Vietnam has built different high-tech parks and incubators to promote entrepreneurship and innovations. These parks are used to attract foreigners focusing on the high-tech industry. The Vietnamese government provides tax credits and other incentives that help attract foreign investments into these parks. These high-tech parks and incubators will generate new knowledge and innovation that are spread across the regions through positive externalities. Furthermore, these high-tech parks and incubators are likely to generate high-growth ventures related to technology. Commonly, new ventures with good products are attractive targets of big companies that prefer to acquire these entrepreneurial firms to promote or enforce their technological and innovative capabilities. When building a high-tech parks and incubators system, the Vietnamese government indirectly creates an effective tool to attract FDI, including M&As from MNCs.
M&As in Vietnam: Challenges for Multinational Corporations
Before deciding to enter an M&A deal, the acquirer often collects information about the firm or target. The more information related to the target firm the acquirer has, the more likely the acquirer will make a better bidding offer that reflects the actual value of the target firm. Firms usually face information asymmetry even with domestic M&As, which become exponentially exaggerated with cross-border M&As. Significantly, this issue would be worsened if a target is located in a country whose formal institutions have yet to develop fully and whose national culture is not similar to the culture from which the acquirer comes. In this case, the target is a Vietnamese firm, and the acquirer is an MNC from another country. The lack of information about the Vietnamese target’s internal resources and capabilities, industry, and macroenvironment makes the MNC either under or overvalue the target firm. This endeavor is so consequential that the firm either gives up an opportunity to acquire a high-potential target or buys a firm with an over-bidding offer. The two scenarios both hurt shareholder values.
What is the information asymmetry if an MNC acquires a target firm? First, the target would know more about their internal activities and other information about their firms’ performance than the MNC considered an outsider. In addition, the target firm would know more about its industry and its home country’s institutional environment. In this situation, information asymmetry happens because target firms have more knowledge and information about their organizational activities, industries, and the home countries’ macroenvironment than the acquirer. The target firm knows they have an advantage in this aspect, and the acquirer does not. The target possibly constructs information to get the most benefits from the M&A deal. The acquirer is usually not so naïve that they do not realize that the lack of information about the target puts them in a disadvantaged position. The acquirer would likely mitigate this information asymmetry by gathering as much information as possible from various sources to evaluate the potential M&A deal. In advanced economies, this information is usually available in the market from which the acquirer will obtain the information when considering an M&A deal. This market information quite accurately reflects how the firm performs. However, what happens if there is no or limited market information that tends to happen in developing countries frequently?
Missing out on a promising opportunity to gain a foothold in an emerging market, including Vietnam, is a less-effective corporate strategy, so MNCs work hard on mitigating this information asymmetry. As a widespread practice, these MNCs may reply in market information, including firms’ performance records, financial disclosures, and so forth, to justify the potential M&A deal in Vietnam, reducing the information asymmetry. However, the market information in the country seems to be scarce and limited. The limitations in market information in Vietnam become the cause of information asymmetry MNCs will likely face if they decide to pursue any M&A deals in the country. Vietnam’s market information limitations can be traced back to economic institutions, socio-culture, and corporate governance. These three factors also complicate the restructuring process in the post-M&A period.
Economic Institutions
Economic institutions include regulative frameworks, government policy toward the economy, and other infrastructures supporting economic activities in a country. The economic institutions provide legal frameworks firms have to follow. Vietnam has transitioned from a centrally planned system to a market-based economy in the past three decades. The government’s concept of a market-based economy guided by socialist principles prompted the country not to embrace all typical market economy tenets fully. Indeed, the Vietnamese government has still retained controlled many vital economic sectors. State-Owned Enterprises (SOEs) dominate the market, holding about 30% of the national capital and contributing around 30% of the total GDP. The current Vietnamese regulations seem pretty protective of these SOEs, and public disclosures of their records are not widespread. In other words, Vietnam’s economic institutions do not fully embrace the market-based economy by requiring all market participants to disclose and report their records to the public.
In addition, Vietnam needs more professional associations that confer standards for business practices on firms as developed countries do. Even though these professional associations do not have coercive power as state laws and regulations do, they confer legitimacy on their members by accepting them into their associations. Being willing to join these professional associations means that firms must accept practices and standards dictated by these professional organizations. A member would be ostracized if their practices and behaviors deviate from these standards and norms, losing prestige and legitimacy. These professional associations usually ensure that their members update and report their activities and that these records are published. As a result, these associations are vital sources of market information and ensure that this information accurately reflects the organization’s performance. After Vietnam deeper integrated into the world’s economy, these professional associations started taking shape but are still in the infant stage. Consequently, Vietnam has still missed a vital source of market information.
