Th¸ng 5 – 2010 - Faculty of Management and Tourism

Transcription

Tr−êng §¹i häc Hμ Néi
KHOA QUẢN TRỊ KINH DOANH – DU LỊCH
----- -----
Th¸ng 5 – 2010
Héi nghÞ khoa häc Sinh viªn Khoa Qu¶n trÞ kinh doanh - Du lÞch
Th¸ng 5 - 2010
MỤC LỤC
1. AN EXPLORATORY RESEARCH INTO WALKING TOUR DEVELOPMENT
IN HANOI .................................................................................................................. 3
Written by: Nghiem Truong Son (3K-08), Tran Thu Phuong (4K-07)
Luu Thi Hoang Oanh, Bui Phan Phuong Thao, Nguyen Thi Thu (2D-07)
Supervisor: Nguyen Duc Hoa Cuong
2. ROLE OF AUDIT IN VIETNAM ........................................................................... 18
Written by: Pham Quynh Anh, Nguyen Thi Thu Phuong (1KT-08)
Nguyen Thi Lien, Le Thi Huyen Trang (2KT-08)
Vu Thi Ngoc (3KT-08), Dang Anh Thu (1KT-08)
Supervisor: Chu Huy Anh
3. MANAGEMENT ACCOUNTING: FRAMEWORK AND PRACTICES IN
VIETNAM CASE STUDY:NATEXCO .................................................................. 30
Written by: Tran Hong Nhung, Nguyen Thi Hoai Thu (1KT -07)
Tran Duy Nam, Vu Phuong Thao, Bui Thi Hai Yen (2KT -07)
Supervisor: Do Van Anh
4. ACCOUNTING FOR FIXED ASSETS................................................................... 42
Written by: Nguyen Thi Ha, Hoang Thu Hang
Bui Thi Minh Hoat, Le Thi Kim, Dinh Thi Thoi
Supervisor: Dinh Le Mai
5. SCIENTIFIC RESEARCH PAPER REPOS CONTRACTS: LAW AND
APPLICATIONS IN VIETNAM ............................................................................. 70
Written by: Nguyen Hong Hanh
Tran Viet Kien, Nguyen Thi Quyen
Supervisor: Nguyen Quynh Anh
6. DANCE WITH VIETNAM INFLATION 2005-2010............................................. 84
Written by: Nghiem Truong Son, Pham Thanh Cong (BA-08)
Le Bich Thuy (AC-07), Bui Thu Van (BA-07)
Supervisor: Pham Thi Hoa Nhai
7. COUNTRY RISK ANALYSIS IN VIETNAM ....................................................... 98
Written by: Nguyen Thi Dieu Tuyet (3TC07), Nguyen Van Trang (2TC07)
Nguyen Thi Bich Phuong (3TC07), Luong Thu Huong (3TC07)
Supervisor: Nguyen Thu Huong
8. THE IMPORTANCE OF PHYSICAL EVIDENCE IN SEVICES
ORGANIZATION.................................................................................................. 120
Written by: Le Tuyet Lan, Thieu Thi Thuy Linh (BA08)
Luu Dieu Linh, Nguyen Thanh Huyen (BA08)
Supervisor: Tran Tuan Anh
9. MARKETING AFTER CRISIS ............................................................................. 135
Supervisor: Ngo Phuong Dung
Written by: Nguyen Thi Thu, Nguyen Thi Hoa (TR-06)
Vu Thi Thin, Hoang Thi Thanh Huyen, Do Thi Phuong (TR-06)
Th¸ng 5 - 2010
10. COUNTRY RISK ANALYSIS IN VIETNAM ..................................................... 169
Written by: Dang Thu Trang, Nguyen Thi My Hanh (3K-07)
Tran Thi Quynh Trang (3K-07), Phung Thi Anh (2K-07)
11. GAP BETWEEN ORDINANCE AND SMALL-SCALE RETAILERS’
MANAGEMENT ON FOOD HYGIENE AND SAFETY .................................... 196
Written by: Nguyen Thi Thanh Huong (3K-08)
Hoang Thu Ha (CN2-08), Nguyen Thi Thuy (2KT-07)
Supervisor: Nguyen Thi Cuc
12. The development of Standby Credit and its application in Vietnam...................... 209
Written by: Le Thi Thu Huong, Nguyen Thi Thanh Nga
Nguyen Thi Ha Nhung, Nguyen Phuong Van
Supervisor: Phan Thi Kim Ngan
13. BILL OF LADING AND ENDORSEMENT PROCESS ...................................... 225
Written by: Nguyen Van Anh (FB-07)
Kieu Thi Thu Hang, Nguyen Le Quyen (FB-07)
14. EFFECTIVENESS OF INNOVATIVE TRAINING ............................................. 240
Written by: Do Duc Thu (4K -07)
Duong Hong Hanh, Nguyen Hai Yen (1D-07)
Supervisor: Nguyen Le Phuong Tram
15. ANALYSIS OF THE DEPENDENCE OF TOURISM REVENUE ON THE
NUMBER OF VISITORS, INVESTMENT, CPI .................................................. 256
Written by: Hoang Thi Hue, Ngo Van Lung (TR-08)
Supervisor: PhD DAO Thanh Binh
16. THE FACTORS AFFECTING STATISTICS FINAL RESULTS OF FMT
STUDENTS............................................................................................................ 268
Written by: Pham Viet Dung, Luu Dieu Linh (BA-08)
Nguyen Thi Dung (BA-08)
Supervisor: PhD. Dao Thanh Binh
Th¸ng 5 - 2010
AN EXPLORATORY RESEARCH
INTO WALKING TOUR DEVELOPMENT IN HANOI
Written by: Nghiem Truong Son (3K-08), Tran Thu Phuong (4K-07),
Luu Thi Hoang Oanh, Bui Phan Phuong Thao, Nguyen Thi Thu (2D-07)
Supervisor: Nguyen Duc Hoa Cuong
ABSTRACT
This paper aims to analyze the potentiality of walking tour in Hanoi and find out
problems which is needed to improve for further development of walking tour in Hanoi.
Basing on both primary and secondary method, the information collected through real
experiences of tourists in Hanoi and tourist information center (HaproTic) which are
conducted through interview and observe. We also gathered some information about
traffic, transportations and attractions in the internet through reliable sources. From
those, we can conclude that
I. INTRODUCTION
Being well-known as a City of Peace and ranked the sixth in top ten most attractive
cities in Asia according to Travel and Leisure magazine of the US in 2007, is one the of
top ten best shopping cities in Asia, of top ten best city for leisure in Asia by online
tourism magazine Smart Travel Asia (2009), Hanoi, a thousand year city, is likely to be
an ideal destination for tourists from all over the world. Looking at many neighbor
countries such as Thailand, Singapore, Malaysia which have utilized Tourism as an
engine to boost their economies, Vietnam generally and Hanoi particularly must take
action to make tourism become a key industry soon.
Besides many popular types of traveling such as cycling tour, in-seat coaching tour,
walking tour could be a trend to develop in Hanoi because Hanoi has many potentials to
nurture it.
Thus, this paper focus on analyzing some aspects of Hanoi ranging from attractions,
transportation, information system… to find out problems which is needed to improve
to develop walking tour and also give some recommendations and potential walking
tours for further development.
II. LITERATURE REVIEW
1. The walking tour concept
Nowadays, tourism is defined by most of the countries as the chief industry to
develop economy because tourism has become a popular global leisure activity.
However to meet the demand of all the customers, tour operators have to create a wide
range types of tours in term of tour styles (luxury tours, budget tour) or tour activity
types (adventure tours, eco-tours…) and another type of tour which depends on
transportation options such as motor coach tours, train tours, bicycling tours… Among
them walking tours has become a popular trend for many tourists. Walking tour may
refer to either a multi-day trip or a full day or partial day trip of one or more destinations
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where the primary method of transportation is walking. Walking tour can be led by a
tour guide or be self-guided. Your tour will probably involves a morning walk with
sightseeing
stops,
lunch,
a
longer
afternoon
walk
and
dinner
(http://en.wikipedia.org/wiki/Walking_tour). Commonly, walking tours take place when
distance between destinations is not too long and accessibility for walking tourists is
somewhat convenient. By participating in walking tour, tourist can take advantage of
seeing destinations in great detail and also saving a large expenditure for transportation.
2. Typical walks in major cities
The Classic Walk in Paris (http://classicwalksparis.com/paris/tours/classic-walk)
Duration: 3.5 hours
Distance: 4 miles or 6.4 km
The Classic Walk offers a whole overview of Paris. Virtually most of major sites in
the city center are covered:
- The Eiffel Tower: the symbol of Paris
- Notre Dame: the most famous cathedral in the world
- Napoléon’s Tomb: the resting place of the most famous Frenchman in history
- Louvre Museum: one of the grandest museum in the world, include the most
famous works: Mona Lisa, Venus de Milo….
- Musee D’ Orsay: the museum hosts a world-class collection of Impressionists paintings.
- Tuileries Garden: Former Royal Garden in the middle of the city
- Champs- Elysees: the most famous avenues in the world. Its sidewalk are lined
with café, cinemas, 5-star hotels and shops.
The French Revolution Walk (http://classicwalksparis.com/paris/tours/frenchrevolution-walk)
Duration: 2 hours
Distance: 2.3 miles or 3.7 km
The French Revolution Walk will enlighten you to the significance of one of the
most important events in modern history. Revive the troubled period leading up to some
famous events in France.
Fashion walking tour (http://www.paris-walks.com/crbst_6.html)
Duration: 2 hours
The tour is conducted by the fashion specialists; it is an enjoyable mixture of
history, anecdotes, and trivia associated with fashion. The tour guide will show you both
famous names and introduce you some lesser treasures. You also can go inside the
shops and purchase what you want.
Vatican walking tour (http://www.enjoyrome.com/walking/vatican.html)
Duration: 3 hours
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The Vatican is one of the most famous interesting and breathtaking beautiful sites in
the world. The tour will take you to some major attractions as well as some lesser
known spots, and provide you a broad base for understanding the history, architecture,
and politics of the Vatican.
The highlights of the tour include:
- Vatican Museums
- Sistine Chapel
- St. Peter’s Basilica
Ancient and Old Rome walking tour
(http://www.enjoyrome.com/walking/ancient.html)
Duration: 3 hours
The tour covers all the well known sites of ancient and old Rome including:
- Colosseum (interior visit)
- Roman Forum (interior visit)
- Capitoline Hill
- Trevi Fountain
- Pantheon (interior visit)
- Piazza Navona
3. Hanoi with walking tour
Hanoi – A legendary city with significant collections of major cultural and
historical attractions
Hanoi – the beautiful capital of Vietnam strategically lies at the center of the
triangular basin of the Red River. It original named Thang Long (City of the Ascending
Dragon) and was first the capital of Vietnam in A.D.1010. With the 1000 years history
and culture and the topography of many lakes and rivers, Hanoi have many attractions
both cultural, historic and natural ones. And it is very potential for walking tour because
most of these attractions were located closed to others. It means that tourists can visit
these attractions by their feet instead of other kinds of transport
Mentioned about Hanoi, we can not forget many rich historic attractions such as
Hanoi Old Quarter, Temple of Literature, Ba Dinh Quarter, Flag Tower, Ho Chi Minh
Mausoleum…
Van Mieu – Quoc Tu Giam is a famous historical and cultural relic consisting of the
Temple of Literature and Vietnam’s first University. The Temple of Literature was built
in 1070 in honour of Confucius, his followers, and Chu Van An, a moral figure in
Vietnamese education. Quoc Tu Giam, or Vietnam’s first university, was built in 1076.
It was the first educational school for royal family members, and it was later opened to
talented students. The site preserves historical vestiges of a 1000 years old civilization
such as status of Confucius and his disciples, and ancient construction such as Khue
Van Pavillion, and Worshipping Hall.
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Another attraction which is also very familiar and attractive with tourists who come
to Hanoi is Hanoi Old Quarter. It is a unique antique quarter which represents eternal
soul of the city. In Hanoi Old Quarter, beside traditional buildings, there are cultural,
historic and religious buildings and traditional restaurants. Nowadays, the Old Quarter
still maintains Vietnamese and Asian architecture and creates a complexity of unique
architecture. Two examples of cultural and historic buildings which still remained are
87, Ma May Street (built in XIX century with old traditional architecture) and 38, Hang
Dao Street (original was communal house built in XVII, now has combination of
traditional and modern architecture). Now, in Hanoi Old Quarter, there are walking
streets and night markets which were established to promote walking tour.
Being a long-standing urban area, Hanoi is also very well-known with its
religious attractions like Quan Su temple, Tran Quoc pagoda, One-Pillar pagoda…
Quan Su Temple was built in the 15th century under the Le dynasty. According to
Hoang Le Nhat Thong Chi, during Emperor Le The Tong’s seign, the Emperor ordered
to construct a building called Quan Su (Embassy) to receive foreign ambassadors to
Thang Long. Because those ambassadors were all Buddhist, they decided to build a
temple on the premises for worship. Today only the temple remains. In 1934, the
General Buddhist Society of Tonkin was founded and choosed as its headquarters.
One-Pillar Pagoda is a historic Buddhist temple in Hanoi. It is regarded alongside
the Perfume Pagoda, as one of Vietnam’s two most iconic temples. The temple is
designed to resemble a lotus blossom, which is Buddhist symbol of purity, since a lotus
blossoms in a muddy pond. In 1954, The French Union forces destroyed the pagoda
before withdrawing from Vietnam after the First Indochina War, it was rebuilt
afterwards.
Beside those cultural and historic attractions, Hanoi is also proud of its natural
attractions which mostly are beautiful lakes and rivers such as West Lake, Sword Lake,
Truc Bach Lake, Red River…
Sword Lake – the beautiful basket of flowers inside Hanoi, a mirror-like green lake
with Ngoc Son Temple, The Huc Bridge, Pen Tower in the surrounding is a part of the
Red river. Sword Lake used to be called Luc Thuy Lake (or Green Water Lake) since
the water was green all the year round. In 15th century, it was named Hoan Kiem Lake
(Sword Lake) after the legend of Emperor Le Thai To.
Cuisine of Hanoi is also very attractive. It is not only diversified but also simple and
sophisticated, for example Thanh Tri Cuon Cake, Pho, Com (green rice), Bun,… And it
is considered as a attraction to attract tourists come to Hanoi.
However, its inner transportation is inappropriate and problematic for
designing walking tours
It will be difficult for a visitor to enjoy a walking tour in Hanoi without an
appropriate transportation system. It cannot argue that because this is a walking tour
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then feet will be the only one means to travel. Besides, a transportation system is
developed to add more conveniences for traveler.
First of all, the most important factor that, in order to walk along a street, is
pavement. In Hanoi nowadays, many streets have a large and nice pavement not only in
using mean but also in the aesthetic mean. However, in the streets that almost every
visitor to Hanoi will walk in maintain a situation of bad pavement, those are Old
Quarters. In the survey we have been conducted, many visitors claimed that pavements
in Old quarters are very narrow; sometimes they have to walk in the road instead of the
pavement.
The road system in Hanoi is the second significant factor. Besides some main roads
for instance Trang Thi, Le Dai Hanh, etc which are very huge, streets in the blocks are
small and crowded. Too many transports circulation around the street make visitors feel
terrible and scared.
In order to travel to the walking streets, travelers need some transports to take them
from their hotels or from airport to Hanoi’s center. Some will be suggested as taxies,
buses, and motor taxies.
Taxies will be the most useful transport. It can be easy to order, able to pick up a
number of people, convenience for changing the route if necessary, cheap by
international standards and a safe way to travel around at night. Average tariffs are
about 10,000d per kilometer.
The bus systems in Hanoi have improved in the past few years but are light years
behind Hong Kong and Bangkok and, in general, buses are not a practical way to get
around town. Even this kind of system is much cheaper but obviously it has more
disadvantages than taxies.
Getting around by motor taxies is easy as long as you don't have a lot of luggage. It
is not a convenience transport for traveler, because they have to negotiate the price
beforehand.
Beside those transports above, traveler can find cyclo, or hide a motorbike or
bicycle to enjoy their moment in Hanoi.
III. RESEARCH METHODOLOGY
In order to fulfill this research, two surveys and one observation were conducted in
two different days and all data colleted are quantitative.
The first survey was carried out on 1 May 2010 from 8.45am to 11.30am around
Sword Lake in the form of personal interviews. One or two researchers interviewed one
tourist and took note what he or she said. In this survey, 17 tourists, both Vietnamese
and foreigners, were randomly chosen to answer various open-end questions ranging
from their motivation to travel, their likes and dislikes in Hanoi, their evaluation about
Hanoi attractions, transportation, and especially about Walking tour. Basing on
experiences from many surveys before, the research group decided to hang on a banner
with slogan “if you love Hanoi, please tell me” to attract tourist’s attention first, then
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asked them to join the survey instead of blocking them on the way and ask for their
cooperation. Furthermore, everyone who participated in the survey received small gift
that is a couple of Vietnamese in traditional dress. As a result, the majority of
interviewees were people who approached us first due to their curiosity and then
expressed their willingness and happiness to take part in the survey. Thus, we got very
good responses from tourists in this survey.
On 11 May 2010, the research group divided into two sub-groups to conduct both a
survey and an observation simultaneously from 4pm to 6 pm. The first sub-group
carried out the survey around Sword Lake and in front of Hapro TIC, a free information
center in Dinh Tien Hoang street in the purpose of figuring out how tourists evaluate the
quality of information system in Hanoi that is one of key factor influencing walking
tours. Once again, a semi-structure interview with open-end questions was used to
collect quantitative data. Especially for the tourists who were out of Hapro TIC, besides
questions relating to general information system in Hanoi, the research group focused
on asking them about their assessment on the quality of information given by this
center. At the end of each interview, respondents were asked to provide their personal
information comprising name, nationality, and email address to make valid references
for the research.
At the same time, another sub-group conducted observation inside Happro Tic
center to evaluate attitude and working style of the staff, facilities and design of the
center. In addition to observing, we also played a role a person who need information
about some destinations in Hanoi to have short interview with the staff so as to evaluate
the quality of information they provided to tourists. Moreover, we also collected many
cards and brochures there to appraise effectiveness of these materials.
Right after each survey and observation, all information collected was entered in
database in order to make deep analysis.
IV. FINDINGS
1. Motivation for traveling to Hanoi
Although most of tourists interviewed are repeated travelers, only one-third of them
have traveled to Hanoi before. However, it is hard for first time tourists to Hanoi to
answer the question why they want to travel to Vietnam generally and to Hanoi
particularly. Some stated that they wanted to be here just for relaxation; some other said
they would like to discover Vietnamese culture and history through their travel. For
those who have visited Vietnam several times before, it is Vietnamese culture, history
and especially Vietnamese people who are very friendly and hospitable that attract them
to come back Hanoi. As one Japanese tourist who has been to Vietnam six times and in
Hanoi three times revealed, he loved Hanoi Old Quarter atmosphere that was hard to
describe by word. Meanwhile, another American journalist who has ever traveled to
Hanoi seven times tenderly looked at the research group and said “I come back here
because of you”. Noticeably, no matter what their motivations are, Hanoi Old Quarter,
Sword Lake, Ho Chi Minh Mausoleum, West Lake, Temple of Literature, and some
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Museums where Vietnamese culture and history are deeply reflected are places that they
have visited or want to visit the best.
2. Likes and dislikes of tourists in Hanoi
Among some common activities that tourists often participate in Hanoi, going
shopping and enjoying Vietnamese traditional food are favorite ones of many
interviewees. They love hanging out Hanoi Old Quarter to watch and purchase small
handicraft souvenirs such as wooden objects, toys, silk clothes, brocades for themselves,
and/or for their families and friends at home. Despite the fact that these products are
very nice and Vietnamese, it is strongly recommended by one tourist that different
shops had better sell different products in order to make shopping experience of tourists
more diverse and exciting. Further, one respondent showed his wish for watching the
hand-made items making process when going shopping in order to learn more about
Vietnamese culture in more creative and exciting way. This can be a good
recommendation for tourism makers to add more value for tourist during their trips. In
terms of food and beverage, the great majority of tourists asked expressed their
preference on traditional Vietnamese dishes; even some gave great praises for authentic
Vietnamese food. Interestingly, one Japanese tourist could name some well-known
Vietnamese food such as pho, spring roll, vermicelli and grilled chopped meat in
Vietnamese. Besides, it is not surprising that every tourist asked stated that they would
like and always come to small family-own shops to enjoy their meals instead of going to
luxury restaurants where Vietnamese taste seems to be weaker than the former.
