ABSTRACT:
The reasons for Samsung’s decision to set up the factories in Vietnam have been widely discussed, but the consequences of the investment are not properly considered. In the context of asymmetric information, people seem to focus on the profits while many negative externalities from the investment are ignored. This study recaps three main reasons for Samsung’s investment in Vietnam - production inputs, market factors and government incentives, as well as its possible impacts on the local economy, environment and peoples health. Policy makers should pay attention to these social costs in analyzing the real impacts of foreign direct investment.
Keywords: Samsung, location decisions, consequences, environment, health.
1. Introduction
A recent report by IDC's Worldwide Quarterly Mobile Phone Tracker suggests that the dominance of South Korea's Samsung Electronics Company Limited (hereinafter referred to as Samsung) in the global mobile market is beginning to slide, partly due to the increasing competition from new Chinese manufacturers - Huawei, OPPO, Vivo - targeting the middle - to low - end market segment (Patterson, 2017). Therefore, it is essential for Samsung to cut costs as well as drive sales to compete with low-cost Chinese producers; and boosting investment in Vietnam - an important manufacturing hub with low production costs and many attractive investment incentives - seems to be an appropriate strategy for the company.
During less than a decade (2008-2017), Samsung has built 4 plants in Vietnam with the total investment around $20 billion. Of which, the first mobile phone plant was built in 2009 in Yen Phong Industrial Zone, northern Bac Ninh province, with the investment of $2.5 billion. Since March 2014, Samsung has invested another $5 billion to set up a second smartphone factory in Yen Binh Industrial Zone, northern Thai Nguyen province which is only 35km far from its first factory. This handset devices and parts plant is the company’s largest handset plant in the world, producing more than 100 million mobile phones and 1 million digital cameras. Samsung’s investment in Vietnam continues to rise dramatically, partly due to its positive business operations. The question why Samsung chooses Vietnam, particularly Bac Ninh and Thai Nguyen province, to set up the factories is widely discussed. But the consequences of these investments are not properly considered, especially with the asymmetric information, many negative externalities are ignored. This study makes little contribution to discuss these concerns.
As Samsung is a multinational enterprise (MNE) and its investments to Vietnam mostly take the form of foreign direct investment (FDI), we would like to explain the reasons for Samsungs location decision and its consequences from the view of international investment. It is not easy to get data in Vietnam; however, several interesting facts are still revealed.
2. Reasons for Samsung’s location decisions
Literature shows that a firm’s decision to locate overseas may result from a number of motivations including resource seeking, market seeking and non-marketable asset seeking (Franco et al., 2008). In this study, we would like to clarify them into 3 main categories to explain why Samsung invests in Vietnam.
- Production Factors: One of the most important motivations of a firm when making an economic decision is to reduce costs. Investment to other countries, especially the developing ones, may lead to falling operational costs including labor costs and skills, land and building costs, energy costs, transport costs because the price of these inputs are relatively low in these countries. In addition to the price, availability of inputs has strong impacts on the costs of production. Factors such as closeness to raw materials, good infrastructure, sufficiency of basic amenities, availability to appropriate skilled employees, power supplies, and land make great contribution in reducing the costs. Technology, together with other economic and financial conditions which facilitate the production, also attracts MNEs to invest overseas.
Vietnam is known for low-cost labor which is much cheaper than China. In 2016, it is estimated that the average wage of a Chinese employee was about 6 times higher than that of a Vietnamese employee. Furthermore, Vietnamese labors fame of being hardworking and creative also contributes to the success of MNEs operating in this country. Beside the availability of cheap and good quality labor pool, proximity to China also makes Vietnam more attractive in the eyes of foreign investors. Previously, MNEs flocked into China to take advantage of the low-cost labors. Now, with the development of the economy, it is becoming costlier to operate in China and MNEs take the trend to invest in China’s neighboring countries as it is much easier and cheaper to move the production.
Moreover, improvement in infrastructure is another key factor facilitating the shift of MNEs to Vietnam. According to the World Bank (2006), around 9 - 10% of GDP has been used for investment in transport, telecommunications, energy, water, and sanitation. “The road network has more than doubled in length since 1990, and its quality has improved substantially… The number of fixed and mobile phones per 100 people has multiplied nine-fold since 1995.” (World Bank, 2006). By 2020, Vietnam's Ministry of Transport is going to make investment of over $5 billion to improve the countrys road transport infrastructure. Besides, one of the future strategies of infrastructure investment is to increase urban population, which will make it easier to do business in Vietnam when the costs of infrastructure provision are reduced through economies of scale.
