By Gregory Unruh and Fernanda Arreola, Thunderbird School of Global Management
Since its reunification in 1975, the Socialist Republic of Vietnam has emerged as one of South Asia’s dynamic economies. The success is impressive given the country’s recent history of war, invasion and massive migration as well as the loss of support from the old Communist bloc. The country’s resurgence began with economic liberalization in 1986 and the implementation of the doi moi or “renovation” policies. Its openness to the free market has made Vietnam the United State’s fastest growing trading partner in Southeast Asia and fostered international economic achievements including the Vietnam-US Bilateral Trade Agreement in 2001, acceptance into the World Trade Organization in 2007 and a 2008 non-permanent membership on the United Nations Security Council. Today, however, Vietnam’s Communist Party leadership is struggling to meet its established targets for the reducing poverty amongst its 87 million citizens with an export oriented growth model in the face of global economic downturn.
The Ethical Climate for Foreign Enterprises
Following the Chinese model, Vietnam’s communist party, the only sanctioned political organization in the country, has modified its ideology and established economic growth as national priority. However, the centrally planned economy, governmental bureaucracy and limited political criticism have, at times, proven at odds with the international concepts of business ethics. The issue of corruption is an important concern, as highlighted by the fact that Transparency International’s Corruption Perceptions Index ranked Vietnam 123rd out of 179 nations. Perhaps more disconcerting to advocates of ethical business practice is the declining perception of bribery as a barrier to doing business. According to the latest International Finance Corporation report, while 67.20% firms studied expected to pay bribes in the country, only 15.18% found bribery a constraint for doing business.
As discussed, corruption is one of the main ethical challenges facing business people Vietnam. According to the Global Integrity 2006 report, corruption consumes between three and four percent of the country’s gross domestic product each year, so managers must be prepared to confront it.
The fast pace of change in the Republic exacerbates the situation, often fostering confusion amongst executives when government is unable to sustain a predictable regulatory and legal environment. According to the World Bank, between 2007 and 2008 Vietnam’s rankings for starting a business, employing workers, protecting investors and paying taxes have worsened with scores now below the average of 181 countries. The situation is challenging for foreign investors, especially those who are new to Vietnam, who find it difficult to keep up with shifting accounting and tax compliance requirements. As in many developing economies, intellectual property issues (IPR) are also on the rise. Violations of IPR are often attributed to low salaries or the idea that agrarian populations have a hard time understanding the private property concept for ideas and inventions. While Vietnam is one of the largest exporters of rice, coffee and nuts it has moved into higher value goods like computer components, raising the IPR stakes for international companies considering manufacturing investments in Vietnam.
All this has hurt Vietnam’s overall business climate, illustrated by Moody’s decision to downgrade the investment outlook to negative and the Economist Intelligence Unit’s grading of banking sector risk at CCC. However, there are counterbalancing developments. As of January 11, 2007 Vietnam became the 150th member of the World Trade Organization and the entrance is improving outlook for foreign investment, transparency and governance. Along with the pledge to improve their regulatory institutions, the government has implemented some penalties for corrupt public officers that have range from jail sentences to executions. And foreign investment in Vietnam continues to rise, indicating that the country will remain an important center for international business.
Five Compliance and Ethics Issues to Consider
Corruption
As discussed, corruption is one of the main ethical challenges facing business people Vietnam. According to the Global Integrity 2006 report, corruption consumes between three and four percent of the country’s gross domestic product each year, so managers must be prepared to confront it.
Deal with it
Most instances of corruption can arise through regulatory bureaucracy and miscalculating the length of time negotiations and permits approval can take. In preparing for business, you should consult trusted local sources such as experienced law and accounting firms and adjust your expectations accordingly. Vietnam has recently strengthened regulations for corrupt public officers, including execution sentences, so an improving climate can be anticipated over time.
Freedom of Speech
Enforcing a single party system in Vietnam has fostered numerous restrictions with regards to freedom of speech, and business managers must be cognizant of the issue. There have been several recent cases of foreign journalists imprisoned for allegedly reporting human rights violations or government abuses. Although there is no reason to assume that such situations are systematic, prudence is called for.
Deal with it
Most responses to freedom of speech issues are fostered by watchdogs groups such as Reporters Without Borders. The organizations pursue fact finding missions, reporting, and publications that allow victims of abuses to expose their situations.
Transparency
Like other rapidly growing developing countries, transparency in most fiscal and decision making is limited. While Vietnam has made progress in establishing regulations for greater transparency, implementation has been irregular creating risks for business. Issues especially arise around property ownership, where foreigners often find themselves trapped in flawed agreements with an unclear real estate title.