Attentively, some of them asked showed their good experiences on enjoying food from
street vendors like Vietnamese people often do. In contrast to many foreigners who feel
afraid of eating food sold in the street because of hygiene matter, these tourists
expressed their willingness to expose to very Vietnamese lifestyle. It is quite interesting
that one Greek journalist revealed bread with pâté in the street was his favorite breakfast
everyday in Hanoi.
In addition to some quite popular activities that tourists want to take part in during
their stay in Hanoi, some respondents who are male journalists and engineer, have
special interests in learning more about architecture, particularly French buildings in
Hanoi. This interest possibly pertains to their jobs and genders. Thus, those prefer
spending time walking around Hanoi Opera house and its environs to satisfy their like to
going shopping in Hanoi Old Quarter or in open markets.
However, in addition to several compliments on attractiveness of many beauty
spots, of Vietnamese culture and history, and friendliness of the local people in Hanoi of
tourists, there are some comments on keeping public sanitation in Hanoi because they
saw many litters scatter on the ground. Therefore, Hanoi would be more beautiful if
both everyone is more aware of keeping environment clean and the local authorities
implement stricter regulations to rule their behaviors.
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3. Opinions on walking tour in Hanoi
When being asked about whether they had ever heard or joined in a Walking tour
before, roughly a half of them replied “No” because they seemed to be unclear about
what a walking tour was. Most of them appropriately thought about traveling on foot
without using any kind of transportation during the tour. This reveals that walking tour
appears to be a quite new term for tourists even though they have ever experienced it
many times or were joining it at the time the survey was being carried out. After being
explained shortly and clearly what a walking tour was, a small number of them
expressed their willingness to combine public transportation means with walking in the
trip as provided that they have a good guide. As several tourists complained,
Vietnamese tour guides are now quite bad at both foreign language and tourism
knowledge. For this reason, tourists often rely on their guidebooks and personal maps.
In fact, currently, most of time, foreign tourists travel on foot and sometimes take a taxi
rather than using other public transportation means like bus, cyclos or motorbikes to
travel in Hanoi because of many reasons. Firstly, the traffic in Hanoi is too heavy,
dangerous and different from their home countries for them to travel. Even some
Vietnamese tourists asked also expressed their dislike in traveling by these modes. For
this reason, one tourist suggested that Hanoi should block some streets suitable for
walking in certain holidays in order to give tourists a chance to enjoy their own walking
tours without any disturb of heavy traffics. Besides, one Japanese civil engineer gave a
comment on improving infrastructure to make traveling on road more smoothly.
Moreover, the instruction of each bus routine at bus stops is in Vietnamese only so that
foreign tourists feel very hard to travel by bus. Worthy saying that the poor instruction
in bus stops as well as from the board hung on the bus makes Vietnamese travelers
misunderstand and lost many times. Additionally, one tourist even exclaimed “terrible”
when he was asked about the signpost on the roads because he did not see any signposts
during his stay in Hanoi. Actually, there is the extreme shortage of signposts on the road
not only in multilingual but also in Vietnamese that makes tourists find more difficult in
their trips. It is Vietnamese people who feel confused when looking at the signposts in
Vietnamese because they are simply the names of streets or roads without any arrows
that show directions. Thus, all of the foreign tourists asked stated that they completely
rely on their guidebook and personal map to find the way. However, some tourists who
used taxi to travel complained that they felt dissatisfied because of being differently by
taxi drivers.
In the respect of ideal time and the length of walking tours, the great majority of
tourists asked want to join a walking tour in autumn and spring, especially in the
morning when the weather is cool and fine. A minority of them was willing to travel in
afternoon summer when the sun burns less hot. According to the majority of
respondents, they would like to take part in a walking tour that lasts from 0.5 to 3 hours
per day only. However, some other were willing to participate in a tour that takes 8
hours in maximum or even the whole day starting from the morning until the night.
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Only one out of 17 tourists desires to join a walking tour at night. This is possibly
attributable to the shortage of night activities in Hanoi. Thus, firstly, it is a good idea if
there are different walking tours designed with different themes and itineraries
according to seasonal changes and time in a day in Hanoi. Next, in order to encourage
tourists to take longer walking tour, it is highly recommended that besides famous and
popular water puppetry performance in Hanoi, more entertainment activities bearing
strong Vietnamese characteristics like bamboo singing (ca tru performance), and Xam
singing, traditional music instruments like monochord, Vietnamese two-chord fiddle
can be performed around Sword Lake in certain days under the control of the local
authority to make Hanoi have more distinctive melody. Equally important, some
Vietnamese traditional folk games such as man chess, swinging; walking on stills may
be organized in parks to arouse the image of very traditional Vietnam in the heart of
busy Hanoi. Furthermore, a night walking tour with food and beverage theme will offer
tourists very great nights in Hanoi. In addition to 30% some of tourists asked love
traveling with family and friends, other expressed their want to travel with strangers
who may come from different countries with different languages. There are some
reasons for this. Different from some tourists who like traveling with strangers because
they are confident in speaking some foreign languages; most of respondents show their
willingness to and interest in learning new things from new friends coming from
different cultures. For them, using body language is the best solution. Especially, some
of interviewees wish to have their travel partners are the local people so as to learn more
about Vietnamese people and have better guidance in some cases. Furthermore, except
for one-third of tourists surveyed is reluctant to travel with kids under 10 or the old
people due to their believed that different tastes and health conditions between this
group and them may affect their travel negatively, the majority of tourists expressed
their readiness to travel with such partners.
4. Tourist information is the main drawback for promoting walking tours in Hanoi
Guidebook and website are the main tourist information channels before the trip
Among the above problems, the most outstanding issue is about information system
for tourists. Most of the tourists stated that before traveling to Vietnam, they only
obtained needed information about Vietnam from guidebooks. During their journey,
they also utilized their guidebook as a direction tool to find the way to the destinations.
In addition, they also base on other sources of information, for instance their relatives,
friends, and searching on Google. Only few tourists have ever visited Vietnam websites
to find out information, however they did not highly appreciate quality and value of
these websites. According to Steven Bugg, a tourist from Australia who traveled to
Hanoi to visit his relatives, some tourism websites of Vietnam in general and Hanoi in
particular upload too general information about destinations. Moreover the information
is mainly for the purpose of commercial such as selling tours, hotel rooms. Therefore
the information appears too bias to him and he can’t absolutely trust in the information
for the tour. To prove for his statement, we tried visiting some tourism websites of
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Vietnam
such
as
www.dulichvn.org.vn,
www.vietnamtourism.gov.vn,
www.vietnamtourism-info.com, www.vietnam-tourism.com.vn, http://www.hanoitourism.gov.vn,
and also read Vietnam guide book online of Lonely Planet to compare the information
from two sources. Actually, these websites only contain some basic information about
tourist agency, restaurants, hotels, and typical attractions. They lack a very important
part about transportation systems which helps tourists to find the way from the
destination to other destinations on your own. While, the guidebook is possible of
providing more detailed information about how and by what means of transportation
which can help them to travel from this destination to other destination. This information
is particularly important for developing walking tour for self-guided tourists.
Provision of tourist information in Hanoi could be improved
During their trips, tourists can base on a variety of sources to search information for
their trips such as signposts, hotels, information centers, tour guides, or local people.
However, in Hanoi, most of these sources have not been developed to serve for walking
tourists effectively.
In term of signposts system, in some famous destinations for walking tour in the
world such as Paris or Romeo, signposts systems are considered as an important
element for the success of these destinations, they are designed and positioned
appropriately for all tourists being able to find their way without difficulty. Mr Cuong,
lecturer of Hanoi University said that when he traveled to Paris, he could find the way
to all destinations by himself just by basing on the direction of the signposts. However,
to Hanoi, signposts system actually is an imperative issue. Mr Steven Bugg claimed that
“It is very terrible, should keep it better”. As well, the other tourists complained that
they rarely saw the signposts on the road; furthermore all of them are in Vietnamese
without translation into English and other languages. Therefore they had to find the way
by their own map and guidebook and sometimes they might loose their ways.
Another tool which tourists can take advantage of asking free information is the
information center. In Hanoi, there are two centers like this: one located in Noi Bai
airport and the other located in Dinh Tien Hoang Street named Happro Tic. However,
when we interviewed to 3 tourists around Hoan Kiem Lake, all of them said that they
have never visited as well heard about the center at the airport. In our subject opinion,
location of this center is not proper due to the reason that when tourists get off their
flights, they have searched enough information to get to their hotel; therefore they want
to come to the hotel immediately for check-in process before doing the other things.
Hence, most of them ignored the center. Whereas, in the center of Hanoi there is only
one center which is located near Hoan Kiem Lake, the other areas such as Ho Chi Minh
mausoleum and West Lake also very popular for tourists haven’t any centers which can
support for tourists to find the information.
About Hapro Tourism Information Center or Hapro TIC (www.ticvietnam.com)
which is established in 2006, it has contributed a big role in providing tourists with free
information and knowledge of Hanoi in particular and Vietnam in general. Hapro TIC
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has two other centers in Da Nang and Ho Chi Minh cities. Hanoi-based Hapro TIC is
mainly composed of an information service section with 2 agents (4 in total with 2 work
shifts), free Internet access section, tour booking services, and Vietnam culture and
tourism books for sale. Besides, Hapro TIC in Hanoi also rent its center to other extra
services including Hanoi Moment’s souvenir boutique, Asiana Travel Mate’s travel
services, Gloria Jean’s Coffees, and currency exchange service by Lien Viet Bank.
Hapro TIC provides free information service assists travelers to find information
and direction faster, which helps develop Hanoi tourism industry. Besides, its good
facilities support travelers to search for information like Internet free access, free maps,
and stocks of various kinds of pamphlets and brochures. Additionally, it also has a
group of English-proficient agents with good behavior, attitude, knowledge and
communication skills. All interviewed customers were quite satisfied with the provided
effective information or service and want to use it again.
Despite all its strengths, Hapro TIC also incurs some problems in its operation
process. English and Vietnamese are the main languages used to assist travelers;
therefore, targeted customers are limited to only Vietnamese, English native speakers
and ESL speakers. Furthermore, four agents in free information section is a modest
number compared to an increasing number of walking travelers to Hanoi.
In addition, this center also faces with problem of outside decoration and location.
The center place is difficult to be recognized among thousands of shops and stalls on
Dinh Tien Hoang Road, while its decoration is not outstanding enough to catch up
tourists. Hence, tourists can mistake it with other shops and ignore them. Even when we
asked a tourist come from Melbourne, Australia – Mr. Greg Woods who stood in front
of the tourism information center, he did not know about this center. The reason he
stood there only because he wants to use free internet of the center to contact with his
relatives. And even us, when we came there to collect information, we also had to spend
some minutes to find this center, because the company’s name board is hang up too high
compare with the view of the viewers; moreover it is hidden by the trees in front of it
which has hampered the service access. Owing to these reasons, when we interviewed
three tourists around Hoan Kiem Lake, none of them know about this center.
Besides Happro Tic, around Hoan Kiem Lake there are also some others small
stores named information center; however, in reality it is only for the purpose of
booking tour but not providing free information for tourists.
The other source of information which tourists can get is from their hotels.
However, the tourist who has asked his hotel to get information said that the hotel just
provided him with general information and they still had to base on the other sources.
This is also a weakness which needs to be improved more for a better tourism
information system in Hanoi to develop walking tour as well as other forms of tours.
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Conclusions
Drawing from the findings, there are some problems to develop WT in HN and the
problem of ineffectiveness information is the most outstanding one. In brief,
information system includes these main following problems:
- Shortage of websites about Vietnam and Hanoi tourism with detailed tips and
advice for walking travelers
- Ineffective signposts system both in quality and quantity
- Lack of free information center for walking tourists
- Unqualified tour guide both in foreign languages and tourism knowledge
V. RECOMMENDATIONS
Drawing from all findings above, there are some recommendations to improve the
ineffectiveness of providing information for traveling in Hanoi generally and for
developing walking tour in Hanoi particularly. First, it is highly appreciated if all of
official tourism websites provide more detailed information about traveling in Hanoi to
tourists, especially information related to events, activities that celebrate up coming
1000-year-old Thang Long anniversary.
Second, the large number of signposts with detailed instructions in some popular
foreign languages besides Vietnamese such as English, French, German, Spanish,
Japanese, Korean, Chinese need to be installed in higher density in order to help
travelers locate themselves as well as find the way easily. In addition to signposts, it is a
good idea to put some big map boards in some places which have large spaces like
Tokyo does. Furthermore, it is necessary to set up multilingual instruction boars and
maps at every bus stop to encourage tourists to use public transportation more and more.
Next, both state-owner and private organizations should join hand to establish more
tourism information centers that follow Hapro TIC model around Hanoi, especially in
places where are highly concentrated by tourists such as around West Lake, Temple of
Literature, museums, parks, markets… Further, in addition to professional staff, it is
students who are major in tourism or culture, history from Universities and colleges in
Hanoi could contribute to the success of these centers by work there in form of
internship. More to the point, it is better if the staff in these centers can speak some
popular foreign languages such as French, Spanish, German, Japanese, Korean, Chinese
besides English only because those from these nations constitutes a large proportion in
the total number of tourists to Hanoi now.
Additionally, the Hanoi authority is strongly recommended to require all taxi drivers
to post the tariff up clearly, then regularly examine their odometers as well as strictly
punish lawbreakers to assure the rights and reinforce belief of travelers. Moreover,
information pertaining to taxi price as well as that of other means of public
transportation should be placed both in websites and map boards on the roads.
Equally important, Hanoi should have more rigid regulations for tour guide
qualification. In order to be a tour guide of Hanoi, a person has to receive a certificate
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that demonstrates both his foreign language skills and tourism knowledge. Hanoi may
also establish a forum for tour guides to update information of Hanoi and to learn more
from one another as well.
VI. FOUR SUGGESTED TOUR PROGRAMMES IN HANOI
1. A walk through three religions of Vietnam
Our first suggested itinerary is “Three integrated religions in Vietnam” tour which
introduces history and influences of three main religions in Vietnam. They are
Confucianism, Taoism, and Buddhism. First, tourists gather in front of Temple of
Literature (Confucianism) to discover the first Vietnamese university. Then we move by
bus or bike to West Lake area where we visit Quan Thanh Temple (Taoism) and Tran
Quoc pagoda (Buddhism).
Temple of
Literature
(Confucianism)
Quan Thanh
temple
(Taoism)
Religions in Hanoi have not been totally discovered and studied. This walking tour
can give travelers unique amazing experiences of Hanoi religions’ philosophies and
history. The walking tour will be carried out in the morning or afternoon. Specially
travelers can take rest time for shopping, snack, and entertainment at West Lake area.
2. A night walk in Hanoi’s Old Quarter
The purpose of this walking tour is to enjoy the peaceful, quiet and glistening
atmosphere of Old Quarter’s nightlife and enjoy night dishes in Hanoi, which have
potential for main tourism products of Hanoi. Our tour will have the following itinerary
in order: first night market of Old Quarter (from Dong Xuan market and Hang Ngang
Street to Hang Dao Street), then to Ta Hien Street, Hang Bong Street, Hang Gai Street,
Tong Duy Tan Street and finally Cam Chi Street. Taking part in this itinerary, walking
tourists can go shopping in night market of Old Quarter, and then visit Ta Hien Street,
which is famous for beer bars for foreigners. Afterward, tourists can enjoy Hanoi’s
night nosh on Tam Thuong gate, Hang Gai Street, Tong Duy Tan Street and Cam Chi
Street, which are cuisine streets of Hanoi, and To Tich and Ly Quoc Su Streets. Here
you can enjoy baked cuttle-fish, Pho, fried fermented pork roll, noodle, pickled fruit
juice, etc. It is noted that night market in Old Quarter only open on Saturday and
Sunday. It means that this tour will operate on Saturday and Sunday. The reasons why
we want to suggest this tour because walking tour in night will avoid many problems
like too heavy traffic, dirty dust and vendors which a walking tour in day will suffer. In
addition, in summer, the weather of night is better than that of day.
3. A walking tour for architecture lovers
This walking tour program is intended for people in love with Hanoi architecture
which is a blend of French and Vietnamese. Its time schedule is from 8 a.m. to 8 p.m.
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Tourists will start walking from Sword lake in Dinh Tien Hoang Street, turn to Ly Thai
To Street to visit Hanoi Opera House, then to Ngo Quyen Street where The North
palace (Bac Bo Phu) are situated. Next, tourists travel along Tran Hung Dao Street
where many French-style buildings exist to Phan Boi Chau Street where they can enjoy
delicious lunch in Quan Ngon restaurant. After having lunch, tourists can travel to Dien
Bien Phu Street to visit Hanoi Flag Tower Contemplation, come to Hoang Dieu road
where Thang Long Imperal City is located, and from Phan Dinh Phung road to Hung
Vuong road to visit Presidential palace, Ho Chi Minh Mausoleum, and One Pillar
Pagoda is next door. From Hung Vuong road, tourists turn to Tran Phu street and travel
to Tong Duy Tan Street and Cam Chi Alley by bus or on foot to enjoy dinner. The tour
will end at Cam Chi Alley.
4. A fashion and art themed walking tour in Hanoi
The walking tour is likely to last 3 hours from 8 a.m. to 10 a.m. Walking travelers
will begin the trip at Apricot gallery on 40B Hang Bong Street, which is one of the
capital's most successful galleries gathering the top-ranking artists from different
generations. Next, Tan My Design in 66 Hang Gai Street is a new shopping experience
in Hanoi, which combines feelings of old Hanoi with modern contemporary architecture
and design. Tan My Design features some of Vietnam’s finest designers – Fashion,
Accessories and Home wares as well as Tan My Design’s own brand. Then tourists can
have a chance to visit Khai Silk in 96 Hang Gai Street, one of the Vietnam’s most
successful chains of silk boutiques which specialize in clothes and other silk products.
Afterward, tourists travel to Vietnamese House on 92 Hang Bac Street for a collection
of gems, handicrafts, small ceramics, etc. and the final destination is Furniture gallery
on 8B Ta Hien Street for furniture products. The tour program may include some
services such as English speaking tour guide, shopping, Hanoi’s finest espresso, and
light meals at Tan My Design café. For more information for this walking tour program,
tourists
can
refer
to
these
websites
as
follows:
http://www.culturalprofiles.net/viet_nam/units/683.html, http://www.tanmydesign.com/,
http://www.hotels-in-vietnam.com/hotels/Travel_Vietnam/shopping-in-hanoi.html.
VII. CONCLUSION
In this research report, we would like to portray the general picture of walking tour
in Hanoi, Vietnam. From the first step, we provided you with our research methodology
and the process of finding. Problems for walking travelers have been deeply analyzed
and synthesized to offer you the most insightful view on Hanoi tourism service
situation, especially its information system and effectiveness. Meticulous
recommendations are also given with the best consideration many factors of information
on websites, street signposts, tour guide qualification, and models of free information
center multiply. Unfortunately, due to the lack of human capacity and time resource, the
report may contain some unavoidable errors or mistakes. To some extent, we, however,
believe that this report can be helpful
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REFERENCES
No author, “Walking tour”, [online]. Available at URL:
http://en.wikipedia.org/wiki/Walking_tour (Accessed 10 May, 2010)
No author, “The Classic Walk”, [online]. Available at URL:
http://classicwalksparis.com/paris/tours/classic-walk (Accessed 10 May, 2010)
No author, “The French revolution walk”, [online]. Available at URL:
http://classicwalksparis.com/paris/tours/french-revolution-walk (Accessed 10 May, 2010)
No author, “Fashion walks”, [online]. Available at URL:
`
http://www.paris-walks.com/crbst_6.html (Accessed 10 May, 2010)
No author, “Vatican walking tour”, [online]. Available at URL:
http://www.enjoyrome.com/walking/vatican.html (Accessed 10 May, 2010)
No author, “Ancient and old walking tour”, [online]. Available at URL:
http://www.enjoyrome.com/walking/ancient.html (Accessed 10 May, 2010)
No author, “Vietnam cultural profile”, [online]. Available at URL:
http://www.culturalprofiles.net/viet_nam/units/683.html (Accessed 12 May, 2010)
No author, “Welcome to Tan My Design”, [online]. Available at URL:
http://www.tanmydesign.com/ (Accessed 12 May, 2010)
No author, “Shopping in Hanoi”, [online]. Available at URL:
http://www.hotels-in-vietnam.com/hotels/Travel_Vietnam/shopping-in-hanoi.html
(Accessed 12 May, 2010)
Tic Tourism information center, “The window to Vietnam”, [online]. Available at URL:
http://www.ticvietnam.com/en/ (Accessed 12 May, 2010)
No author, n.d, “Tourist Attractions”, [online]. Available at URL:
http://www.hanoitourism.gov.vn/home (Accessed 10 May, 2010)
Frommer “Introduction to Hanoi”, [online]. Available at URL:
http://travel.nytimes.com/frommers/travel/guides/asia/vietnam/hanoi/frm_hanoi_019701000
1.html (Accessed 10 May, 2010)
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ROLE OF AUDIT IN VIETNAM
Written by: Pham Quynh Anh, Nguyen Thi Thu Phuong (1KT-08)
Nguyen Thi Lien, Le Thi Huyen Trang (2KT-08)
Vu Thi Ngoc (3KT-08), Dang Anh Thu (1KT-08)
Supervisor: Chu Huy Anh
ABSTRACT
Independent or external audit is playing an increasingly important role in Vietnamese
economy. Not only does it strengthen investors ‘confidence in enterprises’ businesses but
independent audit also enhances the managerial effectiveness by providing the managers with
advisory. Based on the secondary data, this research gives an overview of the development and
scale of Vietnamese independent audit industry. Especially, the study focuses on the roles of
independent audit in Vietnamese economy, the achievements it has gained and the drawbacks it
has overcome. From these points, some recommendations are suggested to improve the
independent audit practices in Vietnam.