Socio-Culture
The value or value creation concept needed to be improved in the centrally planned economy. In this type of economy, the central governments are responsible for allocating quotas to SOEs, and these state corporations would produce enough goods and products to satisfy the population’s needs. People have to go with what is available and cannot go with the ones that bring them the best consuming value. In Vietnam, SOEs are still the flagship of the country’s economy. Due to their monopoly power in specific industries, these SEOs have still not prioritised value creation to gain a competitive advantage. In addition, the country did not undergo the industrial revolutions in Western Europe. Street vendors, small business owners, and farmers have been the backbone of the country’s economy, resulting in a short-term orientation focusing on short-term gains and rent-seeking behaviors. The lack of value creation concept and the short-term orientation are prone to cause rent-seeking behaviors in M&A activities. They pay less attention to the notion that M&A is an excellent opportunity for both acquirer and target firms to create value, such as cost reductions, technological improvement, know-how sharing, and new market expansion.
In recent years, the M&A activities in Vietnam have supported the justifications above that many Vietnamese SEOs and SMEs have been seeking a quick exit that can help them earn maximum short-term gains. These firms make use of some schemes. They announced a potential M&A deal with more substantial and reputational partners to raise the confidence that the deal would be successful and profitable. M&As are good opportunities for the target firms to intentionally inflate their actual assets to maximize their earnings. In other scenarios, an SOE can acquire their partners cheaply to benefit the acquirers that are also their partners. The short-term orientation, the lack of value creation concept, and rent-seeking behaviors in M&As are the culprit of the information asymmetry in the pre-bidding period the MNCs are likely to experience when considering an M&A deal in Vietnam.
Vietnam is a collectivistic country, and this cultural trait could become a hurdle for the post-M&A integration process when the MNCs attempt to restructure the Vietnamese target firms and incorporate the target into their systems. The people in the collective culture tend to develop an in-group thinking style. It means that these people tend to bond together, and they would hesitate to cooperate or disclose information to outsiders. When the MNCs acquire a target in Vietnam and start the restructuring process, they may experience a lack of engagement from the target firm’s employees due to the host country’s culture. The employees may not be willing to share their knowledge and information about the firms and local markets with the acquirer because their in-group thinking styles discourage them.
Corporate Governance
The country’s economic institutions and socio-culture shape corporate governance practices in Vietnam. Vietnam still has diverse markets, combining state and private sectors. The SOEs are the economy’s flagship, and their corporate governance still sticks to the model of the centrally planned economy. Specifically, the state is the source of powers and resources that impose the bureaucratic control system on these firms’ corporate governance. The biggest issue with this type of corporate governance is the lack of managerial accountability. These firm leaders easily shirk their responsibility by blaming failures on the upper or lower-level managers. The lack of strict oversight and monitoring mechanism makes discipline and corrective action less likely. One prominent issue related to this corporate governance mode is that they lack transparency. Indeed, many SOEs are not responsible for the public disclosures of their performance records. As a result, MNCs cannot accurately judge the SEOs’ records based on public information. The conflict in the corporate governance modes between the foreign acquirer and the Vietnamese target will likely complicate the post-M&A integration when the MNCs initiate the restructuring process to absorb the target firm into their system.
In the last several decades, the Vietnamese government has equitized many SEOs not in the country’s vital industries. However, the state usually holds most of these firms, discouraging private investors from acquiring equity because they have the legitimate worry that the rights of minor shareholders are not protected. Generally, the bureaucratic control system is still the primary mode of corporate governance in these equitized SOEs. In recent years, there has been an increasing number of private firms. These private firms and their founders have attempted to operate their firms based on market forces. These private firms are much more efficient and innovative than their SEO counterparts. These private firms, including Vingroup and FPT, have become the country’s symbol of success in the modern economy. These firms have become MNCs and operate across many countries. These private firms have proved the effectiveness and agility of market-based corporate governance that emphasizes efficiency, accountability, and transparency. Even though this corporate governance mode is still in the infant stage in Vietnam, enterprises increasingly adopt it.
Conclusion
Vietnam is located in a strategic region whose economic growth and technological development will have a global impact. As a result, this country has received an increasing amount of FDI since “Doi Moi”, a comprehensive economic and political reform in 1986 carried out by the Vietnamese Communist Party. Many MNCs have attempted to gain a foothold in the country to exploit its emerging market. M&As are likely the most popular entry mode these firms choose to enter the Vietnamese market. The M&A activities in Vietnam are expected to become more vibrant in the coming years due to favorable factors, including location advantage, young and skilled workforce, emerging consumer market, and conducive government policies.
However, the academic community has pointed out that more than 50% of the M&A deals have failed, and the failure odds of cross-border M&As would be higher. It is prudent for MNCs to be aware of some challenges these foreign corporations would face when they enter any M&A deals in Vietnam. These challenges can be traced back to Vietnam’s macroenvironment factors, including economic institutions, socio-culture, and corporate governance. Indeed, the under-developed economic institutions to support the market economy, the lack of value creation concept, and ineffective corporate governance in the country are likely to complicate the M&A activities carried out by the MNCs both in the pre-bidding period and post-bidding integration period.
