Thesis on "International Business Foreign Direct Investment Project"

Thesis 8 pages (2198 words) Sources: 1+ Style: APA

[EXCERPT] . . . .

International Business (Foreign Direct Investment Project)

McDonald's is a worldwide fast food restaurant chain with presence in over 100 countries. The company's success was mainly generated by franchising its business solution to many users and carefully making sure that every rule is strictly followed.

Establishing presence in new markets around the world would only benefit this American corporation because it would help its expansion furthermore and its recognition in the world.

Among the countries in which the restaurant chain doesn't currently have an established location, some emerging Asian markets such as Vietnam, Mongolia, Laos and Mongolia are included.

This paper will investigate the feasibility of entering the Vietnamese market as a democratic and emerging economy in South Asia. The feasibility study will cover several types of market entry, including foreign direct investment and franchising with no corporate owned business.

Vietnam is a developing country with an emerging economy that is expected to change its living habits to adjust to global trends and increased fast food consumption due to reasons, such as increased involvement of the female population on the labor market, less time dedicated to household activities and so on. Also, with the opening of the economy and its development, foreign people visiting or living in the country are estimated to increase in number, which can have an impact on the local eating habits.

The analysis will take under consideration the company's specific competitive advantages, the country's macroenvironment factors (economic, social/cultural and political) and the specifications/characteristics of each type of market entry mode and potential consequences on the parent company, franchisees and the consumer.

1.

Specific competitive advantages of enterprise

McDonald's is a well-known and worldwide successful franchise from the food industry. It can be seen as a recipe for business with the success almost guaranteed, provided that the franchisee respects the franchisor's standards of quality, service, cleanness and value. Moreover, McDonald's provides all the training and support needed to run the business.

McDonald's is a successful tested formula that doesn't require additional research and development costs to be proven. Its cooking process is broken down into small, repetitive activities, which festers high efficiency among employees. Additional efficiency is generated by economies of scale, which are enabled by the division of labor and high volume turnover. Therefore, for the investor/franchisee the risk is reduces as it doesn't have to invest time and resources in market research or product development; McDonald's is taking care of these activities.

Each start-up needs to complete a nine-month training paid fully by the franchisee. The training covers a wide variety of topics, ranging from wearing the staff uniform to preparing foods. The training is compensated by continuous support, which is provided by a highly qualified team of professional consultants.

McDonald's is a well-known brand that enjoys a top-of-mind image in almost any country in the world. Most of the tourists, expats, foreign students or a foreign from any other category is familiar with this brand as at least once it their life they eat something from this chain of restaurants. When operating a McDonald's franchising, the franchisee implicitly has access to the company's brand name, sign, symbol or design. The multinational coordinates its marketing activity at global level, being an active participant in international events with high media exposure, such as the Olympic Games or Football Cups.

2.

Developing foreign country

a.

Analysis of economic factors

The Vietnam War destroyed most of the country's economy. After the war, planned economy was adopted by the Government. The first market economy reforms were introduced in 1986 with the occasion of the Sixth Party Congress. The most worthy initiatives at that time referred to the encouragement of private ownership in industries, commerce and agriculture. The country reached 8% GDP growth between 1990 and 1997 and 7% between 2000 and 2005. Over the same period, foreign direct investment increased threefold. Nevertheless, Vietnam is a relatively poor country, with $1,040 GDP/capita (2008 estimates

), and with a relatively large number of persons living in deep poverty -- also known as the percentage of population living with less than $1/day. On the bright side, the number of people living in deep poverty is decreasing substantially from one year to another and the inflation reached a stable 7-8%.

Following new land reforms, Vietnam become the largest cashew nuts producer with one third global market share and the second largest rice exporter in the world after Thailand. Other products included in the exports from this country include: coffee, rubber, tea and fishery. However, the agriculture's weight in GDP value was only 20% in 2006.

Major improvements have been done to other sectors as well. In July 2006, Vietnam strengthened its intellectual property legislation by making it compliant with TRIPS

. Furthermore, the country has become a World Trade Organization (WTO) member in 2006. Vietnam counts on China, Japan, Australia, U.S., ASEAN countries and Western European ones as main trade partners.

Fig.1 -- FDI by country in Vietnam 1988-2003

Source: The Ministry of Planning and Investment, 2004

of registered capital, followed by Taipei with 1,086 projects and $5,998 million of registered capital and Japan with 418 projects and $4,480 of registered capital (Thuy, 2005).

FDI distribution by region and province shows that South East and Red River Delta on one hand and Ho Chi Minh (Saigon), Hanoi and Dong Nai concentrate most investments (see figs. 2&3).

Fig. 2 -- FDI by province in Vietnam 1988-2003

Fig. 3 -- FDI by region in Vietnam 1988-2003

According to the Law of Foreign Investment in Vietnam (LFI) the following forms of investment are allowed: business corporate contract (BCC), joint-venture (JV) and 100% foreign-invested company.

b.

Analysis of social/cultural factors

The most recent Census (2008) estimated the population at approximately 86 million, ranked 13th in the world with a population density of 253 individuals/km2 or 655 individuals/sq mi.

Vietnamese people account for 86.2% of the population, the rest being divided into 54 ethnic minorities spread across the country. The official language is Vietnamese, but various other languages are spoken within the minority group. Chinese and Japanese are popular foreign languages spoken by locals. About 85% of the population belongs to the Buddhism religion as much of the country's history was influenced by Confucianism, Taoism and Mahayana Buddhism.

The education system has a high state-controlled rate. A large number of public schools have been created throughout the country, in cities, towns and villages in order to raise the national level of literacy, which is already among the highest in the world. Additionally, a large number of specialist colleges were created to develop a diverse and skilled national workforce.

c.

Analysis of political factors analysis

Vietnam is a Socialistic Republic and a single-party state, which is the Communist Party. All the organs of the country's government are controlled by this party.

The country's foreign policy is one of "openness and diversification and multi-lateralization of international relations." Further more Vietnam is looking to "proactively and actively engage in international economic integration while expanding international cooperation in other fields" (Ministry of Foreign Affairs, accessed June 09).

At the end of 2007, Vietnam had established foreign relations with 172 countries, being also a member of 63 international organizations with multiple purposes, such as United Nations, World Trade Organization, ASEAN, etc.

3.

Analysis of entry mode to be used

Entering the Vietnamese market can be done either by setting up a start-up owned by the corporation and expanding the chain with both corporate-owned and franchising businesses or by simple franchising.

The first option implies more resource commitment on behalf of the parent company due to increased costs with setting up the buildings and operating the business. The parent company has more control over the daily activities when running its own operations, which means that the risk of operational failure is decreased. On the other hand, if the entrant has a poor experience with the local market, it will bear high costs of foreignness, which increase the risk of cultural failure.

The second option translates into a lower commitment on behalf of the parent company as the start-up costs are eliminated. However, it may be difficult to market any business idea when not even one business establishment in the country belongs to the parent company. That is, the corporation having at least one location owned by it may be perceived as a sign of worthy investment.

The Vietnamese market is characterized by relatively low labor costs, which represent a high percentage of operational costs. Also, rents and administrative fixed costs, such as electricity are estimated as relatively low compared to locations in more developed countries. Therefore, having production facilities in Vietnam could turn out to be quite efficient for the restaurant chain, especially if these facilities could supply neighboring markets with higher operational costs. Some of the company's food products are distributed globally; however, some are locally produced. Vietnam has good agricultural records, which could also contribute to reduced material costs, which can again be extended to neighboring locations.

Finally, the company can engage in… READ MORE

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