Part A: Introduction
In recent years, Vietnam’s economy has been rapidly developing with the
integration into the world economy. As a result, the demand of audit in general and
independent audit in particular are increasingly higher and higher. Despite being a new
profession in Vietnam, the number independent auditing firms has been rising over the
years. Their efforts are to bring about transparent financial statements, ensure the
compliance of the laws, and help investors make accurate decisions. Although the
profession is still young and still needs a lot of improvement, independent audit has made
many undeniable contributions to the development of a healthy economy in Vietnam.
Particularly, the purpose of our research is to give a panorama of auditing in
Vietnam with scale, development, competitive advantages and disadvantages of
Vietnamese auditing firms, then analyze the main roles of auditors to the economy and
to other interested parties. Therefore, our research is divided into three main contents:
the overview of Vietnamese independent auditing, the development and roles of
independent auditing in Vietnam, and recommendations to the development of
Vietnamese auditing system in the future.
Part B: Findings
I. Overview of the audit in Vietnam
Audit is a large topic that the research cannot focus on all sides of the field,
therefore, it only concentrate on Vietnam’s external audit, which is getting more and
more interest of public today
1. Overview of independent audit of Vietnam
1.1 Development
Independent audit is one of 3 types of audit classified by subject, which includes
State audit and internal audit. Independent audit is periodic or specific purpose (ad hoc)
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audit conducted by external (independent) qualified accountant(s). Its objective is to
determine, among other things, whether (1) the accounting records are accurate and
complete, (2) prepared in accordance with the provisions of GAAP, and (3) the
statements prepared from the accounts present fairly the organization's financial
position, and the results of its financial operations. Therefore, it is necessary for
businesses in a market economy that is typical of competition. Being aware of the
important role of independent audit in the development of the economy, on May 13
1991 the government decided to establish two independent audit firms, namely Vietnam
audit company (VACO) and Vietnam audit service company(ASC) according to
decision 164-5-TC/QD/TCCB, now Vietnam audit and accounting company (ASSC),
which initiated the independent audit practice in Vietnam. 19 years has seen the
dramatic growth of Vietnamese independent audit in both quantity of firms and auditors
force and range of service.
2200
2500
2000
1500
1000
500
0
622
2000
1500
1234
1500171
108
1000
531
500
34
13
2
0
200
150
100
50
0
N u m b e r o f a u d it
fi r m s
Scale of Vietnamese Independent audit
Num ber of
c e r ti fi e d a u d i to r s
B illio n s V N D
Growth in revenue of Vietnames e
independent audit indus try
Certified auditor
Firm
1991 2001 2005 2009
1991
2005
2009
Year
year
Revenue(billions VND)
Source: VACPA
Figure 1: Growth in revenue of Vietnamese independent audit industry
Figure 2: Scale of Vietnamese Independent audit
Two graphs above illustrate the expansion in scale of Vietnamese independent audit
in terms of revenue and quantity of firms as well as the increase in certified auditors.
1.2 Scale
Top ten audit firms in Vietnam 2009
BDO Vietnam
Mazars
AISC
G.T
AASC
A&C
Deloitte
PwC
E&Y
KPMG
31,805
37,200
39,113
62,134
77,384
89,616
266,324
273,130.41
323,089
333,669
Revenue (million VND)
Source: VACPA
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Currently, independent audit firms are classified into 3 types: 136 limited
companies, 23 member firm of international network, 6 foreign companies, and 6
partnership companies, and vary in scale. While foreign companies account for 55%
market share, the rest firms are small and medium enterprises. In terms of revenue, in
top ten audit firms earning the biggest revenue, 5 of them are foreign companies and 5
ones are member firms of international network.
2. Legal framework for Vietnamese audit practices.
Up till now, legal framework established for ground rules in Vietnamese
independent auditing has consisted of decrees and circulars and regulations of the
government and Ministry of Finance (MOF), Vietnamese standards of auditing as well
as accounting law.
2.1 Decrees, circulars and regulations relating independent audit
The Vietnamese government issued decree 105-2004 and decree 30-2009 to
regulate auditors, audit firms, the validity of audit results, the cases that are required to
be audited and other things relating to independent audit. According to these decrees, in
order for an audit firm to be established and to operate in Vietnam, it must meet the
following requirements:
1) The firm must employ at least 3 auditors holding the auditing license, including
Director or General director. If the firm is a joint-venture firm or a limited liability
company, Director or General director must own at least 10% of chartered capital.
Director or General Director must have 3-year experience of auditing after gaining the
auditing license and must not hold administrative or managerial position in other firms.
2) Within 30 days since obtaining operating license, the audit firm must inform
MOF of the establishment of the auditing firm and the list of auditors employed by the
auditing firm.
3) While operating the firm must have at least 3 full-time auditors. Violating this
condition in 6 consecutive month, the firm must stop provide auditing service.
Besides the above decree, the MOF issued the circular 60/2006 to give the detailed
guideline of standards, conditions to establish and operating of auditing firms.
In addition to decrees and circulars, regulations are imposed to control the quality of
accounting and auditing service and to select the auditing firms to undertake the audit of
the stock issuers, listed companies and securities trading companies.
2.2 Vietnamese standards of auditing
Standards of auditing are basic principles of auditing profession and relations
derived from the auditing process. To date, the MOF has issued 37 standards in 7
batches to offer auditors guidelines and directions to apply.
In response to the development and growing role of independent auditing, the
independent auditing law has built and it is going to be passed by National Assembly in
May 2010.
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3. Pros and cons of Vietnamese auditing
3.1 Competitive advantages of Vietnamese auditing
As the globalization and the integration of Vietnam into the world market,
Vietnamese auditing system has developed as well as massively increasing quantity of
auditing firms. This leads to a fierce competition among auditing firms, especially
between Vietnamese ones and foreign ones in way of involving customers. In one
current statistic, “these foreign firms, Ernst & Young Vietnam, KPMG Vietnam and
PricewaterhouseCoopers, serve many large multinational companies and together with
Deloitte Vietnam, hold a 55 percent market share” (2010, audit giants raise eye-brows
with loss report). Therefore, only residual 45 percent of market share is for domestic
firms, which requires them to make differentiation and build their own brand.
The first superior point is the low fees of auditing services. In the opinions of Bui
Van Mai, Secretary General of the Vietnam Association of Certified Public Accountants
(VACPA), to the same client, foreign firms in Vietnam often charge a very high fee, 10
times to even 20 times as much as local firms do. There are many inverse explanations
about this situation. In terms of positive attitude, local firms can reduce their cost to
charge lower because of the government’s favor and guarantee. Meanwhile, beside tax
obstacle, foreign firms in Vietnam impose a very high price as taking advantage of
reputation from parent companies. However, the others think that owing to auditing
procedure deduction, domestic firms are possibly competitive to multinational firms,
following mistakes in the results. Actually, to kill off local firms, many foreign
companies also keep price below cost, this leads to a loss of VND 96 billion (US 5
billion) of three biggest auditing firms. Therefore, it is undeniable that lower price is a
competitive advantage of Vietnamese auditing firms.
Secondly, local firms also understand domestic market more widely than foreign
ones. It is obvious to see that from the option of target customer of the local ones.
Vietnamese auditing market can be divided into three segments with three main kinds of
client: multinational groups, big invested Vietnamese companies, and small and
medium scale enterprises. Both international accounting firms and foreign auditing
firms choose conglomerates, which have large operation and finance scale. However,
“Vietnamese accounting firms mainly serve Vietnamese companies. Big auditing firms
serve big Vietnamese corporations, while smaller firms serve smaller companies which
do not intend to attract foreign investment” (2010, saigontiepthi, Low fees cause
auditing firms’ losses). Beside the reason of insufficient technique and human resource,
local firms choose this kind of client because they are an expertise in this segment. They
truly understand characteristics of culture, economic and politics, so they can give
auditing services such as financial statements or advisory plans under the Vietnamese
law and the government policy.
3.2 Competitive disadvantages of Vietnamese auditing
Although Vietnamese auditing firms are now confident to compete with foreign
firms, they also have weaknesses that need to be improved. After 15 years of growth,
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the gap between local firms and international firms has been narrower. However,
“According to the Vietnam Association of Certified Public Accountants, local auditing
firms are understaffed as there are only around 1,100 certified auditors in the country
and just 111 of them have international qualifications. On average each auditor has to
audit 46 companies and organizations a year” (2010, audit giants raise eye-brows with
loss report). It means that our firms are in short of quality and professionalism, also
raising difficulty for Vietnamese auditing firms to gain the market share from foreign firms.
Furthermore, one problem is about reputation and prestige. Obviously, international
firms have reached worldwide, so they are very famous and believable. Meanwhile,
local firms are even newly born and developed, and the target market is only domestic
clients, which makes us less competitive. As a result, in the programs out of border,
international firms are prospective.
To improve these main weak points, local firms need to upgrade quality of services,
technique, and human resource. Many firms become members of big international
auditing firms to have support from parent companies. Other firms cooperate to help
each other with holding seminars, workshops of professional skills. It is also the main
way of development in Vietnamese auditing firms for the time going.
II. Role of external audit
The market economy requires all enterprises, which operate in all sectors, must have
accurate, timely, and reliable financial information. All annual results of operation of all
enterprises are reflected on financial statements including: balance sheet, income
statement, cash-flow statement, and presentations of financial statement. Because of
many different causes, the business- owners who are in charge of issuing financial
statements want to conceal the loss or weak points of financial results. Conversely,
those who are interested in financial results and financial situations of enterprises
(investors, shareholders…) want honesty and transparency. Those factors lead to
formation of independent audit companies. The independent audit companies have highly
professional staff to providing reliable information for both internal and external users.
1. For internal users:
Audit plays an important role in operating business of any enterprises of various
types and sizes.
Firstly, the managers of the enterprise need honest and transparent information on
financial reports to decide right actions in all phases of management. It is obvious that
business owners cannot control all the thousands and thousands of financial transactions
happen in the enterprises. Only an audit can provide such information: the receipts of
capital, monitoring and managing all the business activities.
Secondly, independent auditors contribute professional guidance and improve
accounting activities in the companies. All activities, especially financial activities are
the combination of the various specific transactions. Whereas, the regulations and
policies from the government always change in the different period of time. The
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auditors’ comments will help business owners to detect errors and violation of law. It
not only helps businesses limit the risk but also find out potential financial strengths in
the internal business.
Last but not least, audit ensures the transparency of financial information of the
companies. At the present, Vietnam is implementing open door policy, multilateral
investment both not only in domestic but also oversee so the government is very
interested in attracting investments from abroad (direct and indirect). These foreign
investors always require audited financial statements to evaluate exactly the financial
situation of the companies, which they intend to invest. It is said that the transparency is
the most valuable asset to the enterprise itself. When a company can be trusted with by
investors, business partners, it will create better conditions for raising capital, finding
the potential business partners, obtaining bank loan, etc.
2. For investors
Transparency in financial reporting is extremely important especially to investors.
Investors make investing decisions based on financial reporting of the companies.
Transparency of the financial statements is essential for financial decision making of
investors. The more transparent information investors get the less risk they can
encounter. Investors would make noise if they rely on dubious financial statements.
It can be argued that one of the most reliable resources for investors is independent
audit. The main purpose of an audit is to enhance the transparency of financial situation
and management system by providing written reasonable assurance from an
independent source. It should provide a “true and fair view” of financial statements in
accordance with an accounting standard.
In the process of preparing and declaring financial information, there are a lot of
problems arising such as benefit contradictions and differences in information using
objectives. Those factors lead to lack of reliability and certainty in accounting
information. In fact, a lot of companies intentionally make financial statement beautiful
by “cooking books” to attract investment or capital. The reason for this practice is that
the company is under pressure to achieve the objectives and plans of revenues, profits or
maintain market shares. To create profitable figures, they would find many ways to
overstate revenues and assets, understate expenses and liabilities, or make improper use
of reserves. This is not too difficult to implement because the accounting standards are
flexible, allowing the application of various accounting methods and many professional
assessment of the subjective view of the managers. Some common practices the
companies often abuse are transactions hiding, accounting standard variation or timing
obscurity and so on. The “create” practice is quite difficult to be detected by investors,
because investors normally do not have adequate level of profession to understand
financial information. Obscure statements also hide the level of debt, thereby also
hiding potential bankruptcy of the company. Even, in many cases, it is difficult to
examine whether accounting information is right or wrong. Therefore, investors really
need professionalism and credibility from the third party-independent audit.
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In recent years, due to rapid economic growth, there are more and more commercial
and financial frauds in Vietnam. Although these fraudulent were not as serious as the
cases of other countries, they have had negative impact on Vietnam economy and
created bad publicity on Vietnamese companies especially the ones listed on the stock
market. According to Stox.vn statistics, as of 20.4.2009, of 357 listed companies, at
least 194 companies have a difference of business results before and after auditing. For
many companies, difference between business operating results was quite large (over
10%). Some typical example can be mentioned are financial fraud of Bong Bach Tuyet
Company, Bien Hoa Join-stock company- Bibica, and the latest case come from
Vinaconex with 263,292 billion VND difference between before and after auditing
financial statement. In this situation, the role of audit becomes more and more important.
In summation, independent audit plays an important role in public and investing
community. It helps to ensure the transparency of financial information, which is crucial
for investment decision. It also contributes to the consistency of economic growth.
III. Achievements and scandals of Vietnam’s audit
1. Achievements
1.1 Establishment of the Vietnam Association of Certified Public Accountants
(VACPA)
The Vietnam Association of Certified Public Accountants (VACPA) is an
organization of practicing auditors in Vietnam. Before VACPA’s establishment on 15
April 2005, the Ministry of Finance directly manages and operates all auditing
activities. The foundation of the association meets the development requirements of
accountancy profession in Vietnam. The objectives of VACPA are to maintain and
develop accountancy profession, improve quality of accounting, auditing and financial
advisory services in Vietnam through training technical update courses, professional
ethics and service quality control, information exchange for its members, as well as to
integrate with other associations in the region and all over the world.
1.2 Promulgation of ethical standards in Accounting and Auditing practice
Standard of morality is a sensitive concept of any industry existing in society, in the
field of accounting and auditing this standard is extremely important and required high
level. According to Ms. Trinh Hong Nguyet, General Secretor of Vietnam Association
of Certificated Public Accountants (VACPA), the Standard of morality is built to bring
the independence, objective, prudence, and confidentiality. Declared in December 1,
2005, the principles are the first official correspondence, which consists of a variety of
rules and guidelines applying the standards of morality for the accountants as well as
auditors in order to make the profession of the auditing in Vietnam.
1.3 The transformation of management model and ownership of auditing
enterprise
The decree 105/2005/NP-CP on independent auditing has exposed some
inadequacies. As a result, the Prime Minister issues the decree 113/2005/ND-CP that
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amends and adds a number of articles in the previous one. It specified that auditing
enterprises might be established and operated in one of four types of entities, which
include limited liability company, partnership, private enterprise, and enterprise under
the Law on Foreign Investment in Vietnam. Accordingly, auditing firms with foreign
owners will always be founded and operated as limited-liability model under the
Foreign Investment Laws. There will be no joint stock company and no state-owned
enterprise. The transformation from stated-owned model to one of the four types above
is not only compulsory but also imperative for businesses to improve the management
capacity and ability to compete. The renovation enhances the independence, objectivity,
transparency. It satisfies the innovation requirements of the Law on Auditing and the
requirement of global economic integration. According to Ms. Ha Thi Thu Thanh, CEO
of Deloitte Vietnam Company limited, transformation of ownership types is judged as a
crucial step forward for each firm as well as for the general development of audit in
Vietnam.
1.4 The formation of website vaa.vn
In March 2007, the website of Vietnam Association of Accountants and Auditors
(VAA) was officially online at www.vaa.vn. Not only be an official information channel
about accounting and auditing in general, VAA in particular, but the website also
increases the interaction between domestic and foreign companies. Moreover, it is a
new tool for VAA to manage the practicing of accounting. In fact, vaa.vn is considered
as a useful information resource about auditing and accounting. It provides a huge
amount of updated news relating to the technical areas of accounting an auditing and the
entire business community. In addition, there are varieties of guideline for preparations
and mock exams for the practicing certifications available on the website for anyone
interested in accounting and auditing.
1.5 Lays of foundation of auditing & accounting in Vietnam according to
international standards
According to VACPA’s statistics, there are more than 150 auditing enterprises and
1,100 practicing auditors. Only a number of businesses develop their own internal audit
program. The scale and quality are quite different among the programs. International
audit firms also implement their own audit program. In Vietnam, it is a relatively
complex task, especially for small companies. Consequently, based on the revised
International Standards on Auditing, which are to be applied from this 15 December
2009 and considered to be applied in the country, VACPA has implemented a project
“Sample Audit Program” funded by the World Bank. The Sample Audit Program
(“SAP”) is designed to guide the nature, timing, and extent of essential audit
procedures, ranging from planning, executing to finalization, to auditing the financial
statements of manufacturing or trading companies. As said by Mr. Nguyen Thanh Lam,
Director of Hanoi office of DTL Auditing Company, the Sample Audit Program
provides auditing enterprises with a coherent process from start to finish. Hopefully, the
quality of auditing will be improved in the coming audit season 2010 – 2011 with the
new regulations.
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2. Scandals
Besides all good points are mentioned about, the auditing in Vietnam can not avoid
some troubles for recent years.
2.1 Bach Tuyet Cotton Corporation’s scandal
In 2008, Bach Tuyet Cotton Coporation (Cobovina Bach Tuyet) shocked all
investor by being revealed that the firm had said to be profitable while it made loss. In
2004, the financial statements after auditing showed that BBC lost 2,121 billion VND.
However, in 2005, a company named A&C was invited to audit the financial statement
of BBC, which released that the business made profit of 982 million VND. Although
the auditor from A&C had opinions excluding some terms like the lack of reserve for
inventory, use of reserve salary to pay insurance and payment for advertising a new
product not included in financial statement.
In 2006 and 2007, another company took part in auditing the activities of BBCAISC. In 2007, BBC required to re-check some items in financial statement for year
ended 2006, therefore, the earnings after tax of Cobovina was negative 8448 billion
VND. The edited data was showed on the beginning of the financial statement for year
ended 2007. After that, BBC started to adjust some transactions to match the earning
from the previous years. As a result, in 2007, BBT had a loss of 6809 billion VND and in
the first 6 month of 2008, the firm had a loss of 4537 billion VND and stopped operating.
This scandal was revealed in 2008 and the State Securities Commission of Vietnam
(SSC) fined BBT 90 million VND and reprimanded A&C and AISC. The punishment
SSC gave to the two auditing companies was considered to be unfair and made many
investors disappointed. However, according to some experts, objectively, the deep
reason of this case was that BBT had provided unfaithful information leading to the
mistakes in the financial statement. In addition, SSC was responsible for disclosing the
information without re-checking to affect benefits of the investors.
2.2 AACC’s illegal consultancy
According to the investment license that the management board of industrial parks
in Dong Nai province issues, Grobest is immune from corporate income tax for four
years since its business is profitable and it is subject to 50 percent of tax reduction for
the next four years. However, in order to receive such treatment, the corporate must
ensure the export of aquatic products and seafood accounted for more than 50 percent in
the first year and go up to 60 percent, and then reach three – quarter of the total revenue.
In fact, in 2004, the firm’s export only made up approximately 5 percent, 30 percent in
2005, and nearly 42 percent of its total revenue in 2006. Because the corporate did not
meet the commitment, it should not been entitled to treatment. Confronting such
problems, Grobest invited AACC to give them tax consultancy services about petition
for Ministry of Finance’s or General Department of Taxation’s ratification that allowed
Grobest to be tax-exempt for four years of its profits and be cut 50 percent corporate
income tax for the following seven years. In exchange for this service, Grobest had to
pay a fee of $155,000 USD and 10 percent of the amount of tax saved if its business had
profits from 2006 to 2011. In 2007, when Tax Department of Dong Nai province carried
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out an investigation about tax-exemption and reduction, the truth of the scandal was
revealed. As a result, Grobest must pay a tax arrears of more than 36 billion VND and a
lot of tax staffs were prosecuted.
