Social costs/benefits versus private-sector analysis. Vietnam’s Ministry of Industry is conducting its own analysis of the proposed project to assemble small-scale bulldozers by Kubota for sale in Vietnam.

a. Explain what the economic framework used by the Vietnamese authorities in scrutinizing the project should be.

b. Assuming that the VND is overvalued by 30 percent and that the opportunity cost of employing Vietnamese labor is only 50 percent of the nominal labor cost incurred by Kubota-Vietnam, assess the project impact on the host country’s economy and its balance of payments. Start with conditions described in problem 2. Iterate by introducing sequentially conditions presented in problem 3.

c. How should Kubota use the result of your analysis for negotiating its proposed investment with Vietnamese authorities?

Data from problem 2

Kubota—the Japanese manufacturer of tractors and small earthmoving equipment—is considering building an assembly plant in Da Nang (Vietnam). The initial investment would amount to dong (VND)
200 billion (US$10 million) and would be financed partly (50 percent) by a loan from the Vietcong Bank in VND at the subsidized rate of 6 percent over five years with bullet principal repayment at the end of year 5 and partly (30 percent)
by a revolver from Mitsubishi-Tokyo Bank at TIBOR + 120 basis points.
The balance of the initial investment is in the form of equity provided by Kubota-
Japan.
Output is planned at 5,000 small bulldozers per year. Sale price is VND 200 million/unit. Power train and chassis would be imported from Japan for VND 100 million cif/unit. Locally sourced parts and labor cost amount to VND 75 million/unit.
Kubota-Vietnam is granted a corporate income tax holiday and will pay a 5 percent royalty to its Japanese parent. Kubota estimates that the project will displace 750 units that are currently exported directly from Japan to Vietnam.
Export sales have a profit margin of 15 percent.
Assume that VND 20,000 = ¥100 over the life of the project and that the TIBOR floating rate revolver can be swapped in a five-year fixed-rate loan paying 3. 5 percent.