Table 1: Urbanization Forecasts in Vietnam
Source: World Bank
- Market Factors: A firm may decide to operate overseas if it finds a high potential to generate sales and deliver customer service. It may even gain greater reputation when taking advantage of being close the market to satisfy customers in a quick manner. Furthermore, closeness to market may also help firms to cut down the cost of transport.
Vietnam is a big market in which Samsung has witnessed great success. With the population of 95,446,735 as of July 15, 2017, ranking 14th in the list of countries by population (Worldometers 2017), both urban and rural consumers have strong demand for mobile phones. According to IDC's Asia Pacific Quarterly Mobile Phone Tracker, in 2014, Vietnam topped the list of ASEAN countries with the highest smartphone growth rates of 57%. Moreover, increasing popularity of social networks and decreasing ownership costs associated with 3G and the internet help boost growth of smart device. According to Euromonitor International (2015), in 2013, Samsung Electronics Vietnam Co. Ltd held the second largest volume share within the Vietnam mobile phones market at 30% (only after Nokia Corp at 43%); but in terms of smartphones, the company ranked the first with a 34% volume share, followed by Apple Inc. with 19% and Nokia Corp with 9%.
- Government Support: Government incentives, attitudes and regulations are a primary reason to locate a company. Countries that have favorable business tax laws, open trade policy, political and macroeconomic stability, grants and preferential loans to MNEs, and sometimes even monopoly rights (Blomstrom and Kokko, 2003) tend to attract more FDI inflows. Among them, tax incentives are considered to be the most common method, as Coughlin et al (1991) state that higher taxes do deter FDI. Besides, community factors such as local amenities and services, culture, climate and geography are also significant when a firm makes a FDI choice. For example, a city which provides an MNE with special infrastructures for its production and has good climate and geographical conditions is certainly more attractive than the others.
Despite the ambiguous empirical evidence of the impacts of MNEs and FDI in knowledge creation and technology spillovers, Vietnamese government has had a number of preferential policies to attract FDI. As part of its WTO accession, Vietnam has removed all requirements inconsistent with the TRIMS agreement. Besides, foreign investors in Vietnam also take advantage of many attractive investment incentives. For example, they are exempt from import duties on goods imported for their own use and which cannot be produced domestically (US Department of State, 2014, p. 10). According to the Embassy of the Socialist Republic of Vietnam in the United States of America, while the standard corporate income tax (CIT) rate is 20% (applied from 1 January 2016), an international firm is levied corporate tax at the rate of 10% within 15 years from the first year it gains revenues; in addition, a foreign investor is exempt from income tax within 4 years from the first year he gains taxable income; and in 9 years after CIT exemption period, he gets 50% CIT reduction. Accordingly, though Samsung has started its business in Vietnam since 2009, it is not until 2013 did the company pay taxes of about $92 million to the government. Furthermore, remote and mountainous provinces can provide additional tax preference and other incentives to draw prospective investors. In particular, Thai Nguyen province offers an extra 3 years of paying half of corporate income tax. This means that Samsung pays no tax for the first four years of operation and half of the full rate for the following 12 years.
In addition, political stability makes considerable contribution to the increase of FDI into Vietnam. The political stability index by the World Bank can be used to measure it, with the values ranging from -2.5 (weak) to 2.5 (strong). The average value for Vietnam during the period from 1996 to 2013 was 0.24 points with a minimum of 0.1 points in 2003 and a maximum of 0.46 points in 2005.
3. Consequences of Samsung’s investments
As mentioned above, Samsung has been granted the best priorities as a foreign investor in Vietnam. It is undeniable that Samsung is such a big MNEs that any government desires to attract its investment as an important source for local economic development. In the context of fierce competition, offering attractive incentives to draw the company is unavoidable. As a result, Samsung surely gains great benefits from this race to the bottom; however, it is important to take into considerations the costs of these incentives. When MNEs’ targets are solely cheap labor and great incentives, the benefits earned by the local economy may be not enough to compensate the incentives given to foreign investors. Some of possible consequences are as follows:
- The benefits to Vietnam are less than expected: As most Vietnamese businesses are infant and cannot meet the investor’ requirements to participate in its supply chain, they need voluntariness of MNEs like Samsung to transfer technology and increase productivity. If Samsung continues to import most components without supporting domestic companies to develop, Vietnam will not benefit much from its investment. Also, this result might come from the weak regulations from the government before approving the investment.
Moreover, recent cases of violation in transfer pricing of hundreds of MNEs in Vietnam have revealed a lot of weaknesses in the management of FDI. Again, this is also the result of the incomplete law on price. It is not clear if Samsung has been in the list or not (the information is not publicly declared), but this issue should be carefully examined and prevented.