Apart from Grobest, AACC also gave tax consultancy services for many other
businesses with foreign investment in Dong Nai and some other surrounding provinces
such as Taya (Vietnam) electric wire and cable Joint Stock Company, Asia Nutrition
Technologies Vietnam, Tung Kuang Industrial joint stock company and Southern Steel
Sheet Company.
2.3 Mistake of auditing chartered-capital in 2009
The auditing and consulting Sai Minh was reprimanded because of the mistake it
made about the chartered capital of 28.8 billion VND of the Toan Cau insurance jointstock company in February 28, 2008.
The Ministry of Finance had shutdown this auditing firm. According to the decree
numbered 17329/BTC-CĐKT in December 10, 2009, Mr. Tran Phuoc (Auditor card:
1049/KTV) who signed in the auditing report and Mr. Nguyen Phu Hien (Auditor card:
0534/KTV) who signed in the capital auditing report of Toan Cau insurance joint-stock
company in March 31, 2008 – the director were suspended for 1 year. Meanwhile, Sai
Minh Company was required to carefully check the auditing process in order to avoid
crucial mistakes and insure the quality of its service.
2.4 Inconsistency in accounting treatment of some listed companies and vague
information disclosure
Along with the overall decline of the stock market in the end of 2008, pressure of
the losses due to reserve of declined stock on the listed firms leads to the inconsistency
in accounting treatments among them and among auditing enterprises. Up to 20 April
2009, there were 357 listed businesses on both Hanoi Stock Exchange and Hochiminh
Stock Exchange. At least 194 of them revealed disparities in business results before and
after being audited.
The most noticeable case was the differences in business results of one business of
Kinh Do Group - Kinh Do Corporation (KDC). With the difference in after-tax
operating income of about 202.987 billion VND (operating income declined from a
profit of 142.376 billion VND to a loss of 60.602 billion VND), KDC were ranked as
the most noteworthy case. A subsidiary of Kinh Do Group also had a large gap between
operating income before and after being audited – that is North Kinh Do Joint Stock
Company (NKD), with operating income dropping from 39 billion VND to nearly 1
billion VND. Sacombank, one of the most prestigious firms in Vietnam also had a gap
in pre-tax profit of 133 billion VND before and after the audit as well.
In the case of Nam Vang Corporation (NVC), the rate of the difference reached to
8,500 percent, from a profit of 0.529 billion VND to a loss of 44,423 billion VND.
Another one was Minh Phu Seafood Corporation (MPC), which had difference rate of
1,043.94%. According to the statistics on the website “stox.vn”, there were 47
businesses with the difference rate of more than 50%. Most recently, after auditing
Vietnam Construction and Import-Export Joint Stock Corporation (Vinaconex), the
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Corporation’s after-tax profit of the year 2009 fell 97.84% compared with that before
the audit.
There were a number of reasons that the businesses could rely on to explain for the
investors about the differences, such as the way revenues and costs are recorded in real
estate businesses or the way financial investments are set aside in financial businesses.
One more cause could be the revaluation of the exchange difference among foreign loans.
A financial expert, Mr. Dinh The Hien stated that the businesses had inconsistent
financial information and large differences without any reasonable explanation could
not be accepted. It only created opportunities for those who grasped the information,
often the insiders, to gain high profits; outside investors suffered a loss. For that reason,
the State Securities Commission of Vietnam should introduce sanctions in order to
punish the enterprises announcing inconsistent information to manipulate the market.
Part C: Conclusion and recommendation
1. Conclusion
This research is carried out in the purpose of providing an overview of the auditing
profession and its important roles in recent years in Vietnam. In 15-years development,
although auditing in Vietnam has faced with many challenges, it has obtained many
significant achievements. One of the outstanding successes of audit is the establishment
of VACPA-the Vietnam Association of Certified Public Accountants. Thanks to the
foundation of this association, not only auditing but also accounting quality are being
managed efficiently and systematically. In addition, promulgation of ethical standards
and transformation of management model and ownership of auditing enterprise are also
considered encouraging results. Furthermore, Vietnamese auditing companies own
some competitive advantages relative to foreign ones such as low fee and expertise of
domestic market.
Some weaknesses of independent audit in Vietnam include low reputation and lack
of quality and professionalism. These disadvantages are being improved by upgrading
services, technique, and special human resource training. As a relatively
underdeveloped auditing system, scandals relating to information disclosure or illegal
consultancy are unavoidable. In order to partly solve these problems, we need to
continue to improve the system of auditing law and enhancing the role and activities of the
professional associations to support state agencies to control independent audit practice.
Due to the lack of professionalism in financial analysis by Vietnamese investors,
auditing has become one of the most reliable resources for public and investing
community. The role of auditing is gradually gaining appreciation by the public,
investors, and enterprises. That is the optimistic signal, promising a significant
development of Vietnamese independent audit.
2. Recommendation
After being a member of the World Trade Organization (WTO), almost all
industries in Vietnam in general, and the field of auditing in particular, have had a great
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number of opportunities as well as challenges. Chances to learn and to enhance
Vietnam’s audit in the global market are always accompanied by fierce competition of
foreign auditing firms. The report gives some recommendations that may help the
auditing field of Vietnam will be stronger and synchronized with international standards.
Firstly, the system of law should be improved. In the field of external audit, the
Government has formed a relatively adequate and comprehensive system of law
bringing into play its effects in directing and operating audit activities for nearly 20
years. Nevertheless, the system is starting to be unsuitable up to now. It should be
amended by promulgating the Law on external audit and the guidelines, updating and
promulgating Auditing standards in accordance with international ones, and regulating
on administrative violations in the independent auditing field.
Secondly, enhancing the role of professional associations can support government
agencies to intensify control over the practice of external audit. An auditor must be a
member of an auditing association that provides training, updated information
frequently and continuously for them. The associations not only accommodate their
members with professional knowledge but also manage their quality and professional
ethics. Despite many recent reformations, Vietnam’s administrative structure is still
inefficient compared to the organizing and operating structures of the associations in the
market economy. Hence, enhancing the associations’ operating roles is an efficient
solution that may help Vietnam’s audit stronger in the present and in the future.
Part D: References
“Chuyển đổi mô hình quản lý và chuyển đổi sở hữu công ty kiểm toán nhằm nâng
cao năng lực hoạt động và cơ hội phát triển”. Available at URL:
http://www.kiemtoan.com.vn/modules.php?name=News&op=viewst&sid=900 (Accessed May 16, 2010)
“Các công ty kiểm toán độc lập: "Sóng ngầm" đe dọa chất lượng”. Available at URL:
http://cafef.vn/2010041805295147CA36/cac-cong-ty-kiem-toan-doc-lap-song-ngam-de-doachat-luong.chn (Accessed May 16, 2010)
“10 sự kiện kế toán kiểm toán nổi bật năm 2007”. Available at URL:
http://www.congnghemoi.net/TaichinhKetoan/ChitietKetoan/tabid/1621/mid/4418/ArticleID/10
6262/tid/1588/dnnprintmode/true/language/viVN/Default.aspx?SkinSrc=[G]Skins/_default/No+Skin&ContainerSrc=[G]Containers/_default/
No+Container (Accessed May 16, 2010)
“10 Sự kiện kế toán nổi bật năm 2005”. Available at URL:
http://www.kiemtoan.com.vn/modules.php?name=News&op=viewst&sid=23 (Accessed May 16, 2010)
“10 Sự kiện kiểm toán, kế toán và thuế nổi bật năm 2008”. Available at URL:
http://kiemtoan.com.vn/modules.php?name=News&op=viewst&sid=1910 (Accessed May 16, 2010)
“10 sự kiện nổi bật trong lĩnh vực kế toán, kiểm toán và thuế năm 2009”. Available at URL:
http://kketoan.duytan.edu.vn/uploads/Files/63399277549353903610%20s%E1%BB%B
1%20ki%E1%BB%87n%20n%E1%BB%95i%20b%E1%BA%ADt%20trong%20l%C4%
A9nh%20v%E1%BB%B1c%20k%E1%BA%BF%20to%C3%A1nc%C3%B4%20T%E1%BA%A5m.doc. (Accessed May 16, 2010)
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MANAGEMENT ACCOUNTING:
FRAMEWORK AND PRACTICES IN VIETNAM
CASE STUDY:NATEXCO
Written by: Tran Hong Nhung, Nguyen Thi Hoai Thu (1KT -07)
Tran Duy Nam, Vu Phuong Thao, Bui Thi Hai Yen (2KT -07)
Supervisor: Do Van Anh
ABSTRACT
Management accounting (Managerial accounting) has appeared and developed in Vietnam
for about 15 years. The recent Decree No 53/2006/TT-BTC of Ministry of Finance was issued
on June 12th, 2006, guiding the application of management accounting in business. In fact, a
great number of enterprises have not understood clearly and thoroughly about the content as
well as the way to set up a management accounting system. Moreover, there has not had any
expertise and experienced consultant organization to give advice and guidelines enterprises to
build managerial accounting system. From this fact, our group chose a specific company – Nam
Dinh Textile to explore their management accounting system and base on their information the
chief accountant provided to define whether this system worked effectively and helped managers
in making decision or not. Our research includes three main parts: first, study on framework of
Vietnam management accounting under the laws and regulation; second, the comparison
between managerial accounting system in Vietnam and in United States and last but not least,
and the application in Nam Dinh Textile Company. Recommendations for the company and
some suggestions for further research are given at the end of report.
1. Introduction
Accounting can be divided into two fields – financial accounting and management
accounting. Financial accounting is used much more popularly than managerial one
because it focuses on reporting to external parties such as investors, government
agencies, banks and suppliers. Meanwhile, management accounting focuses on
information for internal decision makers of a business. These two accounting fields
contribute considerably to the success of the enterprises. However, up to now,
management accounting in Vietnam has not been gained proper attention from the
enterprise side, or if it has, most enterprises do not know how to operate a complete and
efficient management accounting system. From this fact, finding the reason why
managerial accounting has still not developed in Vietnam is our group’s main concern.
To achieve this goal, Nam Dinh Textile Company – a manufacturing company was
chosen for case study so that we can base on provided information from the company’s
accounting department to explore how management accounting system was carried out
and whether it brought a lot of benefits for the managers’ decision, in specific, and for
the whole company, in general. From that, it is easy for us to know the main reasons for
the hesitance in apply managerial accounting system in the company.
In this report, we mentioned about some regulations guiding to apply this system,
some limitations in Vietnam’s managerial accounting system compared to the standards
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in this field of developed countries and the important part about the application in Nam
Dinh Textile Company.
2. Literature review
“Management accounting is the process of preparing management reports that
provide accurate and timely key financial and statistical information required by
managers to make day-to-day and short-term decisions. These reports typically show
the amount of available cash, sales revenue generated, amount of orders in hand, state
of accounts payable and accounts receivable, outstanding debts, raw material and in-process
inventory, and may also include trend charts, variance analysis, and other statistics”
(http://www.businessdictionary.com/)
As can be seen from this definition, unlike financial accounting which produces
annual reports mainly for external stakeholders such as creditors, investors, and lenders,
management accounting generates monthly or weekly reports for the firm's internal
audiences such as department managers and the chief executive officer. The process of
management accounting refers to different stages such as:
• cost analysis: understanding about the material and labor costs(both direct and
indirect, both fixed and variable), as well as cost of goods sold
• cost-volume-profit analysis: analyzing the relationship between cost, volume,
profit to determine appropriate production index;
• break-even point analysis: finding out the point which maximize the profit given
the resources;
• pricing analysis: determining sales price for products;
• budgetting: building up budget plans for production and sales;
Besides, management accounting also includes other fields such as research on
inventory, fixed asset and salary methods, etc.. in the corporation.
Management accounting plays a very imprtant role in managerial system. The
provision of accurate, relevant, reliable and timely accounting information will aid
management in taking managerial and economic decision for the efficient management
of the organisation and the attainment of the overall organisational goals and objectives.
Management accounting must be done by each corporation under control and
instructions of goverments. In Vietnam, the definition, the applied subjects, aims as well
as framework of managment accounting is regulated in the circular number 53/2006,
issued by the ministry of Finance.
3. Methodology
Our research aims at two aspects: analyzing the framework of management
accounting in Vietnam and considering its practices in reality.
First, in order understand the framework of management accouting in Vietnam, we
mostly base on secondary data. The information comes from the circular 53/2206 of the
Ministry of Finance and Law on Accounting. Besides, we also use the book and internet
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resources to have more understanding of management accounting in general and its
practices in Vietnam particularly.
Second, we chose a public company, stating Nam Dinh textile company
(NATEXCO) as the case study so that our group could examine the application of
management accounting to this business. We designed an interview questionaire and
arranged an appoinment with Ms. Hoai, chief accountant of NATEXCO on May 12th
2010. In this interview, we asked questions about the company history and its products,
accounting department and especially different elements of management accounting
such as: costs, salary, inventory, fixed assets, pricing, etc. Moreover, we asked about her
assessment on management accounting and her giving solutions to these problems. We
also requested Ms. Hoai to provide us with some accounting materials of NATEXCO in
the past through our email (attached in the Appendix). These data helps us have a truly
look in NATEXCO management accounting so as to evaluate the level of application of
it in NATEXCO.
4. Management accounting frame work practices in Vietnam
4.1. Summary of Vietnamese accounting law documents:
Unlike financial accounting, information provided by management accounting is
used inside the companies and affects decision making. However, the concept of
management accounting is quite new in Vietnam. It is only used outspread in recent
years and official documents of government about this field are also limited, which is
proved by the existence of only two legal documents: Vietnamese accounting law in
general and Circular No. 53/2006/TT-BTC which guides implementation of
management accounting in enterprises.
4.1.1. Vietnamese accounting law:
Accounting Law was issued in June 17, 2003 to uniform accounting practices in
Vietnam. Its aim is to meet the requirements of State agencies, enterprises,
organizations and individuals for supplying relevant, timely and transparent information
in management and administration activities.
As indicated in the law, the subjects of application include enterprises funded and
not funded with the state budget, individuals and cooperation, from all economic
sectors. These could be Vietnamese enterprises or representatives of foreign
organizations on Vietnam.
The practices of accounting include collecting and processing accounting, keeping
track of financial revenues and expenditures, and supplying information for internal and
external uses to meet the requirements of explicit, understandable and accurate data.
Besides, information must ensure the continuity of accounting periods as well as be
arranged in a comparable and systematic manner.
Collection or spending, administrative or non-administrative activities of both state
and non state funded enterprises are the main objects of accounting. Items of business
activities are assets, liability, capital, revenues and expenditure, tax, etc…
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The fields of accounting comprise of financial accounting, management accounting,
general accounting and detailed accounting. The Ministry of Finance is responsible for
guiding the application of accounting practices suitable to each field. The law also
indicates how monetary units are used in calculations for both local and foreign
enterprises. The normal accounting period might be an annual, quarter or monthly
accounting period.
The content of accounting practices is the most important part of the Law.
Regulations are set about the practice of Accounting vouchers, book-keeping
accountants and accounting books, financial statements, accounting inspections, asset
inventory, preservation and archival of accounting records. The case of division,
separation, consolidation, merge, ownership transformation, dissolution or bankruptcy
of accounting units are also taken into the consideration.
Regarding the operation of accounting systems, each organization must organize
their accounting staff to meet the requirements of law provisions. The law ruled out
criteria, rights and duties of accountants and chief accountants.
The law of accounting came into effect from the first of January 2004, and ceased
the effectiveness of the 1998 Accounting and Statistics Ordinance.
4.1.2. Circular No. 53/2006/TT-BTC:
After Law on Accounting as well as other instructive documents has come into
existence, on June 12th 2006, the Ministry of Finance has promulgated the Circular
No.53/2006/TT-BTC in order to assist the application of management accounting for
manufacturing and trading enterprises.
The subjects of applications are enterprises in production, trading and service
sectors. Appropriate contents in the Circular can be used by financial and banking
enterprises like insurance company, stock and investment companies, credit fund as
well as other financial organizations.
According to the circular, the process of management accounting includes the
collecting, processing, analyzing and supplying economic and financial information in
response to effective management requirements to give the right financial decision
within accounting units.
To be different from financial accounting, management accounting is to provide
information internally for managers about production and operating activities. For any
aspect of management accounting, the cost of any unit, work and product is seriously
taken into consideration. This is quite important to review the implementation of
revenue, cost and profit plans to manage assets, materials, capital, debts as well as to
select information for long term and short term decision. Based on the implementation
of past decision, corrective actions should be taken to make budget estimation
production and other activities.
The main contents of the management accounting include: Products’ cost and unit
price management accounting; Sales and sales results management accounting; Cost-
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volume-profit analysis; Appropriate information Selection for decision making;
Production and sales budget; Management accounting of some other items namely:
Fixed asset management accounting; Inventories management accounting; Labor and
salary management accounting and Debts management accounting.
4.2. Comparisons between Vietnam and US management accounting:
4.2.1. Similarities:
As mentioned above, only two legal documents about management accounting is
not enough and will create difficulties for companies to apply because they do not know
which method is suitable, how to deal with problems met when using and so on.
However, these documents still open directions for internal accounting system because
they provide basic background information. Therefore, these two materials and the book
“Cost Accounting: A managerial emphasis” (Horgen C T, Foster G & Datar S, 13th ed.
Prentice Hall, 2008),which is considered as a source of documents about US
management accounting, are quite similar in term of definition, subjects, units, rules,
responsibilities, main contents of management accounting, etc as mentioned in the
summary of Circular No. 53.
For example: in cost accounting, the most important part in management
accounting, there are the same criteria to classify costs into categories like variable,
fixed and mixed costs or direct, indirect, controlled and uncontrolled costs. Moreover,
job costing and process costing methods in these sources are presented similarly.
4.2.2. Differences:
However, Vietnam’s management accounting is at the early stage of development
comparing with US ones, so information in official documents is still more theoretic,
general, stops at basic points and does not give out needed detail to help companies
implement effectively. This will lead to differences in contents of management
accounting between two.
Firstly, in the Circular No. 53, a lot of theories, mostly definitions, are mentioned
and many methods are listed out. However, there is no information about how to apply
methods in real condition of companies, advantages and disadvantages of these to help
companies choose the ones that are suitable for them. In addition, the terms are used
without further explanations and examples to make them more understandable; for
instance: in section (1.2.2) about cost management, there are two cost accumulation
methods namely: direct method and allocation method. It seems to be vague when
mentioning that direct method is used in case costs related to one cost object and the
other is to more than one cost object without citing what is cost object to make it clearer
and more easily to apply although it is a key word.
Moreover, it is the unequal weight because job costing method is described more
detailed than the others which are referred to the names without further explanations
about what they are and how to use them; however, it is almost theoretic because of no
example beside complicated guide by words. Among these other methods, target
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costing, coefficient costing and cost exclusion basing on secondary products costing
methods that are unpopular are mentioned while a much more accurate method, activitiesbased costing, are not. In addition, nothing about advantages and disadvantages of all
methods as well as steps and proper conditions to apply exists in this circular. Taking job
costing and process costing as examples, job costing is used for unique products and for
custom orders when each job, product, or batch of products cost separately while
process costing is done when production involved continuous process of similar items
and cost assigned according to set periods of time, not according to specific jobs.
However, if company’s condition does not belong to these above like: products or
services differ greatly in volume and manufacturing activities and/or overhead costs
constitute a significant portion of total costs, activities-based costing method should be
considered because it provides an accurate but high cost measurement.
Furthermore, cost-volume-profit analysis which requires calculating contribution
margin, break-even point, cost structure, operating leverage and so on is a crucial in
management accounting, so formula, format and application should be added to make a
standard. It is also the same cursory situations for sales and sales result management,
information selection for decision making, budget setting and costing for fixed assets,
inventory, labor and salary, debts due to lack of detailed explanations and guides.
After all, one area that is very necessary but received little concern or even ignored
in management accounting in Vietnam is performance measurement because its
importance may be assessed inappropriately or offset by its costs. However, this state
must be reconsidered due to the fact that performance measurements will point out the
effectiveness of the business in financial and non-financial results in order to have
prompt adjustments. They are balanced scorecard and accounting-based ratios namely:
return on investments, residual income, economic value added, return on sales and so
on. If it is not used, companies will not know how well or bad they did and something
not good might happen.
