Trade Policy, Firm Behavior & Economic Development in Vietnam - Case Study Example

TRADE POLICY, FIRM BEHAVIOR & ECONOMIC DEVELOPMENT IN VIETNAM: A CASE STUDY Outline Introduction…………………………………………………….2 Trade Policy……………………………………………………..2 Firm Theory……………………………………………………..3 Economic Development…………………………………..4 Conclusion……………………………………………………….5 Works Cited……………………………………………………..6 Introduction Vietnam is a South East-Asian nation famous for its war involving American troops in the 1960s. Vietnam operated as a Communist nation with a small number of Foreign Trading Corporations (FTC), monopolies and a Centrally Planned economy (Auffret 2). In 1986, the government of Vietnam adopted the Doi Moi which is a Renovation strategy for the transition from a purely Communist economy to a free market economy (Freeman). The turnaround in the Asian country’s economy is the main indicator of economic and social activities in the country at present. This paper critically examines the trade policies, firm behavior and the general economy of Vietnam. Trade Policy The key determinant of Vietnam’s trade policy is the 1986 Doi Moi Renovation Policy, which sought to shift the country from the left to a middle position in terms of economic and governance policy system. Under Doi Moi, the government has two positions; the first is to transform the economy from a centrally planned one to a free market economy and the second is to promote export oriented industries (Auffret 2). The transformation of the nation’s economy was done by the devalution of the currency, breaking state-owned monopolies, privatization and the development of trade policy instruments like tariffs, quotas and licensing. The nation also has mechanisms that seek to support export oriented industries like manufacturing industies. The nation has pegged its currency, the Dong to world market prices and it is fixed by the forces of demand and supply. Due to this, prices of goods and services are standardized. This makes it propitious for the elements of the market economy to function effecitvely and efficiently. Vietnam has a trade policy that supports the establisment of private sector companies. This is done through an incentive structure that utilizes tax discrimination to support some private ventures particularly export-oriented manufacturers (Athukoralan). With strengthened structures within the country, Vietnam seeks to expand its influence into other nations around the globe through multilateral and bilateral trade arrangements with other countries. These policies are meant to create a conducive atmosphere for international trade and also create an unending trend of demand for Vietnamese goods around the globe. Vietnam is a member of ASEAN which gives it economic links with its neigbhbors and causes it to follow the collective actions of these nations to protect national interests. It is also a member of the World Trade Organization which in turn enables the country to gain access to many global markets around the world. Vietnam has a bilateral agreement with the US which gives the Vietnamese goods a niche in the United States. In return, many US businesses are being set up in Vietnam to take advantage of the cheap labor and low cost of production that exists in the country. Although Vietnam has a strong support for the growth of privatization and international growth, the country maintains a strong grip on its state-ran institutions with a view of ensuring economic stability and resistance to undue foreign influence (Vuong 7). The state has strong policies like the need for foreign businesses to employ Vietnamese and also meet certain basic requirements that are nationalistic in nature. Firm Theory The concept of organization in Vietnam is also influenced strongly by the transition in the national economy from a planned one to a free market status. Most of Vietnam’s businesses under Communism were owned by the state. Thus, prior to 1986, every worker in the country was working for the government. Doi Moi, the Renovation plan has done three main things to state-owned businesses in Vietnam; first of all, it has stripped state-owned businesses of their protected status, secondly it has led to a lot of competition and finally, the disintegration of state-owned monopolies are manifest itself in the form of outsourcing (MacMillan 287). State-owned businesses were the only businesses that were allowed to operate in the country. Although the transition to a free market has sought to make changes, many state-owned businesses are still strong and they operate in a less pronounced fashion. Prior to the rennovation, state-owned businesses were monopolies and they had so much protection like entitlement to subeventions and less checks and balances. However, with the advent of Doi Moi, state-owned businesses need to justify their budgets and remain productive in their operations. Subventions and legal protections are limited and units that are not productive are privatized. A lot of individuals and groups have broken away from the state-owned businesses to form their own private entities. Over 30,000 businesses have been created after Doi Moi (Vuong 7). This is fueled by labor from the former state-owned businesses. The government also focused on increasing and improving the informal sector by