- Possibility of environmental pollution and resource
depletion: developing countries have been considered to be “pollution heavens”
because the environmental standards and regulations there tend to be much lower
than in developed countries. This has been one of the reasons why polluting
corporates move their plants overseas. Dinh (2015) investigates 80 FDI
enterprises in Vietnam and finds about 51% (mostly in leather and food
processing industries) agree their operation can cause severe pollution, and
40% (mostly in paper, steel and mineral industries) agree they can cause mild
pollution. Recently, the Formosa environmental breakdown is a clear evidence
for the necessity to tighten the environmental standards and examination to
MNEs.
Source: The World Bank (govindicators.org)
Again, we do not have a thorough public report on Samsung’s practice of environmental regulations in Vietnam; then, jumping into any conclusion is a bias. But semiconductor production can cause environmental hazards (Tsai et al., 2002), so it is necessary to have appropriate actions to avoid such a disaster as Formosa breakdown to reoccur in the future.
- Violation of worker rights: Samsung has had bad reputation all over the world, even in its home country - South Korea. Despite the lack of official reports, people have heard of Samsung for causing cancer and attempting cover-ups in Korea, dangerous workplaces in Brazil, price-fixing cartel and criminal in Canada and the United States, child labor scandal in China, illegally low wages in Europe, exploiting apprentices in India, union-busting in Indonesia, "modern day slavery” in Malaysia, discrimination against women in Mexico, sacking union members in the Philippines, locking out workers in Thailand, low wages in Taiwan and forced overtime in Vietnam. There could be political and economic reasons for this lack of information, but it is not overstated that we should pay attention to the problem. The fact that Samsung is a powerful worldwide corporation requires more efforts in seeking the truth.
Besides, it is noticeable that excessive working hours occurs not only in Samsung but in many other MNEs in Vietnam as well (Worker Rights Consortium 2013). According to the Consortium, the other issues including child labor, gender discrimination, health and safety hazards, inadequate wages, precarious work, non-enforcement of Labor Laws and “wage theft” are increasingly common in Vietnamese FDI enterprises. From the society perspective, these are costs imposed to vulnerable workers. Without considering such costs, it is hard to attain sustainable economic development.
- Health impacts on workers and local residents: There are many worldwide studies on the health impacts of MNEs’ existence on the employees and local residents. But to the best of my knowledge, there has been no official study on the Samsung workers health and the impacts of the existence of Samsung’s plants on the health of local residence. This issue is actually related to the above stated issues including possible pollution and violation of health and safety hazards by the MNEs. It suggests that a thorough research should be carried out to cover these problems.
- Social impacts: Big Samsung plants usually attract thousands of workers to reside in the areas near the plants location. Many local supporting businesses thrive thanks to that flock of migrants. The concentration of people leads to both positive and negative socioeconomic impacts; but we tend to focus on economic benefits with little attention to social costs. The sudden high rate of pregnant women employees, gambling, drugs, prostitution are some examples that need to be addressed now and considered before approval of any future projects.
4. Conclusions and Policy Implications
Asymmetric information is one of market failures, in which who have more information will earn more benefits. This problem often occurs in reality, and in this case, Vietnam seems to have not enough information (or not enough carefulness /resources in collecting the information) to make the best decisions. It is undeniable that Samsung is a giant corporate which has a great contribution to economic growth in the countries where it sets operation, especially in the field of annual exporting values. But it would be wiser if we had more information before making decisions. This might be a reminder when Vietnamese government is considering approving another investment from Samsung in the near future.
Vietnam has made great efforts to make use of current valuable FDI and attract more FDI flows in the future: improve the business environment, develop the supporting industry, focus on training highly qualified labor force and enhance the law system. Many achievements have been attained, but the reform process seems to be slow. Reasons for that fact are not the focus of this study. The focus of this study is what we should do, given the current FDI facts.
First, it is essential to make a social costs and benefits analysis to have a broader picture of the Samsungs investment in particular and other FDI enterprises in general. It is required to have trustworthy and accessible data. The research should be publicly available to widespread the knowledge and attract more attention from the society.
Second, realizing the fact that asymmetric information is a severe problem in Vietnam, it is essential to improve the practice of examining the information declared by the foreign investors and promote democracy among people in the decision-making process.
Third, instead of increasing tax breaks for foreign investors, tax incentives should be spent for local supporting industries to encourage these businesses to obtain robust development. When supporting businesses are strong enough to attract foreign investors, using external financing source as the leverage for the local economic development is more efficient and Vietnam will be more likely to achieve sustainable development.