It is known that to have an effective management accounting in this newly
integrated period of Vietnam it will take a long time to help Vietnam government
together with companies approach gradually and develop to improve entire system.
5. Case study: Application of management accounting in Nam Dinh Textile one
member of state responsibility limited company (NATEXCO)
5.1 Company background:
HISTORY
Nam Dinh Textile company (NATEXCO), founded in 1920, is considered one of
the oldest companies in Vietnam. The head office is located at 43 To Hieu, Ngo Quyen,
Nam Dinh city.
The company came into being by French when they invaded Vietnam in order to
exploit the country’s resources. From Vietnam’s liberation in 1945 up to now, it has
been the member of The Vietnam National Textile and Garment Group. In the past, with
the role of the flagship of textile and garment industry in Vietnam, “Nam Dinh textile”
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used to be a famous brand within the country. The company contributed a lot to
development and income of the whole country in the very early time after
independence. However, when Vietnam economy stepped into the new stage of
innovation and intergration, due to outdated machines and management system, the
company was unable to catch up with other foreign competitors. It made NATEXCO
face up with huge bad debts that the company could not pay back to the debtors.
Aiming at saving the company out of its recession, in 2005, Vietnamese government
had an effort on writing off a bad debt of NATEXCO, equalling 222 billion VND (Duc
T., 2005). At the same time, the government made suitable adjustments to operation and
management of the company. In July 2005, Nam Dinh textile company was changed
into Nam Dinh Textile one member of state responsibility limited company, with 133
billion VND of charter capital according to QĐ 185 signed by the prime minister
Nguyen Tan Dung (Linh S., 2005). The director is Mr. Dao Quang Hiep. Accompanied
with this change, the company expanded its operation to new fields beside textile
industry. At the end of 2007, the Hanoi Securities Trading Center undertook auction
sale of 2,930,000 shares (par value at 10000 VND/ share) (Kiều M.,2007).
Photo 1: Nam Dinh Textile Company in the early 1920s (yahoo.com)
Since the establishment, NATEXCO has been specializing in producing fibre, cloth,
garment products and other services. The table below lists NATEXCO main garment
products in term of output and characteristics:
Products
Output (per year)
Fibre
100 tons
Visco Rayon
300,000 meters
Tuytsilen
2,000,000 meters
Pe/Co, Cotton, Petex
Others
2,000,000 meters
800,000 products
Characteristics
Pe/ cotton or cotton
(Average indice: Ne 32)
Company’s traditional products
Made from Australia and New Zealand lambs’
fleece;
European standard;
Exported to Japan
Include: Kaki, Garbadin, Caro, etc.
Include: trousers, jackets, chemises, etc.
(source: vnnet.vn)
What is more, since the company’s reformation in 2005, NATEXCO has been
investing in some other industries, such as: hospitality (restaurants, hospitals, etc.),
transporatation (accomodation cars, store services, etc.), real estate and construction.
5.2 Mangement accounting in NATEXCO
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COSTS MANAGEMENT
The factory applies both direct method and allocated method in term of cost
accounting. Under direct method, the cost incurred only involved in cost subjects such
as fibre, cloth and garment products. So, the factory allocates costs into machine hours
directly. Under allocated method, the cost incurred involved in many cost subjects. With
this allocated method, they can record expense quite exactly correspondent with
production level.
The cost object of the factory is a finished product. The method of calculating cost
of production which company is applying is according to types of products and tasks.
They gather and allocate direct material costs, direct labor costs and overhead costs for
each seperate task, each particular product or a group of products. Moreover, the factory
estimates overhead costs of each task and each product at the beginning of the period;
then at the end of the period, they adjust the difference between actual overhead costs
and estimated ones. Doing this way can help NATEXCO minimize the differences
between actual overhead costs and estimated values. Besides, Nam Dinh textile
caculates the costs of goods sold in monthly period. Monthly is an appropriate time
because the company’s production takes place in a small scale.
RELATIONSHIP AMONG COST, VOLUME AND PROFIT
Studying on the relationship among cost, volume and profit relates to three very
important factors: sale price, quantity and cost (both fixed and variable). Moreover,
understanding the relationship among these involve in analyzing the break-even point
(in term of quantity, sales, time..), which is very important for manager to make right
decisions about future production and sale process.
However, in Nam Dinh Textile company, these following studies are still not
available. Accounting departmant has not done research on break-even point as well as
having a deep understand about these three factors yet. The reason, stated by the chief
accountant, is mainly because of lack of the cost for these activities. Besides, human
resouces of these practices are very limited in term of skills and time to do such
practices. Therefore, accounting department in NATEXCO assigns the price of each
product not basing on break-even point analysis but basing on determining the price that
can make up for the costs and get the expected profit.
BUDGETING
Firstly, it is important to understand what budget is and how it operates as well as
its importance to managers’ decisions.
Budget is a formal written statement of management’s plans for a specified time
period, expressed in financial terms. Its cycle includes four steps: planning the
performance of the organization, providing a set of specific expectations, investigating
variations from plans, and planning again, considering feedback and changed it.
It is said that budgets are an integral part of management control systems because of
some benefits it brings to the firm. It helps to build up association and promote
communication among subunits within the company. Besides, it is also one of the
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effective tools to evaluate employees’ performance by comparing the actual quantity
with the planned one. One more advantage is motivating managers and other
employees. It can be explained when the executives set achievable goals for their
subordinates, they will work harder to achieve it.
However, there are still some challenges existing in administering budgets, which
makes many medium and small – size companies in Vietnam hesitate to use it. Nam
Dinh Textile Company is among them. The chief accountant of this company explained
that budgeting is a time – consuming process that involves all levels of management.
Moreover, as can be easily understand that the company needs to adjust plans in
accordance with conditions changes. Nowadays, everything is changing so fast and
unexpected situations can happen anytime. These are the reasons the top management of
Nam Dinh Textile Company decided not to use it until now.
MANAGEMENT ACCOUNTING FOR OTHER ITEMS
Management accounting also concerns some important items such as: fixed assets,
inventory, salary and debts. It is obvious that the main objective of management
accounting is to provide meaningful information so that the managers can base on this
information to make decisions and fulfill an organization’s goals.
FIXED ASSETS
In term of fixed assets, management accountant needs to show the effectiveness of
using and managing fixed assets of each unit and the whole company as well as the
demand for using these fixed assets. This will help managers to define methods to
explore these fixed assets in an effective way and consider investing in new fixed assets.
As provided, the main fixed assets of Nam Dinh Textile are plant, machines and means
of transportation like truck. Actually, workers who directly operate machines and truck
understand more clearly about the effectiveness of these fixed assets than management
accountant does. However, in this company, each unit works separately and association
among departments is limited. As mentioned above, association is one of the benefits
when applying management accounting. It is the reason why management accountant
does not have enough and quality information related to using fixed assets to provide
proper advice for manager.
INVENTORY
Secondly, inventory is an important item for the company, especially manufacturing
company like Nam Dinh Textile Company. One of the objectives of managing
inventory is to establish list of materials and more importantly, to organize management
accounting in term of the quantity and value of beginning and ending inventory, cost of
goods sold as well as purchase and sales units. To do that, the company needs to
determine the accounting method to calculating inventory. As chief accountant’s
answer, this company applies weighted average method. It is learned that LIFO results
in the lowest income, FIFO the highest and weighted average an amount in between. In
fact, the provided information about inventory has helped managers a lot in making
decision about which inventory items the company should purchase more and which
buy less as well as the effect of price changes on sales revenue and cost of goods sold.
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As stated in point c, articles 6.2, Circular 53 of Ministry of Finance to guide about
management accounting, enterprises establishes standard costs of raw materials,
materials for each product and set up the reserve level for each list of inventory;
however the company does not budget for any items including inventory.
SALARY
Salary is also one important concern of enterprise. In fact, payroll scale of each
industry has stated in Decree 76/2009 applied from November 1st, 2009. Textile
industry is not an exception. Payroll scale of this industry includes six levels and is
divided into three groups depending on the hardness level and the complexity of the job.
However, as Ms Hoai said that the company does not follow this regulation about
payroll scale. She said the company used these scales to calculate insurance, social
assistance. Meanwhile, they calculated salary based on each product and job the
workers had completed. To evaluate the performance and contribution level of each
employee to pay salary, accountant looks at timekeeping table. Salary is sensitive issue,
so it is hard to ask about the specific amount salary this company is paying for their
employees. However, Ms. Hoai considered that the company has paid higher amount
than the level the government regulated.
LIABILITIES
Lastly, about liabilities, this company calculated bad debts according to debt time of
each debtor (typical a year). Actually, accountant has a liability ledger to record the
detail information such as debt holders’ name, the amount, payment date and the quality
of debts. This information provided by accountant helps managers to consider carefully
about liability policy: tighten of flexible for each kind of customers depends on their
reputation, which can be seen from liability ledger.
PERFORMANCE EVALUATION
Management accounting in Nam Dinh Textile has not been paid much attention and
has still been disregarded. As can be seen in NATEXCO, budgetting – a very important
stage in management accounting – is not yet undertaken. Moreover, the company does
not analyze the relationship among cost, quantity and profit as well as not figuring out
break-even point. The lack of these very important steps in management accounting is
partially able to explain the inefficiency of NATEXCO’s management accouting as the
chief accountant’s comment. Therefore, the managers in NATEXCO can not base on
information which is brought to by management accouting to make right decisions to
the company. According to the chief accountant of NATEXCO, it is necessary for the
company to assess the performance of management accounting carefully and up to date
new regulations to complete an effective decision making system.
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5.3 Recommendations:
After analyzing the framework of the
management
accounting
in
Vietnam
theoretically
and
the
application
of
management in one of state company named
NATEXCO, we would like to give some
recommendations to improve the efficiency
and effectiveness of practices of NATEXCO
management accounting.
Firstly, the company should evaluate the
performance of management accounting after a
Photo 2: NATEXCO now (namdinh.gov.vn) fixed period of time (quarterly or yearly). Then
they can find out their strengths, their
weaknesses of their performance and overcome these drawbacks. As a result, the
information submitted to manager will be adequate and precise.
Secondly, the company should establish one department to research on the
relationship between cost, volume and profit from production and sale activities in
operation progress of the factory (monthly, quarterly and yearly). From that, they can
find out methods to maximize profit, reduce manufacture cost, or diversify products.
Besides, the company should carry out deep analysis of breakeven point to schedule
manufacture and business plan appropriately.
Thirdly, the company should search the content and method to set up the budget for
all categories. Moreover, they should flexibly apply budgetting, adjust appropriately
with their conditions and economic condition in each period.
Finally, the director and the other managers should pay attention to norm plan so as
to link all the departments.
6. Conclusion and limitations
Our research has a look at the management accounting in term of framework and
practices in Vietnam. After the study, there are many issues which still exist. The issues
often arise when Vietnamese companies apply the goverment regulations into practices
in reality. For example, performance measurement is not good enough or companies do
not pay much attention on research on cost- volume – profit or beak-even point models,
resulting in very bad quality of information.
Due to lack of time resource and human resource, our research has some drawbacks.
First of all, we can not undertake a survey on different companies in different fields.
Thus, the result from NATEXCO case study only does not fully reflect management
accounting practices in Vietnam. Second, when comparing between Vietnam and
United States management accounting, our reference of United States framework
mostly base on the book “Cost Accounting: A managerial emphasis” (Horgen C T,
Foster G & Datar S, 13th ed. Prentice Hall, 2008). In reality, there are many books that
write about this topic because the practices of management accounting are very various.
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Therefore, there might be something that may conflict among the book, leading to some
not exact analysis on management accounting which are in practices in United States.
We suggest further research on analyzing deeply drawbacks of Vietnam management
accounting and figuring out worthy solutions to complete the famework and upgrade the
effectiveness in management accounting operation in companies in Vietnam.
REFERENCES
“Managerial accounting” [online], available at URL: http://www.referenceforbusiness.com/
encyclopedia/Man-Mix/Managerial-Accounting.html (accessed: May 16, 2010).
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http://www.vietnamforumcsr.net/default.aspx?portalid=1&tabid=336&itemid=5634 (accessed:
May 18, 2010).
Business dictionary [online], available at URL: http://www.businessdictionary.com/
(accessed: May 16, 2010).
Circular
53/2006/
TT
–
BTC
[online],
available
at
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http://www.kiemtoanvietnam.vn/index.php?option=com_content&view=article&id=321:thongt-532006tt-btc-hng-dn-ap-dng-k-toan-qun-tr-trong-doanh-nghip-&catid=81:k-toan-kimtoan&Itemid=122 (accessed: May 15 2010).
Công ty cổ phần dệt lụa Nam Định [online], available at URL:
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Chi, K. 2007, Khấu hao và các phương pháp tính khấu hao tài sản cố định [online],
available at URL: http://www.saga.vn/Taichinh/Ketoan-Kiemtoan/Ketoantaichinh/4652.saga
(accessed: May 16 2010).
Duc, T. 2005, “Đề nghị xoá 222 tỉ đồng nợ cho dệt Nam Định” [online], available at URL:
http://dantri.com.vn/c76/s76-87209/de-nghi-xoa-222-ty-dong-no-cho-det-nam-dinh.htm
(accessed: May 16, 2010).
Horgen C. T., Foster G. and Datar S. 2008, “Cost Accounting: A managerial emphasis”,
13th ed. Prentice Hall.
Kiều, M. 2007, “Dệt Nam Định đấu giá gần 3 triệu cổ phiếu” [online], available at URL:
http://vneconomy.vn/65406P7C642/det-nam-dinh-dau-gia-gan-3-trieu-co-phieu.htm (accessed:
May 16, 2010).
Khai, Q. 2006, Phương pháp tính hàng tồn kho [online], available at URL:
http://www.tapchiketoan.com/ke-toan/tai-san-ngan-han/phuong-phap-tinh-gia-xuat-hang-tonkho-ph.html (accessed: May 16 2010).
Linh, S. 2005, “Dệt Nam Định thành công ty TNHH” [online], available at URL:
http://w13.vnexpress.net/GL/Kinh-doanh/Chung-khoan/2005/07/3B9E0649/ (accessed: May 16, 2010).
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Định
xưa
và
nay
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Nga, N. X., “Hệ thống thang, bảng lương: Quy định và hướng dẫn xây dựng” [online],
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The ministry of Finance [online], available at URL: http://www.mof.gov.vn/ (accessed: May 15 2010).
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ACCOUNTING FOR FIXED ASSETS
Written by: Nguyen Thi Ha, Hoang Thu Hang
Bui Thi Minh Hoat, Le Thi Kim, Dinh Thi Thoi
Supervisor: Dinh Le Mai
Abstract
Accounting for fixed assets seems to be of growing concern for almost every company in the
world. As firms expand their business with a larger scale, fixed assets tend to grow
correspondently. The accounting for fixed assets, therefore, cannot be ignored because it helps
firms to manage their assets effectively and efficiently. However, there exist some variations
between the accounting for fixed assets under Vietnam Accounting Standard and International
Financial Reporting Standards. Due to certain condition and policy of each country, the
variations are possible but the whole still share a lot of similarities to the common standard. In
this paper, the procedure to account for fixed assets under Vietnam Accounting Standards will
be analyzed. In addition, some comparison with the international practice as well as examples
will also be made. It is hoped that this paper will help foreign investors; especially students who
are studying international school in Vietnam be aware of the accounting practice in both
international scale and country scale.
I. Introduction
Accounting for fixed assets seems to be an important practice for every company all
over the world because fixed assets often take up the largest percentage in a firm’s asset.
However, the practice is not alike for every country. Generally, most of the countries’
financial reporting practices are based on a common standard referred as “International
Financial Reporting standards” (IFRS). There are still some variations due to the certain
conditions and development of each country. The so-called Vietnamese accounting
standards, although, share a lot of similarities to IFRS, the variations still exist. In
continuing its way to harmonize with international financial reporting standards, VAS
has had some changes reflected in many other decrees or circulars over years to reach to
the common standards.
On talking about the differences between Vietnamese accounting standard and
international accounting standard or IFRS the question arising is “how to help students
who study in international university or foreign accounting practice in Vietnam aware
about Vietnamese practice?” The answer to the question is also the purpose of this
paper. More specifically, the practice to accounts for fixed assets under Vietnamese
accounting standards will be gradually analyzed in this research. To make the situation
clearer, examples will also be given to help a deeper understanding of the reader.
While under IFRS fixed assets are often referred to property, plant, and equipment,
under VAS fixed assets can be divided into two forms: tangible fixed assets and
intangible fixed assets. The accounting for these two main types of fixed assets will be
gradually presented as below.
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II. Fixed assets in enterprises
1. Definition and criteria to determine
(According to Vietnamese Accounting standard, supplemented by Decision no.
206/2003/QD BTC dated 12 Dec 2003 and circular no. 203/2009 TT BTC dated 20
Oct 2009 by the Ministry of Finance)
Definition: Fixed asset is assets in the physical forms (tangible fixed assets) or
value form (intangible fixed assets) to perform one or some particular functions in the
operation and business activities of the company; fixed asset has big value and usable in
a long period of time, in conformity with the criteria of tangible fixed assets
a. Criteria to recognize tangible fixed assets:
- Future economic benefit is probably obtained
- Historical cost is measurable
- Useful life is estimated at more than 1 year
- Its value is equal or greater than10 million VND
Note: IAS or IFAS does not have the forth criteria in determining tangible fixed assets.
When determining the components of tangible fixed assets, the enterprise should
apply the above criteria on a case by case basis. Separate parts, such as tools and
swages, may be consolidated and apply the criteria of tangible fixed assets to such
aggregate value. Accessories and auxiliary equipment are often considered as movable
and thus accounted as expenses. Major accessories and maintenance equipment can be
determined as tangible fixed assets when their useful lives last for over 1 year. If they
are only used in association with tangible fixed asset irregularly, they shall be accounted
as separate tangible fixed asset, capitalized and depreciated over the period shorter than
the life of related tangible fixed assets.
In each specific case, total cost of tangible fixed asset may be allocated to their
components and separately accounted for each one. This is applied in case when each
component of an asset has different useful life or they contribute to create different
economic benefits to the firm.
b. Intangible fixed assets: all fixed assets satisfy the above 4 criteria but not in the
group of tangible fixed assets. (More details given in part “Intangible fixed assets”)
2. Classification of fixed assets:
a. Fixed assets used for operation process of enterprises.
- Tangible fixed assets:
+Houses, plants, architectural objects
+ Machine, equipment
+ Means of transportation and conveyance system
+ Managerial tools
+ Perennial tree garden, animals yield products and labor for humans.
+ Other tangible fixed assets
- Intangible fixed assets: land, trade mark, brand name, patent.
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b. Fixed assets the company uses for social welfare, security, military… in the
company can be classified as fixed assets for business operation
c. Fixed assets the company stores for other divisions or for the Government are
classified in conformity with the common regulation.
3. Determination of acquisition cost of tangible fixed asset
In conformity with the regulations, in all cases, increase or decrease of tangible
fixed asset should be reflected in historical cost. Historical cost is all the costs incurred
to get the asset and putting it into the ready- for –use condition or position.
3.1 Historical cost of tangible fixed assets
a. procured tangible fixed assets
Historical cost of procured tangible fixed asset= purchasing price+ taxes(excluding
refundable tax amount)+ expenses attributable to put the assets into ready-use state such
as registration fee, transportation, loading and unloading, installation, ground
preparation and trial run cost, registration fee, etc. It is quite similar to criteria in IFAS
which states that Procured fixed assets= purchasing price+ attributable costs + site
restoration costs.
Example: Hoa Phat company buys a machine at the price of 50 million Vnd,
installation cost is 2million, ground preparation cost is 2 million Vnd
Cost of machine = 50+ 2+ 2= 54 million Vnd
When procured tangible fixed assets are houses, architectural objects...with land use
right, then the cost of assets must be determined separately with the cost of land.
In case, procured tangible fixed assets are paid by deferred payment method, their
historical cost must be accounted at the purchasing price promptly paid at time of
purchase. The difference between price promptly paid and payable amount will be
considered as the expense in the payment period, except in case that difference is
accounted into the historical cost of the tangible fixed asset according to the regulation
of “capitalizing borrowing expense” (costs attributable to the construction investment or
production of uncompleted assets shall be capitalized or added to the value of that
assets/capitalized interest cost for self-constructed assets)
Costs incurred, if just indirectly related to the procured tangible fixed assets, will
not be included in the historical cost of the asset,
b. Tangible fixed assets purchased from exchange form
Historical cost of a tangible fixed asset purchased in the form of exchange for a
dissimilar one or other assets can be determined = the reasonable value of the received
one + taxes+ attributable expense to put the assets into ready use.
Example: Company A exchange a machine A (15 million VND) for a dissimilar one
B (18 million VND – reasonable value), property tax: 200, 000 VND, transportation
cost: 100,000 VND.