Deal with it
The risks of limited transparency and weak institutions can be addressed somewhat by understanding that the potential sources of dispute prior to negotiations. This means investing upfront in appropriate guidance and consultation with trusted local experts and the use of insurance as necessary. In the case of real estate it is imperative to request and analyze all proper ownership documentation prior to finalizing a deal.
State Monopolies
Monopoly issues in Vietnam have been created by the protectionist role of the government as the sole owner of crucial service providers in the country. Privatization has been gradually advancing, but economic success legitimizes the government’s claim to continued intervention, especially in the electricity, telecommunications and aviation sectors.
Deal with it
In response to international concerns, the government launched the Competition Law in 2005. Among other things, the law prohibits agreements that restrict competition, monopolistic abuses and anti-competitive behavior. The law applies to all businesses and professionals including State-owned enterprises (SOE). Investors that experience unfair treatment under the law have recourse with VCAD, a government agency belonging to Ministry of Industry and Trade of Vietnam given investigative powers, and the Vietnam Competition Council (VCC), an agency give adjudicative powers by the law.
Supply chain ethics
As the prices of labor and cost of living in several established Asian economies have risen, many businesses have relocated to lower-cost Vietnam. While there are sound business reasons for this, companies have to be aware of the perception that lower costs arise because worker rights, health and safety and environmental protection are ignored. The reputations of companies including Nike and IKEA have suffered when issues like child labor abuses have been tied to the production of a company’s product by local contractors.
Deal with it
When doing business in the country, at a minimum it is important provide external evidence that you are compliant with all applicable Vietnamese laws and regulations. It is also prudent to establish open and transparent communication with your company’s stakeholders and to provide guarantees that supply chain ethics are not being outsourced to local firms. Common practices for doing so include supplier codes of ethical behavior, corporate social responsibility reporting and membership in globally recognized roundtables such as the United Nations Global Compact.
Etiquette Tips You Should Know Before You Go
Greetings
The standard greeting for male foreigners in Vietnam is the handshake, given both upon meeting and departing. Vietnamese business people regularly shake with both hands, placing the left hand on top of the right wrist as a sign of respect. In the case of male and female greetings, it is also natural to bow the head rather than shaking hands, and visiting business people should follow their hosts, especially if women initiate the gesture.
Business Meetings
When planning meetings, it is important to remember that Vietnamese will always be punctual and expect others to do the same. Even when public officers are delayed it is still expected that their counterparts will show up on time. Both women and men should dress in a conservative formal suit. When engaging in business, it is important to remember the significance of hierarchy when being introduced or introducing colleagues. People will typically be presented by age and then by gender. You should not be surprised if you are asked about your age as it is an attempt to apply the proper form of address. During business interactions Vietnamese are often perceived as calm and slightly impersonal, perhaps because direct eye contact is avoided and can be considered offensive. Extended silence during business conversation can be a way of expressing disagreement or discontent without a loss of face, which is very important in Vietnam and should be respected by visitors.
Business Cards
Business cards will be exchanged on the initial meeting and should be presented with both hands. When receiving a business card it is important to show adequate respect by reading through all details before putting it on the table. Vietnamese hosts will appreciate receiving translated business cards that clearly show title and rank.
Gift Giving
Gift giving is an important demonstration of gratitude and respect in Vietnam. Exchanging small gifts in a professional context is common and taken as an expression of the honor that it represents to do business. When giving gifts to a new acquaintance you should provide small non-expensive items wrapped in colorful paper. It is important to avoid gifts that have superstitious connotations, such as handkerchiefs or anything black. If you plan to bring flowers, make sure to consult the florist to avoid utilizing varieties intended for funerals. The Tet holiday, which is the day in which all Vietnamese celebrate their birthday, will fall on February 14th in 2010, so avoid taking it for Valentine’s Day.
Dinners and Social Events
Vietnamese tend to be attentive hosts, provide a pleasant conversation and enjoy other’s company. Just as with business meetings, Vietnamese will expect you to show on time to dinners and social events. Arriving fifteen minutes late will be perceived as a lack of respect to your host. When invited to someone’s house, bring a gift that can be used for dinner (fruit, sweets, flowers and wine) or a small typical item from your home country. Names are very important in Vietnam and you might find it confusing when interacting in the casual environment of your guest’s home. For instance, children will have secret names called ten cung com, which are names only used at home. Only the parents and the child will know and use this name and avoid exposing the child’s name to visitors, the parents may call their children by rank of birth like “daughter one” or “son two.” Guests should respect the Vietnamese Confucian values of duty, loyalty, honor, respect for seniority and sincerity and avoid comments or topics that challenge these values.
