Vietnamese Business Culture. Formal and Informal Institutional Barriers for Foreign Firms

by Niko Greger

Term Paper 2015 15 Pages

Economics - International Economic Relations



1 Institutional barriers and risks of Vietnam´s business for foreign firms
1.1 Formal institutions
1.1.1 Formal institutions in politics
1.1.2 Formal institutions in the legal system
1.1.3 Formal institutions in business and economy
1.2 Informal institutions
1.2.1 Culture - the linking element
1.2.2 Religion
1.2.3 Language and communication

2 How to overcome institutional barriers and risks in Vietnam´s business culture
2.1 Manage institutional barriers
2.2 Companies experiences of overcoming institutional barriers in Vietnam

List of references

1 Institutional barriers and risks of Vietnam´s business for foreign firms

The Socialist Republic of Vietnam (SPV) is a fast growing economy in South-East Asia with 5,8 % GDP growth rate in 2014 (German Foreign Office 2015, p.1). Foreign firms became aware of Vietnam while seeking for new sales markets, cost-efficient production sites and cheap labor. Vietnam´s population is relatively young with 95% share under the age of 65 (Meyer, Tran, & Nguyen 2006, p.1). Through the economic reform “Đổi mới” Vietnam´s economy could change from centrally planed to a socialist oriented market economy (Vietnam Development Information Center 2012, p.5). Through this reform the Vietnamese market could be liberated and opened to foreign investors and companies (Edwards et al 2013, p.433) and became a favorite of foreign companies as Samsung, LG and Toyota (Vietnam Development Information Center 2012, p.6).

Doing business in Vietnam requires international firms to navigate in unfamiliar waters . (Ghemawat et al 2008, p.88). Starting business in an emerging market like Vietnam is new and risky but provides enormous potential when respecting the “rules of the game” (Peng et al 2008, p.921) quoted from (North, 1990). These rules, commonly known as institutions, determine the success and failure of firms (Peng et al 2008, p. 920). Institutions can be defined as “regulative, normative, and cognitive structures and activities that provide stability and meaning to social behavior” (Peng et al 2008, p.921) quoted from (Scott, 1995).

Abbildung in dieser Leseprobe nicht enthalten

Figure 1: The institution based view: a third leg of the strategy period (Source: Peng et al. 2006, p.15).

In a strategy tripod institutions serve as third leg next to industry and research based views of business, as shown above in Figure 1. The figure illustrates, the role of institutions regarding company´s performance and the creation of comparative advantages (Peng et al 2008, p.923) quoted from (Ingram et al 2002). The more the cultures between home and host countries differ the more the usefulness of an institutional-based perspective on the business strategy shows up (Peng et al 2008, p.924 ) quoted from (Hafsi et al 2005) and (Henisz & Swaminathan 2008, p.537). The tangle of barriers comprising of language, culture, regulations, laws, norms and cognitions seem to hinder foreigners to gain substantial foothold in the Vietnamese market (European Business Development Group 1996, p.6).

Especially when company´s foreign performance works lower than expected the absence of an entirely understanding of host countries institutions is conspicuous. As long as company´s business works as expected, market supporting institutions are invisible for the foreign firms (Peng et al 2008, p.922).

1.1 Formal institutions

Institutions, and thereby potential institutional barriers, occur on the meta-levels as formal and informal institutions. Formal institutions can be divided in several aspects as mentioned below.

1.1.1 Formal institutions in politics

The highest government institution is the National Assembly. Vietnam is a one-party state of the Communist Party of Vietnam (CPV). Its political system has no separation of powers. Members of the National Assembly are officially independent but have to orientate their interest to the CPV (Giang et al 2012, p.134). The current constitution expands extensive powers of the executive authority, which affects fundamental rights as freedom of opinion, press and assembly (Country Watch 2012, p.37). Despite authoritarian government style and missing democracy the political environment of Vietnam can be stated as stable (Austrade 2013, p.1).

Through releasing the Doi Moi reforms the Vietnamese government tried to make Vietnam´s economy more attractive and liberate. The reforms worked out well and many foreign companies invested in Vietnam. However, some issued laws and regulations were ambiguous, which gave local authorities the role to interpret and implement them, sometimes arbitrarily (Meyer et al 2005, p.10) quoted from (Tenev et al 2003). Even the government is aware of the deficient implementation of reformed regulations at local levels. Vietnams political situation experiences a dual transformation process with liberating markets on the one hand and stagnation regarding developments of compliance of fundamental rights or democracy.

Although Vietnamese politics can be stated as relatively stable the political situation can be a barrier for international firms. Especially on issues like land registry or investment license (Meyer et al 2005, p. 10) quoted from (Phan 2003).

1.1.2 Formal institutions in the legal system

In the last years the Vietnamese government focused on reforming the jurisdiction to be efficiently and highly effective (Ninh 2013, p. 2). Reforms were welcomed by international firms doing business in Vietnam because legal institutional barriers decreased (Homlog & Springler 2013, p.71). But still there are several loopholes in the legal system of Vietnam. For instance, different levels of regulations are often inconsistent, which complicates firm´s foreign business (OECD 2011, p.63). Legal certainty is seen as specious. In addition intercultural differences and different legal perception in business relationships complicate implementation of the anyhow embryonic legal system (Homlog et al 2013, p.71).

Inevitable corruption is widespread to circumvent the unfavorable legal system. “Transparency International” ranks Vietnam as 112th out of 183 countries in the worldwide “Corruption Perception Index” (Transparency International, 2012). 71% of Hanoi´s inhabitants and 67,5% of Ho-Chi-Minh-City´s inhabitants admit to pay bribes. Police, customs, tax office and land office are the public bodies with the highest corruption. In 2005 the government published the “Law on Anti-Corruption”. Prison sentence for paying and receiving bribes were planned. The clout of the institutions that have to pursue anti-corruption should be questioned (Homlog et al 2013, p.89) (Do et al 2009, p.197).

1.1.3 Formal institutions in business and economy

Last years legal reforms supported the corporate regulations to boost the economy. The government tries to equals domestic and foreign companies, but it is apparent that inefficiency and lack of transparency complicate international business foundations and joint ventures (Homlog et al 2013, p.138).



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Monash University Malaysia, Sunway Campus
institutional barrier vietnam legal system culture religion language


  • Niko Greger



Title: Vietnamese Business Culture. Formal and Informal Institutional Barriers for Foreign Firms