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Historical cost of received one= 18million+ 200,000+ 100,000=18,300,000 VND
Historical cost of a tangible fixed asset purchased in the form of exchange for a
similar one/from its sale and exchange for the right to own similar one, then the historical
cost of the received one can be determined = net book value of the exchanged one.
c. Self constructed or self produced tangible fixed assets
Historical cost = actual cost of asset + attributable cost to put the assets into readyuse state. In these cases, it is obligation to exclude all internal profits and unreasonable
expenses like wasted labor, materials, supplies... In excess of normal levels in the
process of self constructed or produced.
According to circulation No. 203/2009 TT BTC of the Ministry of Finance:
- Historical cost of self-produced assets = selling price + other attributable costs.
- Historical cost of self-constructed assets= total costs at the time of putting to use.
Example: Company B self-construct a building by 1 billion VND borrowed from
AB bank, interest rate= 10%/year.
Historical cost of the building= 1 billion+ total interest expenses
d. Tangible fixed assets augmented from other sources (donation, present,
assignment, contribution from other owners…)
- Sources are from donation, present or excess due to recording error: historical
cost = costs evaluated by the Committee of evaluation.
- Tangible fixed assets from the contribution of other owners:
Historical cost is reasonable value most shareholders accept or based on the
reevaluation of the Committee of evaluation.
(According to circulation 203/2009 TT BTC of the Ministry of Finance)
Example: A corp. receives a machine presented by shareholder C. Its value is 100
million VND, related costs= 2 million (transportation, trial run cost)
Total historical cost = 100+ 2= 102 million VND
e. Financial lease tangible fixed assets
When tangible fixed assets are leased in the form of financial lease, their historical costs
can be determined according to the regulations of the accounting standard section 06 “lease”.
Historical cost of financial leasing tangible fixed asset in book of lessee is fair value
of the asset at the time of leasing.(more details are given in the part of financial lease
fixed assets)
f. Tangible fixed asset is from internal transfer or assignment:
Historical cost = reasonable value evaluated by the Committee of evaluation + other
expenses or the book value of the transferring division.
Example: department A receive a fixed assets from other division B in the company.
The revaluated value is 15m, installation cost is 1m
Total historical cost = 16m
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g. Tangible fixed asset is from investment & construction by the method of bid.
Historical cost = closing adjustment price+ other related costs
Example: X Construction Company delivers a building to company B with the
closing adjustment price: 2 billion VND. B pays X in cash
Dr 211 tangible fixed assets: 2billion VND
Cr cash: 2billion VND
3.2 Historical cost of tangible fixed assets of individuals, owner of private
company, limited company, or corporation without the bill or record, is the reasonable
value the company evaluates by its own, and the company will be responsible for the
accuracy of that value.
3.3 Historical cost of tangible fixed assets can be changed in the following cases:
a. Reevaluate the value of tangible fixed asset in conformity with the regulations
b. Improve the assets
c. Remove or replace one or some components of the asset
3.4 Tangible fixed assets can be accounted according to the net book value
Net book value= historical cost - accumulated depreciation
3.5 Capital cost or expenditure
- Cost incurred is recognized to included in historical cost of the tangible assets if
these costs help improve the current conditions of assets and contribute to create higher
productivity of the assets in future
- Maintenance cost or repair cost for the purpose of sustaining or restoring the
current capacity to bring about the current profit is just considered as expense.
Note: commonly, historical cost determination of tangible fixed assets under VAS
and IFRS are similar.
4. Record for the increase or decrease in value of tangible fixed asset
4.1. Accounts used
- Account 211” tangible fixed assets”
211: houses, architectural objects
2112: Machinery, equipment
2113: means of transportation
2114: managerial tool
2115: long lived trees, animals give products
2118: other tangible fixed assets
4.2. Record for the increase in tangible fixed assets
a. When tangible fixed assets increase due to purchase:
- Dr account 211 tangible fixed asset: purchasing price excluding tax
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Dr account 133: VAT deducted
Cr account 111,112, 331: Cash/cash at bank/ payable to the seller
- Costs related to put assets into ready-use state:
Dr account 211 tangible fixed asset
Dr account: 133 VAT deducted
Cr account 111, 112.. cash/cash at bank
Under IFRS: Dr assets (houses, land, equipment)
Cr cash
Company purchases an equipment at the price of 315 million VND including
VAT(5 %), pay by working capital; transportation and loading/ unloading costs are 2,1
million VND including VAT(5 %). Company pays tax by discount method. These
related cost are paid by cash.
Example:
VAS:
(unit: million VND)
Dr account 211 tangible fixed asset: 302
Dr account 133 VAT deducted: 15.1
Cr account 411 working capital: 315
Cr account 111 cash: 2.1
- IFAS:
Dr assets: 302
Dr tax expense: 15.1
Cr cash: 317.1
- Import tax when purchasing tangible fixed asset from foreign country is included
in historical cost of assets:
Dr account 211/ 213 tangible/intangible fixed assets
Cr account 3333: Import or export duties
- VAT amount of tangible fixed asset is deducted:
Dr account 133 VAT deducted
Cr account 33312 VAT for imported goods
Note: with firms not in group of paying VAT in discount method, their VAT
amount will be included in historical cost of the asset
- If tangible fixed asset is bought from used funds, we can base on the historical cost
to transfer these cost into business capital
Dr account: 414 fund for development and investment
Dr account 441: Capital for investment and construction
Cr account 411 working capital
b. Buying tangible fixed assets in installment method: accountant records:
Dr account 211 tangible fixed asset
Dr account 242 long term prepaid expense
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Cr account 331 payable to seller
Under IFRS:
Dr assets
Cr account payable
- As well as periodic payment to supplier:
Dr account 331: payable to supplier
Cr account 111, 112 cash/cash at bank
Under IFRS:
Dr account payable
Cr cash (installment amount)
- Interest amount due to late payment is accounted into expense:
Dr account 635 financial activity expenses
Cr account 242 long term prepaid expense
Cr account 142 prepaid expense
Example:
A corp. buys equipment at the cost of 20million VND, VAT (5%) in discount
method, installment amount is 7.4million VND/years in 4 years. Interest expense:
20%/year.
VAS:
Unit: million (m) VND
Dr 211 tangible fixed assets: 20m
Dr 133 VAT deducted: 1m
Dr 242 long term prepaid expense: 18m
Cr 331 payable to seller: 39m
Periodic payment:
Dr 331 payable to seller: 7.3m
Cr 111 cash: 7.3m
IFAS:
Dr assets: 39m
Cr account payable: 39m
Periodic payment:
Dr account payable: 7.3m
Cr cash: 7.3m
c. when company is presented or sponsored the tangible fixed asset, record:
- VAS:
Dr account 211 tangible fixed assets
Cr account 711: other revenue
Cost directly related to tangible fixed assets presented, sponsored is accounted in
historical cost:
Cr account 111, 112,331 – cash/cash at bank/ payable to seller
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- IFAS:
Dr assets
Cr contribution income/ other income
Example: C present a computer to company B with the market value of 24 million
VND. Installation and trail run costs are 1million VND by cash.
VAS:
- Dr 211 tangible fixed assets: 24m
Cr 711 other revenue: 24 m
- Record costs related:
Dr 211 tangible fixed assets: 1m
Cr 111 cash: 1m
IFAS:
Dr equipment: 25m
Cr cash: 1m
Cr other income: 24 m
D. when using self produced products: converts it into tangible fixed assets:
Dr Cost of good sold: account 632
Cr account 155 finished good
Cr account 154 work in process cost
- as well as record increasing in tangible fixed assets:
Cr account 512 internal sales revenue
- installation, trial operation cost related:
Cr account 111, 112, 113- cash/cash at bank/ cash in transit
Under IFRS:
Dr Assets(houses, land, machine)
Cr donation/ contribution revenue
Convey a fixed assets in managerial division into tools with historical cost of 19m,
accumulated depreciation is 9 million, the net book value is allocated in 2 years starting
from this year.
VAS:
Dr 211 tangible fixed assets: 10 m
Cr 512 internal gross sales: 10m
IFAS:
Dr assets: 10m
Cr revenue: 10m
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d. tangible fixed assets in exchange for the similar one:
Dr account 211 tangible fixed assets received one
Cr account 214 depreciation
Cr account 211 tangible fixed assets exchanged one
e. Tangible fixed asset in exchange for the dissimilar one
- When delivering the asset, record the decrease in asset
Dr account 811: other expense
Dr account 214 depreciation expense
Cr account 211 tangible fixed assets
At the same time, record the increase in revenue:
Dr account 131 account receivable
Cr account 711 other revenue
Cr account 3331 VAT
When receiving the asset:
Cr account 131
Under IFRS:
- Exchange of assets in the loss case:
Dr new assets
Dr accumulated depreciation- old one
Dr loss on disposal of assets
Cr old assets
Cr Cash
- Exchange of assets in the gain case:
Dr new assets
Dr accumulated depreciation- old one
Cr cash
Cr gain on disposal of old one
Cr old assets
Example: A exchange an asset to X. historical cost is 20m, accumulated
depreciation 10 m. The new one value is 25m, depreciation value is 5m, Vat 5%.
VAS:
- When delivering the asset, record the decrease in asset
Dr account 811 other expenses: 10m
Dr account 214: 10m
Cr account 211 tangible fixed assets: 20m
- At the same time, record the increase in revenue:
Dr account 131 account receivable: 21m
Cr account 711 other revenue: 20m
Cr account 3331 VAT: 1m
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- When receiving the asset:
Dr account 211 tangible fixed assets: 20m
Dr account 133 VAT deducted: 1m
Cr account 131 account receivable: 21m
IFAS:
- Exchange of assets in the gain case:
Dr new assets: 20m
Dr accumulated depreciation- old one: 10m
Cr gain on disposal of old one: 10m
Cr old assets: 20m
f. When the construction finishes, and asset is used:
Cr account 241 construction in progress
- If assets are not satisfied with the criteria of tangible fixed assets, record:
Dr account 152, 153- raw materials/tools and supplies
Cr account 241 construction in progress
- When company is assigned the assets, based on the historical cost, depreciation
and residual value to record:
Dr 211 tangible fixed assets: historical cost
Cr 214: depreciation expense
Cr 411 working capital residual value
Note: when company finds out that there is an increase in value of tangible fixed
asset due to the error in recording:
Cr related accounts
And the depreciation expense is included in production and business cost:
Dr account 142 prepaid expense
Dr account 627, 641, 642 general operating expense/selling expenses/administrative
expenses
Cr account 214 depreciation of fixed asset
5. Record the decrease in tangible fixed assets:
a. Company sells tangible fixed assets:
- Record decrease in value of assets:
Dr account 214 depreciation of fixed assets
Dr account 811 other expenses residual value
Cr account 211 tangible fixed assets historical cost
- Revenue from sale:
Dr 111, 112, 131 cash/cash at bank/ account receivable
Cr account 3331 VAT
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- Firm pays tax by direct method:
Dr account 111, 112, 131
About the tax:
Dr account 711 other revenue
Cr account 3331 VAT
- Costs related to selling process:
Dr account 811 other expenses other revenue
Cr account 111, 112 cash/ cash at bank
Example: Company sold one tangible fixed assets, historical cost is 300 million
VND with depreciation: 120 million, sales price is 220 million including VAT 20
million VND. It received cash through transfer of credit account
a.
b.
Under VAS
Dr account 811 other expenses: 180
million
Dr account 214: 120 million
Cr account 211 tangible fixed assets:
300 million
Cr account 711: 200 million
Under IFRS
Dr cash: 220 million
Dr accumulated depreciation: 120 m
Cr assets: 300 million
Cr gain from sale: 40 million
b. Company liquidates the assets:
- Record decrease in tangible fixed assets: the same in sale of assets
- Record cost incurred related:
Dr account 811 other expenses
Cr account 334,338, 111, 112 payable to employees/other payable/ cash/ cash at bank
- Revenue from the liquidation:
Dr account 111, 112, cash/cash at bank
Cr account 711 price without tax
Cr account 3331 VAT
- Pay tax by direct method:
Dr account 111, 112 cash/cash at bank
Under IFRS:
Dr depreciation expense
Cr accumulated depreciation
Dr cash
Dr accumulated depreciation of machine
(Dr Loss on disposal of assets)
Cr machine
(Cr Gain on disposal of machine)
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Example: Liquidation of fixed assets with the historical value is 120 million VND,
net book value is zero, liquidation cost + liquidation price = 0.
Under VAS
Dr 214: 120 million
Under IFRS
No record, just write off the
assets out of the book.
Cr 211 tangible fixed assets: 120 million
c. When transferring tangible fixed assets to other divisions:
Dr account 1361investment in subsidiaries: net book value
Dr account 214: depreciation of fixed asset
Cr account 211 tangible fixed assets/ 213: historical cost
Example: Department A transfers its assets to other division in the company with
historical cost of 17m, accumulated depreciation 10m:
Dr 1361 investment in subsidiaries: 7m
Dr 214 depreciation of fixed asset: 10
Cr 211 tangible fixed assets: 17m
6. When auditing, company finds out the deficiency of fixed assets but not yet
sees the reasons, it can use the historical cost, depreciation, and net book value to record
the assets
- Assets used for operation and business activities:
Dr 214 Depreciation expense of fixed assets
Dr 138 Other account receivable
Dr 411 working capital operation capital
Dr 811 other expenses
Cr 211 tangible fixed assets tangible fixed assets
Under IFRS:
Dr depreciation expense
Cr accumulated depreciation
Example: After auditing, A find out that its fixed assets’ value is 20 million VND
lower than its book value without the reasons.
VAS:
Dr account 214 depreciation expense: 20million VND
Cr account 211 tangible fixed assets: 20 million VND
IFAS:
Dr depreciation expense: 20millionVND
Cr accumulated depreciation: 20 million VND
7. When transferring tangible fixed assets into tools, swages, record:
a. If the net book value is small, allocate it on the cost of objects used in the
accounting period:
Dr account 627, 641, 642 “residual values”
(general operating expense/selling expenses/administrative expenses)
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Dr account 214 depreciation expense
b. If the residual value is big, transfer it into prepaid expense to allocate gradually to
cost of other objects:
Dr account 142 prepaid expense net book value
Dr account 214 depreciation of fixed assets
-Then allocating gradually to others:
Dr account 627, 641, 642 general operating expense/ selling
expenses/administrative expenses
Cr account 142 prepaid expense: allocation amount.
8. To illustrate, please refer to the following example:
Hoa An company, producing Green bean cake, pays tax by discount method. Its
operation on April, 2010 was related to some increase and decrease in tangible fixed
assets. Record the journal entry:
8.1. It purchased machine and paid through transferring the credit account,
purchasing price without tax is 400 million VND, VAT is 40 million VND.
1.a
1.b
Under VAS
Dr account 211 tangible fixed assets:
400million
Dr account 133 VAT deducted: 40 million
Under IFRS
Dr machine: 400 million
Dr tax expense: 40 million
Cr cash: 440 million
Cr account 009 fundamental discount capital:
400 million
8.2. Company sold one tangible fixed assets, historical cost is 300 million VND
with depreciation: 120 million, sales price is 220 milliion including VAT 20 million
VND. It received cash through transfer of credit account
a.
b.
Under VAS
Dr account 811: 180 milliion
Cr account 211 tangible fixed assets:
300 million
Under IFRS
Dr cash: 220 million
Dr accumulated depeciation: 120 m
Cr assets: 300 million
Cr gain from sale: 40 million
9. Dispositions of plant assets
A disposition of a plant asset is the sale, exchange, retirement, involuntary
conversion, or abandonment of the plant asset
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Account 211 tangible fixed assets
Account 2112: building
Account 2113: machine
Account 2114: transportation
Account 2115: equipment
9.1. Sale of plant assets
Companies record depreciation for the period of time between the date of last
depreciation entry and the date of sale
Decrease of fixed asset
Dr Ac 214- Depreciation expense
Dr Ac 811 other expenses- book value of asset
Cr Ac 211 tangible fixed assets- Original cost of asset
Money receives when sale asset
Dr Ac 111, 112, 131 cash/cash at bank/VAT deducted
Cr Ac 711 other income- without tax
Cr Ac 3331- VAT
Expenses when sale asset
Dr Ac 811 other expenses
Cr Ac 111, 112 cash/ cash at bank
9.2. Involuntary conversion
Involuntary conversion: fire, flood, theft, or condemnation
To illustrate, a corporation has equipment but it’s fired, then the insurance company
compensate with price $500,000 which substantially exceeded the $200,000 book value
of the plant and land (cost of $400,000 less accumulate depreciation of $200,000). This
made the following entry:
Dr Ac 112 cash at bank 500,000
Dr Ac 214-Accumulated Depreciation 200,000
Cr Ac 211 tangible fixed asset 400,000
Dr Ac 111, 112- extra amount 300,000
9.3. Exchange:
The proper accounting for exchange of nonmonetary, such as property, plant, and
equipment, is controversial. An exchange has commercial substance if the future cash
flows change as a result of transaction. That is, if the two parties’ economic position
change, the transaction has commercial substance.
9.3.1 Exchange with the same price
Dr Ac 211- Original cost of old fixed asset
Dr Ac 214- Accumulated Depreciation
Cr Ac 211- Original cost of the new
9.3.2 Exchange without the same price
When Co. A gives fixed asset for Co. B, Co. A records transaction as follow:
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Dr Ac 811 other expenses- book value of old asset
Dr Ac 214- Accumulated Depreciation
Cr Ac 211 tangible fixed asset- original of old asset
When Co. A receives new tangible fixed asset
Dr Ac 211 tangible fixed assets- original of new asset
Dr Ac 133 VAT deducted- depreciation of GTGT tax (if any)
Cr Ac 131 account receivable- fair value of the old
In case, Co. A receives extra money when price of old asset is higher than the new:
Dr Ac 111, 112 cash/ cash at bank- extra amount
Cr Ac 131 account receivable
In case, Co. A pays extra money when price of old asset is less than the new
Dr Ac 131 account receivable
Cr Ac 111, 112 cash/ cash at bank
10. Fixed assets under financial lease
According to Vietnamese Accounting Standards, A financial lease is a lease
whereby the lessor transfers most of the risks and rewards associated with the
ownership over an asset to the lessee. The ownership over the asset may be transferred
at the end of the lease term.
The cases leading to financial lease may include:
a/ The lessor transfers the asset’s ownership to the lessee at the end of the lease term;
b/ At the inception of the lease, the lessee has the right to purchase the leased asset
at a price expected to be lower than the reasonable price at the end of the lease term;
c/ The lease term accounts for most of the economic life of the asset even if the
ownership is not transferred;
d/ At the inception of the lease, the present value of the minimum lease payment
accounts for most of the reasonable value of the leased asset;
e/ The leased asset is of a special-use type which can be used only by the lessee
without major modification or overhaul.
Lease contracts will be also considered financial lease contracts if they fall into at
least one of the following three cases:
a/ If the lessee cancels the contract and pays compensation for damage associated
with the contract cancellation to the lessor;
b/ Incomes or losses from the change in the reasonable value of the residual value of
the leased asset are associated with the lessee;
c/ The lessee is able to continue leasing the asset after the lease contract expires at a
rent lower than market rents.
Recognition: With financial lease, the account used is 212- financial leased assets.
The historical cost recorded at the inception of the lease terms is based on section 06:
lease in VAS. The recognition is as follow:
At the inception of a financial lease, the lessee will recognize the financial leased
asset as an asset and liability in its balance sheet with the same value equal to the
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reasonable value of the leased asset. If the reasonable value of the leased asset exceeds
the present value of the minimum lease payments for the lease, the present value of the
minimum lease payments shall be recorded. The discount rate used for calculating the
present value of the minimum lease payments for the lease will be the interest rate
implicit in the asset lease contracts or the interest rate inscribed therein. If the interest
rate implicit in the lease contract is undeterminable, the lessee’s incremental borrowing
interest rate will be used for calculating the present value of the minimum lease
payments.
Initial direct costs incurred in connection with financial leasing activities, such as
costs for lease contract negotiation and signing will be recognized into the historical
costs of the leased assets.
Theoretically, accounting for leased assets under VAS is quite similar to IFRS’s.
However, in practice the situation seems to be more complicated because of the
differences in the account as well as tax system.
Under VAS, the journalizing process is as follow:
Before the acquisition of the leased assets: company recognizes for the attibutable
to the acquisition of the leased assets: negotiation cost, transaction cost, ect.
