Vietnam is a country undergoing a transformation from a centrally planned socialist economy to a system that is more market-oriented. The transformation dates back to 1986, a decade after the end of the Vietnam War that united the north and the south of the country under communist rule. At the time, Vietnam was one of the poorest countries in the world. Per capita income stood at just $100 per person, and poverty was endemic, price inflation exceeded 700% and the Communist Party exercised tight control over most forms of economic and political life. To compound matters, Vietnam struggled under a trade embargo imposed by the United States of America after the end of the Vietnam War.

Recognising that central planning and government ownership of the means of production were not raising the living standards of the population, in 1986, the Communist Party embarked upon the first of a series of reforms that transformed the economy a little bit. Agricultural land was privatised and state farm collectives were dismantled resulting in a surge in farm productivity. Rules restricting the establishment of private enterprises were relaxed and some price controls were removed. State-owned enterprises were privatised. Barriers to foreign direct investments were lowered. Vietnam entered into trade agreements with its neighbours and also joined the World Trade Organisation in 2007.

Vietnam achieved annual economic growth rates of 7% after the reforms. Living standards have surged with GDP per capita on purchasing parity bases reaching $6,400 in 2016. The country is now a major exporter of textiles and agricultural products, with an expanding electronics sector. State-owned enterprises now only account for 40% of total output down from a near monopoly in 1985.

Despite this progress, significant problems still exist in Vietnam. The country is too dependent upon exports of commodities, the prices of which can be very volatile. The state-owned enterprises are inefficient and burdened with high levels of debt. The Communist Party has maintained a tight grip on power and bans all political parties, labour unions and human rights organisations. The courts lack independence and are used as a political tool by the Communist Party to punish critics. There is no freedom of assembly or freedom of the press in Vietnam.

Corruption is rampant in Vietnam. There is a well-established tradition of public officials favouring their families and friends. The privatisation processes provided the opportunity for government officials to appoint themselves and family members as executives of formerly state- owned companies. Many observers believe that widespread corruption has a negative impact on new business formation and is hamstringing economic growth.

(Source: Adapted from Hill & Hult (2019), International Business: Competing in the Global Marketplace, 12th Edition, McGraw Hill Education)

Qa. Vietnam has been described in the case study as a Communist State. Explain the implication of Vietnam as a Communist State for foreign direct investment.

b. Discuss the political, economic and legal costs of doing business in Vietnam for international businesses.

c. Explain three types of risks that international businesses could face while doing business in Vietnam

d. Discuss three actions that the government of Vietnam could take to achieve economic transformation in order to attract foreign direct investment