encouraging small and medium scale companies. His is done by the promotion of informal banking and savings systems. This therefore supports petty enterprises and irregular trading around the country (Freeman) The privatization of the Vietnamese economy has let to a lot of competition that the state-owned businesses and other public organizations need to work hard to meet. Also, private sector organizations have a lot of work to do to remain competitive because the state-owned businesses have a pedigree and footing that they hardly have. This therefore means that the competition in the economy is huge and hence, businesses require a lot of effort to remain competitive. Finally, the concept of outsourcing is very much in tune with the country’s private sector development. Units of large state-owned entities that fail to perform are quickly outsourced to more productive private sector organizations that can meet the expectations of these entities. This therefore means that outsourcing is one of the most viable business trends in the country. The business culture in Vietnam is however different from other nations. Managers prefer to run organizations using the traditional controls and this affects the socio-economic systems that promote growth. Additionally, there the challenge of a lack of entreprenural tradition and low business education in the country (Vuong and Tri) Economic Development Vietnam has had a long-standing tradition of being an agrarian economy. The country was colonized by the French, who zoned the north for industrialization and the south for agriculture ((Vuong 2). This division became the basis for the division of the country into two during the Cold War and the proxy wars to followed. This war evidently affected the nation’s economy for the past 30 or so years due to the exodus of refugees and the destruction of infrastructure. However, after the exit of the Americans, the country regained is footing under a single government which remained Communist until the Renovation of 1986, which has changed the country’s economy to what it is now. Vietnam has a strong human resource base. It is the 13th most populous country in the world and its GDP is amongst the fastest growing in the world (Vierra and Vierra 7). This gives it a very competitive status in terms of the cost of labor and this contributes to the country’s status as one that has a stock of cheap labor. The GDP in 2010 stood at a little over US$100 billion and this represented a GDP per capita of about US$1,200 (Vierra and Vierra 7) Vietnam has opened its doors to foreign investors and has a number of economic conditions and statutes that protects foreign businesses in the country. The poverty levels are quite high when compared to the West however, they are at the level of India, China and the Philippines. The Heritage Foundation reports that 49.9% of the economy is free of government interferance. However, the government is promoting certain key activities that will reduce the cost of doing business in Vietnam and also encourage local and foreign investors to do business in the country (Vierra and Vierra 7). These activities include: 1. Production of export goods: The state seeks to give tax allowances and other incentives to businesses that produce for export. 2. Promoting the processing industries so that they can add value to the goods they produce. 3. Investment in high technology 4. Environmental protection 5. Research and development 6. Providing labour-intensive industries 7. Efficient use of raw materials 8. Major infrastructure and project capacities All these come together to enhance the country’s economy. Vietnam is a member of the major international trade blocs like World Trade Organization and Association of South East Asian Nations. It has bilateral links with other nations that acts as a boost to is export situation. Conclusion The Doi Moi Rennovation policy of 1986 moved the country from a centrally planned nation to a free market status. This saw to the privatization and liberalization of businesses in the country. Businesses in Vietnam share features that are as a result of the transition from state-owned businesses and monopolies to capitalist entities. The economy of Vietnam is recovering and there is evidence that it is going to do better in the future. Works Cited Athukoralan, Prema-Chandra. "Trade Policy Reforms & The Structures of Protection in Vietnam." World Economy (2005). Journal. Auffret, Philippe. Trade Reform in Vietnam: Opportunities & Emerging Challenges. Singapore: World Bank Asia Pacific Region, 2003. Print. Freeman, Donald. "Doi Moi Policy & The Small Enterprise Boom in Ho Chi Minh City, Vietnam." Geographic Review Vol 86 No 2 (1996): 178 - 197. Journal. MacMillan, John. Reforming Asian Socialism: The Growth of Market Institutions. Michigan: University of Michigan Press, 1999. Print. Vierra, Kimberly and Brian Vierra. Vietnamese Business Guide: Getting Started in Tomorrows Market Today. Singapore: John Wiley & Sons, 2010. Print. Vuong, Hoang Quan and Dung Tran Tri. "Vietnam Entrepreneural Cultures." IUP Journal of Entrepreneurship Development (2009): 55 - 74. Journal. Vuong, Quan-Hoang. Financial Markets in Vietnams Transition Economy: Facts, Insights, Implications. . Saarbrücken, Germany: VDM Verlag, 2010. Print. Read More