Dr account 142 prepaid expense
Cr account 111/112/…: cash/ cash at bank
The prepaid for the assurance of the lease contract:
Dr account 342 long term liability
Dr account 244 long term collateral and deposit
Cr account 111/112: cash/cash at bank
Acquisition of the leased assets:
Dr account 212: fixed assets under financial lease (excluding VAT)
Cr account 342: long term liability (present value of the minimum lease payment or
reasonable value of the leased assets)
The initial direct cost is included in the historical cost of the leased asset:
Dr account 212- fixed asset under financial lease
Cr account 142 prepaid expense/111cash /112 cash at bank (the amount equal to the
amount recorded above)
At the end of the fiscal year, basing on the lease contract, determine the lease
liability for the next period
Dr account 342 long term liability
Cr account 315 Long term loans due to date
Periodically get the bill to pay lease liability
To record the lease liability and interest expense
Dr account 635 financial activities expenses (current interest expense)
Dr account 315 Long term loans due to date (including value added tax)
Cr account 111/112 cash/ cash at bank
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Periodically depreciate the leased assets to operating expense or capitalize to
construction in progress
Dr account 623/627/641/642/241…/executing machine using expense/general
operating expense/
Dr account 009 fundamental discount capital
Cr account 214- Depreciation of fixed asset
To illustrate, there is an example as follow:
X is a construction company which pay VAT on deductible base. In January 2004,
Company X had the following activities related to financial lease fixed assets:
1. Buy a financial lease asset at the end of the lease term. X paid in cash the amount
of 30,000,000VND. The historical cost of the financial leased assets was
400,000,000VND, the depreciated amount was 380,000,000VND.
2. X also returned another financial lease asset to the lessor at the end of the lease
term, the historical cost was 200,000,000 VND and it has been fully depreciated.
3. Use transfer payment to pay for the lease expense with the amount of
135,000,000VND in which the initial expense: 100,000,000VND, interest expense:
25,000,000 VND, VAT expense: 10,000,000VND
4. Acquire another financial lease asset from company Y. the total expense was
400,000,000 VND (VAT not included), the current expense was 40,000,000 VND.
Other attributable expenses which had been paid already were 10,000,000VND.
Requirement: journalize the entries
Solution:
1. a. Dr account 211- tangible fixed asset
400,000,000 VND
Cr account 212- financial lease fixed asset
400,000,000 VND
b. Dr account 211- tangible fixed asset
30,000,000 VND
Cr account 111- cash
30,000,000 VND
c. Dr account 2142 - accumulated depreciation under financial lease 380,000,000VND
Cr account 2141- depreciation expense (tangible fixed asset) 380,000,000VND
2. Dr account 2142 accumulated depreciation under financial lease 200,000.000 VND
Cr account 212 fixed asset under financial lease
200,000,000 VND
3. Dr account 315 long term loan due to date
Dr account 635 financial activities expenses
Cr account 112 cash at bank
100,000,000 VND
10,000,000 VND
25,000,000 VND
135,000,000 VND
4. Dr account 212 fixed asset under financial lease
410,000,000 VND
Cr account 111 cash
10,000,000 VND
Cr account 315 long term loan due to date
40,000,000 VND
Cr account 342 long term liability
360,000,000 VND
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11. Methods of depreciation
Depreciation http://www.investorglossary.com/depreciation.htm is the reduction in
the value of an asset from wear-and-tear or obsolescence. It is not a matter of valuation
but a mean of cost allocation to expense in a systematic and rational way to those
periods expected to benefit from use of the tangible assets. According to VAS,
Economic benefits yielded by tangible fixed assets shall be gradually exploited by
the enterprises through the use of these assets. Nevertheless, other factors, like technical
backwardness, wear-and-tear of these fixed assets due to their non-use, often cause
reductions in the economic benefits which the enterprises expect these assets would
bring about. Therefore, when determining the useful life of tangible fixed assets, the
following factors must be such as: the extent of use capacity or output of such asset: the
extent of wear-and-tear, depending on the use process, the enterprise’s repair and
maintenance of the asset; from the replacement or renovation of the technological chain
or changes in the market demand for the products or service turned out by the asset;
legal constraints in the asset use...
Enterprises need to estimate service lives of assets because it differs from its
physical life. The useful life of tangible fixed assets shall be determined by the
enterprises mainly on the expected use extent of the assets. In fact, the estimated useful
life of fixed assets may be shorter than their actual useful life. In most cases, a company
estimates the useful life of an asset based on its past experience of the same or similar
assets.
According to Finance Minister’s Decision No 206/2003/ QD-BTC, there are 3 main
methods of depreciation: Straight-line depreciation method; Declining-balance
depreciation method; and Units-of-output depreciation method. Basing on real
conditions applied for each method, firms can choose an appropriate method suitable for
their own kind of fixed assets. Then, they must register their depreciation method to tax
agency before depreciating. The chosen and registered one will be implemented
consistently during usage of these fixed assets.
11.1. Straight-Line Depreciation
Method of computing depreciation in which the depreciable cost (historical or
purchase price) of a tangible capital asset is reduced by an equal amount in each
accounting period (usually a year) over the asset's estimated useful life. Straight line
depreciation is computed as a fixed expense by dividing the asset's depreciable cost by
the number of years the asset is estimated to remain in service. Suitable where the usage
of an asset remains generally uniform despite the asset's age, it is the simplest and most
common method of computing depreciation. For easy computation, the depreciation rate
may be converted to a percentage of the depreciable cost. Steps of calculating as follow:
Determine the useful life of the asset in years
Determine the salvage value of the asset after its useful life
Deduct the salvage value from the purchase price of the asset
Divide the number of useful years into the total in step number 3
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As an example, ABC Ltd. bought a new machine on 1 st Jan 2002. The following
information is provided:
Cost $11,000
Salvage (residual) value $ 1,000
Usage (useful life) 5 years
Required: Show the depreciation expenses and net book value using Straight-line method.
Solution:
Depreciation per year: (11.000 - 1.000)/5 = $2.000
Year
31 Dec 02
31 Dec 03
31 Dec 04
31 Dec 05
31 Dec 06
Beginning value
11,000
9000
7000
5000
3000
Depreciation
2000
2000
2000
2000
2000
Accumulated
depreciation
2000
4000
6000
8000
10000
Net book value
9000
7000
5000
3000
10000
11. 2. Declining-balance depreciation method
The declining balance depreciation method is an accelerated method since a large
part of the cost of the fixed asset is expensed at the beginning of the life of that asset. To
calculate declining balance depreciation the depreciable basis of the fixed asset is
multiplied by a factor. The depreciable basis is the book value of the fixed asset - cost
less accumulated depreciation. The factor is the percentage of the asset that would be
depreciated each year under straight line depreciation times an accelerator
The declining balance rate is multiple by the book value of the assets at the
beginning of each period. The depreciation charge reduces the book value of the asset
each period, applying constant-declining balance rate to lower book value result in
lower depreciation charges each year. This process continues until the book value of the
asset equals its estimated value.
Refer to example above; show the depreciation expenses and net book value using
Reducing method at 40% per year.
Solution:
- Year 1 (at 31 Dec 02): Accumulated depreciation: (11.000 – 1.000) x 40% =
4.000; Net book value: 11.000 - 4.000 = 7.000
- Year 2 (at 31 Dec 03): Accumulated depreciation: (7.000 – 1.000) x 40% = 2.400;
Net book value: 7.000 - 2.400 = 4.600
- Year 3 (at 31 Dec 04): Accumulated depreciation: (4.600 – 1.000) x 40% = 1.440;
Net book value: 4.600 – 1.440 = 3.160
- Year 4 (at 31 Dec 05): Accumulated depreciation: (3.160 – 1.000) x 40% = 864;
Net book value: 3.160 - 864 = 2.296
- Year 5 (at 31 Dec 06): Accumulated depreciation: 2.296 – 1.000 = 1.296; Net
book value: 2.296 – 1.296 = 1.000 = residual value
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11.3. Units-of-output depreciation method
The units of production method of depreciation are based on an asset’s usage,
activity, or parts produced instead of the passage of time. Under the units of production
method, depreciation during a given year will be very high when many units are
produced, and it will be very low when only a few units are produced.
For example, A new milling machine is purchased for $22,500. It is expected that
the machine can last for 16,000 hours. Determine the depreciation charge for a year
when this machine was used for 2,600 hours.
Solution:
The salvage value can be estimated as 10% of first cost or $2,250. Charge for one
hour of use is determined as follows:
Charge/hour = (22,500 - 2,250)/(16,000)
= $1.266/hour
As the machine is used for 2,600 hours, the depreciation charge is
Depreciation charge = (2,600)(1.266) = $3,291.60
DURATION FRAMEWORK FOR THE USE OF FIXED ASSETS
Issued with circular 203-2009-TT-BTC by the Ministry of Finance dated 20 October 2009
Categories of fixed assets
A- Dynamic machinery and equipment
1. Dynamic generators
2. Electrical generators
3. Electrical transformers and power source equipment
4. other machinery and equipments
B. Working machinery and equipment
1. Tools
2. Mining and construction machinery
3. Tractors
4. Machines used for agriculture and forestry
5. Oil, petrol and water pumps
6. Metallurgical equipment for manufacture of building
materials, terracotta, porcelain and glassware
7. Specialized equipment for manufacture of chemicals
8. Specialized machinery and equipment for manufacture
of building materials, terracotta, porcelain and glassware
9. Specialized equipment for manufacture of optical and
electronic component, and for precision mechanical
engireering
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Minimum
useful lives
(years)
Maximum
useful lives
(years)
8
7
7
6
10
10
10
10
7
5
6
6
6
7
10
8
8
8
8
10
6
6
10
8
5
12
10. Machinery and equipment used for manufacture of
leather, for printing stationery and cultural products
11.Machinery and equipment used in the textile industry
12. Machinery and equipment used in the clothing industry
13. Machinery and equipment used in the paper industry
14. Machinery and equipment for production and
processing of grains and foodstuffs
15. Machinery used in the film industry and in health
services
16. Telecom, information, electronics, informatics and
television and machinery and equipment
17. Machinery and equipment for production of
pharmaceutical drugs
18. Other working machinery and equipment
CMeasurement
equipment
and
laboratory
instruments
1. Equipment for measurement of and experiment on
mechanical, sonic and thermodynamic volumes
2. Optical and optical spectru equipment
3. electrical and electronic equipment
4. Analytic measurement equipment used in physical
chemistry
5. Radioactivity measurement instruments and equipment
6. Equipment used in specialized sectors
7. Other experimental and measurement equipment
8. Moulds used in the casting industry
D- Transport equipment and means of transport
1. Means of transport by road
2. Means of transport by railway
3. Means of transport by waterway
4. Means of transport by airway
5. Equipment for conveyance via pipelines
6. Equipment for goods discharge and lifting
7. Other facilities and means of transport
E- Managerial tools
1. Calculating and measuring instruments
2. Electronic equipment, machinery and software for the
purpose of management
3. Other managerial instruments and facilities
F- Buildings and Architectural works
1. Subtantial buildings
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7
10
10
5
5
7
15
7
15
12
6
12
3
15
6
10
5
12
5
10
6
5
6
10
8
10
6
5
6
2
10
8
10
5
6
7
7
8
10
6
6
10
15
15
20
30
10
10
5
3
8
8
5
10
25
50
2. Building of other kinds
3. Storehouses, tanks, bridges, roads, air runways, parking
lots, drying yards, ect
4. Quays, dams, sewers, canals, harbours and docks
slipways and so forth
5. Other architecral works
G- Livestock and perennial platations
1. livestock of all kinds
2. Industrial and perennial plantation; and orchards
3. Lawn and green areas.
H- other types not in the above categories
Th¸ng 5 - 2010
6
5
25
20
6
30
5
10
4
6
15
40
2
4
8
25
III. Intangible assets
1. Definition:
Intangible fixed assets mean assets which have no physical form but the value of
which can be determined and which are held and used by the enterprises in their
production, business, service provision or leased to other subjects in conformity with the
recognition criteria of intangible fixed assets.
2. Criteria for recognizing intangible fixed assets:
First of all, the certainty to acquire future economic benefits brought about by the
asset. The second criterion is that the asset’s historical cost must be measurable. The
useful life is estimated to last for over one year is the fourth criteria and all value criteria
prescribed by current regulations are met will be the last criteria for deciding which
assets can be intangible fixed asset.
Accounting of intangible fixed assets which are classified by groups of fixed assets
of the same nature and use purposes in the enterprises’ operations, including:
+ The right to use land for a definite term;
+ Trademarks;
+ Distribution rights;
+ Computer software;
+ Licenses and right concession permits;
+ Copyright, patents;
+ Preparation formulas and methods, models, designs and prototypes;
+ Intangible fixed assets being developed.
3. Determination of historical cost of intangible fixed assets:
Historical cost means all costs incurred by the enterprises to acquire intangible fixed
assets as of the time of putting these assets into use as expected.
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a) Historical cost of separate-intangible fixed asset consists of the purchasing price
(minus (-) trade discounts or price reductions), taxes (excluding reimbursed tax
amounts) and expenses directly related to the putting of the asset into use as planned.
b) Historical cost of a procured intangible asset is the purchasing price plus taxes
(not including reimbursable taxes, related costs counted to the time of putting the assets
into use as expected.
c) Historical cost of intangible fixed asset under exchange form is the reasonable
value of vouchers issued in relation to capital ownership.
d) Historical cost of intangible fixed asset created from within the enterprise is the
costs directly related to designing, constructing and experimenting prototypes or models
before they are put into production or use, designing tools, molds, jigs and swages
related to new technologies, designing, constructing and operating economically
infeasible trial workshops for commercial production operations, designing, developing
and manufacturing on a trial basis substitute materials, tools, products, processes,
systems and services, new or improved. All costs incurred in the research stage
(including activities of researching into and developing new knowledge, exploring,
evaluating and selecting final options, The application of research results, or other
knowledge, The exploration of alternative methods for materials, tools, products,
processes, services, Formulas, designs, evaluation and final selection of alternative
methods for materials, tools, products, processes, systems, services, new or further
improved) and costs for having trade name, issuing right, consumer list shall not be
recognized as intangible fixed assets but as production and business expenses in the period.
e) Historical cost of intangible fixed asset which is allocated by the State, donated
or presented, is determined according to the initial reasonable value plus (+) the
expenses directly related to the putting of the assets into use as planned.
f) Historical cost of intangible asset being the right to use land is the cost of having
legal land using right plus other cost for leveling the surface, compensation….In case
the corporations rent the land that cost is allocated to business expenses, not intangible
fixed asset.
4. Methods for posting the accounts (all journal entries are based on
Vietnamese accounting standard)
a) Posting the account for purchasing intangible fixed assets:
- Where intangible fixed assets are bought for manufacturing goods, services,
including VAT that is calculated according to discount method.
In Vietnam:
Debit account 213 - Intangible fixed assets
Debit account 133 VAT deducted - VAT deduction of fixed asset
Credit account 111 -Cash
or Credit account 112-Cash in bank
or Credit account 331 - Payable to seller
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For example a company buys patents from one person with 5% VAT, pay by cash,
the transaction will be:
Debit account 213 - Intangible fixed assets VND 500,000,000
Debit account 133 VAT deducted VND 25,000,000
Credit account 111-Cash VND 525,000,000
or Credit account 141 – Advances VND 525,000,000
or Credit account 331 - Payable to seller VND 525,000,000
- Where intangible assets are purchased for manufacturing goods and services, not
levied by VAT
Credit account 112, 311…Credit- Cash in bank
Payable to seller
With the above example, but the company does not be eligible to pay VAT, the
transaction will be recorded as follow:
Debit account 213 - Intangible fixed assets VND 500,000,000
Credit account 112, 311…Credit- Cash in bank VND 500,000,000
b) Purchasing intangible fixed assets that are paid by deferred payment mode,
mortgage:
- In case intangible fixed assets are purchased for manufacturing goods, services,
levied by VAT that is calculated by discount method.
Credit account 231- Intangible fixed assets
Credit account 242- Long-term prepaid expenses
Credit account 133 VAT deducted
Credit account 331- Payable to seller
- If intangible fixed assets use for producing goods, services not levied by VAT or
levied VAT directly:
Debit account 242- Long-term prepaid expenses
Credit account 331- Payable to seller
- Interests return from purchasing intangible assets with deferred payment mode
every term
Debit account 635-Financial activities expenses
Credit account 242- Long-term prepaid expenses
or Credit account 142 - Prepaid expenses
Making payment to seller:
Debit account 331- Payable to seller
Credit account 111,112 Cash/ cash in bank
c. Intangible fixed assets purchased in form of exchange:
* Intangible fixed assets purchased in form of exchange for a similar intangible
fixed one:
When receiving intangible fixed assets purchased in form of exchange for a similar
intangible fixed one and use immediately for manufacturing activities:
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Debit account 213 –Intangible fixed assets (receiving)
Debit account 214- Intangible fixed assets depreciation
Credit account 213- Intangible fixed assets (exchange)
* Intangible fixed assets purchased in form of exchange for a dissimilar intangible
fixed one:
- Recognizing the decrease in intangible fixed assets for exchange:
Debit account 214- Fixed assets depreciation
Debit account 811- Other expenses
Credit account 213- Intangible fixed assets
- Simultaneously reflecting income from exchange of fixed assets
Debit account 131- Accounts receivable
Credit account 711- Other income
Credit account 3331- Value added tax
Recognizing the increase in intangible fixed assets receiving from
exchange:
Debit account 133 - VAT deducted
Credit account 131- Accounts receivable
d) Value of intangible fixed assets that are created from within enterprise in the
development stage:
* When having costs in the development stage, if result is not satisfied the definition
and standard for recognizing fixed assets, that costs will be recorded as manufacturing
costs or long-term prepaid expenses.
Debit account 242 - Long-term prepaid expenses
Debit account 642 - administrative expenses
Credit accounts 111,112,152,153… Cash, cash in bank…
* When the result of development stage meet definition and standard of recognizing
fixed assets, recording as follow:
- Real costs that arise within the stage in order to become historical costs will be
recorded as:
Debit account 241 - construction in progress
Credit accounts 111, 112,152,153,331…– Cash, Cash in bank, payable to seller…
- At the end of the stage, accountant must record real costs become historical costs:
Debit account 213–Intangible fixes assets
Credit account 241 - Construction in progress
e) When purchasing intangible fixed assets is the right to use land accompanying
with houses, accountant should record separately the right to use land as intangible fixed
assets, house as tangible fixed assets:
Debit account 211–Tangible fixed assets
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Credit accounts 111,112,331… –Cash, cash in bank, payable to seller…
f) Purchasing intangible fixed assets from exchange payment by documents that
related to the right to own capital of joint stock companies, historical cost of intangible
assets will be the legal value of those documents, recorded as follow:
Debit account - Intangible fixed assets
Credit account 411 - Working capital
g) When the enterprises have donated or presented intangible fixed assets that used
for manufacturing activities:
- When receiving the donated and presented intangible fixed assets:
Debit account 711- Other income
- Costs related to donated and presented intangible fixed assets:
Credit accounts 111,112…- Cash, cash in bank…
- For depreciation of intangible fixed assets, it is recorded as follow. For example,
the depreciation expenses are VND 135,807,740. The transaction recoding will be:
Dr account 627 General operating expenses VND 135,807,740
Cr account 2143 Intangible fixed assets depreciation VND 135,807,740
- When company increases adjustment for depreciation with the amount of VND
367685825
Dr 009: VND 367685825(off- balance sheet account)
(009: depreciation capital)
Recording decreased adjustment (depreciation):
Dr account 2143 Intangible fixed assets depreciation VND 231,878,085
Cr account 627 General operating expenses VND 231,878,085
(367685825-135807740=231878085)
IV. Revaluation (Impairment) of fixed assets
Under IFRS impairment refer to the write off of long lived assets (PPE and
intangible assets) whose carrying amount is not recoverable. Under VAS, there still
exists the impairment of both tangible and intangible fixed assets, however, the practice
seems to be more flexible. When there is an increase in the value of fixed asset like
land, the revaluation will be recorded.
Account used: 412- increase/decrease amount in revaluation of fixed asset
- If the revaluation result shows an increase in the value of fixed assets, the difference
will be recorded as: Dr account 211 tangible fixed assets/213 intangible fixed asset
Cr account 412 difference upon assets revaluation
- If the revaluation result shows a decrease I the value of fixed assets, the different
will be recorded as: Dr account 412 difference upon assets revaluation
Cr account 211 tangible fixed assets/213 intangible fixed asset
- If there is a change in the depreciation expense due to the revaluation of the fixed
assets, the adjustment should be made as:
+ With increase in depreciation expense:
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Dr account 412 Difference upon assets revaluation
Cr account 214 accumulated depreciation
+ with decrease in depreciation expense:
Dr account 214 accumulated depreciation
Cr account 412 difference upon assets revaluation
V. Management of fixed assets
Fixed assets management refers an accounting process that seeks to track fixed
assets for the purposes of financial accounting, preventive maintenance, and theft
deterrence
Fixed assets are essential for company to generate goods and services, but without
accurate method of keeping track of these assets it would be very easy for the company
to lose control of them. Therefore, fixed assets management seems to be always
necessary. As a result, companies reduce expenses through loss prevention and
improved equipment maintenance. They reduce new and unnecessary equipment
purchases, and they can more accurately calculate taxes based on depreciation
schedules.