REFERENCES:
1. Blomstrom, Magnus and Kokko Ari. 2003. “The Economics of Foreign Direct Investment Incentives.” Working Paper 168, Bundesbank Conference.
2. Coughlin, Cletus C., Joseph V. Terza and Vachira Arromdee. 1991. “State Characteristics and the Location of Foreign Direct Investment within the United States.” The Review of Economics and Statistics, Vol. 73, No. 4, pp. 675 - 683.
3. Dinh Duc Truong. 2015. “Environmental Management in Foreign Direct Investment (FDI) Enterprises in Vietnam.” Tạp chí Khoa học Đại học Quốc gia Hà Nội, Tạp 31, Số 5, 46 - 55.
4. Embassy of the Socialist Republic of Vietnam in the United States of America. 2015. “Taxation.” Accessed on April 4, 2015.
5. Euromonitor International. 2015. “Consumer Electronics in Vietnam.” and “Mobile Phones in Vietnam.” Accessed on April 1, 2015 http://www.euromonitor.com/consumer-electronics-in-vietnam/report http://www.euromonitor.com/mobile-phones-in-vietnam/report
6. Franco, C., Rentocchini, F. and Marzetti, G. V. 2008. “Why Do Firms Invest Abroad? An Analysis of the Motives Underlying Foreign Direct Investments.” No 0817, Department of Economics Working Papers, Department of Economics, University of Trento, Italia.
7. Patterson, Steve M. “Q1 2017 smartphone shipments: Samsung rebounds, Apple goes sideways, Chinese makers roar.” Network World. Accessed July 15, 2017 http://www.networkworld.com/article/3193126/mobile-wireless/q1-2017-smartphone-shipments-samsung-rebounds-apple-goes-sideways-chinese-makers-roar.html
8. US Department of State. 2014. “2014 Investment Climate Statement”. Accessed on April 4, 2015 http://www.state.gov/documents/organization/229305.pdf
9. Tsai, Wen-Tien, Horng-Ping Chen, and Wu-Yuan Hsien. 2002. "A review of uses, environmental hazards and recovery/recycle technologies of perfluorocarbons (PFCs) emissions from the semiconductor manufacturing processes." Journal of Loss Prevention in the Process Industries 15, no. 2, 65 - 75.
10. Worker Rights Consortium. 2013. "Made in Vietnam: Labor rights violations in Vietnams export manufacturing sector." Accessed on July 16, 2017 http://www.usfashionindustry.com/pdf_files/WRC-Report-Vietnam.pdf
11. World Bank. 2006. “Vietnams infrastructure challenge.” Accessed on April 12, 2015. http://siteresources.worldbank.org/INTEAPINFRASTRUCT/Resources/CrossSectoralIssues.pdf
12. Worldometers. 2017. “Vietnam Population.” Accessed on July 15, 2017 http://www.worldometers.info/world-population/vietnam-population/
NGUYÊN NHÂN VÀ HỆ QUẢ CỦA VIỆC SAMSUNG
ĐẦU TƯ VÀO VIỆT NAM
● ThS. NCS. ĐỖ THỊ THÙY LINH
Khoa Marketing, Thương mại và Du lịch
Trường Đại học Kinh tế và Quản trị kinh doanh, Đại học Thái Nguyên
● ThS. NGUYỄN QUANG HUY
Khoa Quản lý - Luật kinh tế
Trường Đại học Kinh tế và Quản trị kinh doanh, Đại học Thái Nguyên
TÓM TẮT:
Nguyên nhân Samsung quyết định đầu tư xây dựng nhà máy tại Việt Nam đã được thảo luận rộng rãi, nhưng hệ quả từ việc đầu tư này vẫn chưa được đánh giá một cách đúng mức. Trong bối cảnh thông tin bất đối xứng, chúng ta tập trung vào khía cạnh lợi nhuận mà bỏ qua nhiều ngoại ứng tiêu cực từ việc đầu tư này. Bài viết nhắc lại ba nguyên nhân chính tại sao Samsung đầu tư vào Việt Nam - yếu tố sản xuất, thị trường và ưu đãi của Chính phủ, cũng như đề cập những tác động từ việc đầu tư đối với kinh tế, môi trường và sức khỏe. Chính phủ cần lưu ý đến những chi phí xã hội này khi phân tích tác động thực sự của đầu tư trực tiếp nước ngoài.
Từ khóa: Samsung, vị trí đầu tư, hệ quả, môi trường, sức khỏe.
Xem tất cả ấn phẩm Các kết quả nghiên cứu khoa học và ứng dụng công nghệ số 09 tháng 08/2017 tại đây