.Many organizations face a significant challenge to track the location, quantity,
condition, maintenance and depreciation status of their fixed assets. A popular approach
to tracking fixed assets utilizes serial numbered Asset Tags, often with bar codes for
easy and accurate reading. Periodically, the owner of the assets can take inventory with
a mobile barcode reader and then produce a report. (www.en.wikipedia.org)
An example of fixed asset management can be as follow:
VI. Conclusion
In conclusion, the step to account for fixed assets is a continuous procedure which
starts with the determination of historical cost. Then the procedure continues with the
record for the increase and decrease in fixed assets along with their
depreciation/amortization and revaluation. In comparison with IFRS’s the procedure is
quite similar, however, in reality the practice seems to exist some differences because of
the appearance of Vietnamese code system. In addition, the replacement of the circulars
or decision made by Ministry of Finance to fit with the new situation of Vietnam has
leaded to the adjustment in practice as well. Yet the purpose of the adjustments is still to
reach a common goal- finding the way to harmonize with IFRS. Particularly, in the
context of Vietnam’s integration in WTO, outsourcing or off shoring happens more
regularly. It seems to always necessary for current accountants as well as potential
accountants and other related parties (investors, managers, etc) to be aware of both
Vietnamese and international practice to equip themselves with deep knowledge and
help them have better investment decision or management measurement.
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REFERENCES
1. Nhi Vo Van, 2006, “Kế toán tài chính, lý thuyết và sơ đồ”, Labor and Social Affair
publish house. Accessed at 28th April 2010.
2. http://en.wikipedia.org/wiki/Fixed_assets_management. Accessed at 22 May 2010
3. Loan Dang Thi, 2009, “kế toán tài chính trong các doanh nghiệp”, national economic
university publish house.
4. Vietnam
government,
“Vietnam
accounting
standard”,
Available
at
http://www.webketoan.vn/forum/attachment.php?attachmentid=7337&d=1256885510
Accessed at 4th May 2010.
5. Ministry of finance, “Quyết định 15/2006/QĐ-BTC”, Available at Error! Hyperlink
reference not valid. Accessed at 4th May 2010.
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SCIENTIFIC RESEARCH PAPER REPOS CONTRACTS:
LAW AND APPLICATIONS IN VIETNAM
Written by: Nguyen Hong Hanh
Tran Viet Kien, Nguyen Thi Quyen
Supervisor: Nguyen Quynh Anh
ABSTRACT
The rule “higher risk, higher return” has made the derivative market become an important
part of the whole market. It not only provides market participants with hedging tools but also
speculative tools for making profits.
Vietnam is an emerging market with a lot of chances for growth and plenty of risks as well.
In the country, though the derivative instruments still have not much developed, some of them
have widely been used. Our research aims at conducting analysis on sale and repurchase
agreement (also known as repo), a derivative market tool in Vietnam. Emphasises are placed on
law aspects and the market participants’ behaviors within the laws. Especially, throughout the
research report, the question of “why recently repo captures a lot of attention” is step by step
solved. In particular, our paper looks into the repo tool in both stock and bond market, the
participants in each market, their benefits and behaviors within the law platform in Vietnam.
Finally, key findings and recommendations are presented in the conclusion part.
PART I. Introduction
1. Introduction
The Vietnamese financial market has undergone massive changes in recent years.
Since the initiation of the stock market in mid-1998, the Southern East Asian has
developed from the stage of an “emerging economy” to a more advanced market with a
myriad of financial products and services, many of which are far from similar to
Vietnamese investors. The Sale and Repurchase Agreement, commonly known as Repo
transaction (for simplicity, we will use the term “repo” consistently in our research) is
one such instrument that has captured much attention among the market participants in
Vietnam of late. The introduction of Repo has a profound effect on many players, from
cash-rich individual investors who find it as a source of easy money to banks and other
financial institutions who recognize in it the potential of diversifying their securities
holdings and remedying maturity mismatch. Even local government has stepped in the
Repo transactions in an effort to stabilize the financial markets in certain instances.
What is repo then that could stir up frenzy in an already turbulent and highly sensitive
market of Vietnam? We will in turn look at the different aspects of a repo transaction,
its constituent players and their roles. Hopefully, in the process, new light could be shed
on the century-old market instrument yet still holding wonders to many.
2. Methodology
This research was conducted with our greatest effort and care despite time limit.
A secondary research approach was employed to gather information, data and
materials which were then incorporated in our paper as convincing evidences, and
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references. Our group took advantage of the Internet as a cheap and easy access to
human rich knowledge and information source in order to search for needed materials.
Popular searching engines such as google.com, yahoo.com assisted us much in the
process of collecting documents, facts and figures. In order to increase the reliable and
quality of the information, sources such as official websites of government authorities,
famous online newspapers, and websites of big corporations are given priorities to the
others. Our text book “Bank asset and liability management” by Moorad Choudhry
proved to be a useful reference source of knowledge.
Primary research approach was also used. Emails asking for consultation are sent to
expertise people in the field that are our instructor Ms. Nguyen Quynh Anh and
Ms.Tran Phuong Thao from Trang An securities firms about confusing related issues.
PART 2. Analysis
1. Repo transactions in Vietnam:
1.1 Overview
A repo agreement is loosely defined as a transaction in which one party sells
securities to another, and at the same time, and as part of the same transaction, commits
to repurchase identical securities on a specified date at a specified price.i Though the
definition seems straightforward enough, the nature of the transaction, its counterparties
and their respective roles as well as the practice of the market in which it takes place
will exert a certain level of ambiguity. For example, is a repo agreement essentially a
dual transaction in which the agreements to sell and buy back are made simultaneously
or two separate transactions of reverse positions actually constitute a repo agreement?
The question turns out to be the key feature that separates a classic repo and a sell buy
back repo. In a classic repo one party will enter into a contract to sell securities,
simultaneously agreeing to purchase them back, while a sell/buy back repo means an
outright sale of a bond on the value date and an outright repurchase of that bond for
value on a forward date. In addition to those types, there exists tri-party repo in which a
third-party is contracted to act as an agent of both the seller and buyer.
However in Vietnamese market a repo transaction is, for most parts, conducted on
the “classic” and sell/buy back basis. The procedure of executing a repo contract (or so
one may label this second-length process) is fairly simple. Imagine an individual
customer has noticed some good buy after long and arduous hours of screening the
dashboard. Unfortunately, he has already fixed up most of his portfolio and is short of
cash to cover a “surfing” or a speculative investment. It is time to turn to a repo
transaction. After the terms and conditions of the contract are agreed upon (the
brokerage firm normally present to its customer formal and standard contracts with
uniform provisions), our quick-thinking investor just has to sign in the form and the
wired amount is immediately transferred into his account for further investment. No
more smart money goes to waste! Also at the termination date, just a few moments are
spared to transfer back the funds plus the repo rate. A notice is then sent to customers,
stating their repo contracts with the firm have expired accordingly. The procedure for a
sell/buy back repo is essentially the same except for some technicalities.
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The main terms and conditions of a repo contract include the following:
- The legal status of counterparties to the transaction
- Rights and obligations of the counterparties
- Collateral: could be stock, bonds other securities and for some instances other
assets such as real estate.
- Repo interest rate, repo term, margins and deductions applied, revaluation method
- Other terms and conditions
1.2 Laws and applications regarding repo market
The rapid expansion in the repo market may necessitate a comprehensive and
detailed body of regulations to ensure the instrument is employed with ease and free of
misinterpretation. In the absence of laws governing repo, undesired outcomes may arise
in the process of market formation. The years 2006 and 2007 have seen an impressive
development of repo market in terms of trading volume, number of deals and
institutions with a repo desk. Is the legal system of Vietnam capable of keeping pace
with the dynamic nature of the business? This issue will be looked at with some detail
later in our report.
2.Repo transactions with bonds
2.1 The government and Open market operation
The strategic move of Vietnam’s Ministry of Finance in establishing a stand-alone
market for trading bond early in March 2008 has a direct impact on repo transactions.
Now let us look briefly at the main participants in a bond-repo transaction.
The most prominent participant into a repo market is undoubtedly the State Bank of
Vietnam (SBV). While it is a fairly new market instrument to most individual investors, a
repo transaction was, in effect, executed by SBV as early as in 2000 by means of Openmarket-operation. Since then, the number and value of deals have been increasing through
the years. The trading value of several open market transactions is presented in figure 1.1.
Ngày đấu giá
02/05/08
02/14/08
02/15/08
1/21/2009
1/22/2009
1/22/2009
1/23/2009
1/30/2009
3/18/2009
3/19/2009
9/29/2009
9/30/2009
Hình thức
giao dịch
Reverse Repo
Reverse Repo
Reverse Repo
Reverse Repo
Reverse Repo
Reverse Repo
Reverse Repo
Reverse Repo
Reverse Repo
Reverse Repo
Reverse Repo
Reverse Repo
Kỳ hạn
(ngày)
14
7
7
14
14
14
14
14
14
14
7
7
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Giá trị trúng
thầu (tỷ VND)
3,000
1,000
3,000
3,000.00
3,800.00
5,000.00
11.54
1,100.00
872.00
6,000.00
6,000.00
Lãi suất trúng
thầu (%)
17.30
25.00
30.10
8.00
8.00
8.00
8.00
7.50
7.50
7.00
7.00
Th¸ng 5 - 2010
It is apparent from the table that an upward trend in the volume of reverse repo
transaction, or the open market operation looked from the perspective of commercial banks.
Although it is not explicitly stated as a repo transaction, the essence of one such
operation resembles that of a repo contract. An open market operation requires the
purchase/sale of a block of government bond by means of open bidding to commercial
banks and a subsequent reverse transaction. The purpose of the operation is to adjust
some key economic variables, including inflation and interest rate and to improve shortterm liquidity in the banking system without changing the money supply. Due to the
short term nature of the objectives desired, Repo is an ideal medium with the term as
low as 6 days. Thus our government has strong interest in repo as a versatile instrument
in stabilizing the macro environment. The other counterparty to this transaction is large
commercial banks and state-owned banks and other credit institutions. Although the
operation is labeled as “open market”, at earlier stages, non-market power has to be
utilized to achieve SBV’s goals. That is, commercial banks are forced to take part in the
transactions while their strategic directions may dictate otherwise. In recent years,
however, a more subtle and market-oriented approach is in place so that Open-marketoperation comes closer to its true meaning in Vietnam.
2.2 Repo market between credit institutions and individual investors
In 2006, BIDV (Bank of investment and development of Vietnam) issued new
bonds with value of more than 2.200 billion VND for 10 and 15 year maturity. The
issue had provided the bond market with high quality bonds suitable for the purpose of
repo trading. In addition with their involvement with SBV, commercial banks and
financial institutions also carry out repo contracts with individual investors although
their financial resources mean they have a different standing and incentives in
association with the transactions. The key difference is that repo activities with
individual investors are profit-driven. By advancing cash to investor and accepting
bonds as collateral, banks earn short term profit on those transactions in the form of
repo rate. By convention of the Vietnamese market, the repo rate is based on the
prevailing rate on short-term loans. Short term interest rate can change substantially
over the course of several days but the repo rate is “locked in” for each contract. For this
reason, the effective cost of repo for individual investors, also being the fee income for
banks may prove volatile. Nonetheless, the instrument is useful for diversifying banks’
income and strengthening their balance sheet. On the other hand, individual investors
also benefit from a repo contract as a readily available source of funds to cover short
positions in their portfolios. The anecdotal investor in the previous section may well
illustrate this point. In some circumstances, banks and credit institutions also use repo as
a short term financing method, in the same way as individual investors do. For example,
in late 2008, Agriseco (Agriculture and rural development bank) introduced the repo
contract with 15-day term. Investors entering this contract purchase government bond
for a 15 day period. Agriseco was committed to buy back the bonds at the same price
when the period expired, plus a monthly interest of 0.475% for customers with an
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account at Agriseco and 0.4625% for those who do not have one. These terms are quite
attractive compared to the normal savings deposits rate. It came as no surprise that
Agriseco was able to mobilize more than 10,000 billion VND from repo activities alone
in 2004. The implication of repo may come further than simply mobilizing funds, it also
means that bank can make corrections to their asset and liablity by contracting repo if
asset-liablity mismatch (the differing maturities of asset and liability) exists.
2.3 Repo transaction in interbank market
Up to this point, we have deferred the discussion of repo instrument in one of most
the most dynamic environment – the interbank market. In developed economies, repo
transactions are a commonly used as a short term financing instrument in interbank
market, especially for the purpose of making up the shortfall in the required reserves.
However, in Vietnam there are little empirical evidence to show that a similar interbank
repo market exists.
The interaction of banks and credit institutions on a repo basis, on the other hand,
mostly come in form of bond trading on the exchange. In fact, 70% of all the volume of
bond transactions are implemented through the repo mechanism. Thus the integration of
repo mechanism has changed the bond trading practice fundamentally. The versatility of
a repo contract, which allows for terms of 6 days up to 9 months and differing trading
values, may be a plausible reason for its popularity among credit institutions.
2.4 Laws and applications on the bond repo market
Although there is currently no set of laws explicitly governing the practice of repo
transaction with bonds, certain regulations of the open maket operation as stipulated in
the State Bank of Vietnam Code can be applied for this market segment. More
specifically the Decision NO.85/2000/QD-NHNN14 of March 9, 2000 by State Bank of
Vietnam provided for the term, bidding rules, interests rate and other provisions that can
regulate the use of bond repo. However, one pitfall that need to be kept in check is that
according to the Decision, only short term notes, bonds (or otherwise valuable papers)
are allowed for the purpose of open market operation. The repo contract itself, for the
most parts, is a short term market instrument. This restriction somewhat limits the
power of repo intrument in the open market operation scenerio.
3. Repo transactions with stocks
3.1.Mutual impacts of stock repos and Vietnam securities market
Vietnam securities market and stock repos market have mutual influences on each
other. When the securities market booms or bursts, the stock repos market experience
rapid growth or slowdown accordingly. At the same time, the latter used as a financial
leverage tool make the funds in the securities market increase then contributes to the
boom of the former. Meanwhile, when the securities market loses its value and liquidity,
repos transactions may worsen the situation.
The booming period of Vietnam securities market began from year 2006 to 2007
mainly due to the favourable economic development. In 2006, according to Vietnam
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general statistic office website, the economy of the country grew at 8.17% - a high rate
in the region and the world. In addition, after Vietnam successfully held the APEC
summit and joined the WTO, there were high expectations in the ongoing development
of the economy. In the year 2007, the economy continued prospering. On 1/1/2007, the
Securities Law was put into practice providing legal frames for the development of the
securities market (TTXVN, 2007). Consequently, the securities market in Vietnam thrived
during the years. VN-index hit its peak at the score of 1170 at the beginning of 2007.
To increase profitability, many investors engaged in repos transactions. They put up
their OTC stocks as collateral in securities firms or commercial banks to obtain funds
while at the same time promised to buy them back. The funds were then used to buy
other attractive securities in the market. This made the trading volume and value
increase substantially. A record of 15million stocks and investment fund certificates
traded at 1259 billion VND was made on 26/9/2007 (Nhat Linh, 2007). Stock price also
rose as a result of higher demand. Many stocks reached their top prices such as SJS
(728,000 VND/share), FPT (665,000 VND/share), DHG (394,000VND/share), REE
(285,000VND/share), SSI (255,000VND/share), SAM (250,000VND/share), KDC
(246,000VND/share), VNM (212,000VND/share), ACB (292,000VND/share)… This in
return motivated investors to borrow more and more via repos. At some point, investors
were willing to pay a P/E ratio of 40 (Le Dat Chi – Truong Minh Huy, 2010).
In 2008, the economy of Vietnam was negatively influenced by the world financial
market. GDP in 2008 was just 6.18%, much less than those in the previous years.
Moreover, the inflation rate in Vietnam in year 2008 was markedly high at 19.89%
(compared with 12/2007) and 23% (compared to year 2007). To fight inflation, the
government imposed a restriction on the monetary policy causing obstacles for the
economic growth. As a result, many enterprises announced loss or a decrease in the
profit such as DPM, PVF, HPG... (Anh Vu, 2009) Seeing this bleak economic picture,
investors revised their expectations to a more realistic level. By the end of 2008 VN
index hit its bottom at 286.85 score.
As stock prices were volatile and VN-index lost its score, many investors ceased
participating in the securities market making the liquidity of the market decrease. The
average trading volume stood at 8.02 million stocks and investment funds certificate
with a total value of 482 billion VND. The lowest trading volume recorded was on
HASTC with 272300 stocks with a value of 10.35 billion VND (Tuan Truong, 2008).
Moreover, since the securities market did not bring much profit anymore, investors
engaging in repos could not purchase back their stocks or deposit more money when the
price of the stocks used as collateral fell below initial margin. As a result, securities
firms and commercial banks had to sell the stocks held as collateral in those repos
contracts to cut loss. However, at that time the market already lost its liquidity and stock
price was low, a substantial supply of stocks drove the stock price and the securities
market value to a lower level.
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In the year 2009, the economy of Vietnam started to recover as a result of the
government’s effort, especially its stimulus package of 160 thousand billion VND.
Though the country’s GDP was at 5.23%, it was among the top economic growth rate in
the world. Contrary to the bleak picture in 2008, many enterprises announced making
profit such as Nhiệt điện Phả Lại (PPC) with profit before tax in the first 5 months at
500,2 billion VND, (168% planned profit), REE achieved 60% planned profit before tax
in the first 5 months, with nearly 150 billion VND… Moreover, 3 big corporations Bao
Viet, Vietcombank, Vietinbank successfully made their IPOs on the stock market. These
factors helped boost the security market (Bạch Hường - Ngọc Châu, 2009).
Since the securities market started recovering, the demand for repos transaction has
been increasing. According to Ms.Cao Thị Hồng – Deputy CEO securities firm VIS,
many firms started offering repos transactions after ceasing this activities for a while
due to the slump in the securities market in 2008 (VnEconomy, 2009). In the current
year 2010, as many investors believe that the securities market in Vietnam will grow
and volatile in an upward trend (Quang Sang, 2010), the liquidity and value of the stock
market would improve. Therefore, repos contract as a financial leverage may regain its
popularity just as several years earlier.
3.2. Participants
Repo is done widely by the Security firms in the developed financial markets. The
collaterals in such contracts are mostly bonds. However, in Vietnam, stock repo is also a
popular activity. Most of stocks in repos are stocks in OTC market, the rest are the blue
chip stocks. Moreover, this repo market attracts a lot of attentions because the active
participants are the individual investors who make up the most of the security market.
As mentioned in the development of Repo activities, repo was prosperous in 2006 and
2007. It is a substitute for pledged stock, which appeared in VN earlier. Both stocks
pledging and repo are considered to be ways for investors to buy securities before
actually paying, which is restricted according to Vietnam’s securities law. Basically
they are two types of secured loans and investors often use money from these loans to
invest in the stock market. However, Stock pledging is the contract between a financial
institution and an investor, whereas in a repo, contracts are signed between security
firms and individual investors. In compare with pledged stock, repo brings the party
which needs to borrow money some flexibility. Firstly, investor can change the stocks
in the repo contract if agreement is reached between 2 parties in repo. Secondly, repo is
more convenient for short term borrowing because of fewer procedures involved.
3.2.1 Parties that enter a repo
In a repo contract, individual investors use their current stocks as collaterals for
entering a repo. Their counter party is a security firm. The repo process take place as
mentioned in our overview of repo previously.For these investors, repo bring them some
benefits.
First of all,with the long term investors, repo is an choice to get credit for their long
term investment. In reality, during the downturn of the stock market from 2008,
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liquidity of the market reduces. Therefore, investor with long term goal can make use of
Repo to get fund instead of trying to outright selling their current stocks
(http://vneconomy.vn)
Secondly, Repo acts as a financial leverage to boost net return. Investors, besides
their equity, can access to this borrowed fund to invest more in stock market. According
to the published data, Repo, together with other other financial leverage such as stock
pledged and margin trading, has booted the stock market up to 100-200
%.(http://vnexpress.net)
During 2006 and 2007, through repos, investors got fund and made a short term
investment in stock to grasp the substantial growth of Vietnam’s stock market.
However, due to the excessive use of this instrument and other financial leverage
instruments, risk that investor faced increased. As a rule in using financial leverage, it
can bring the investor superior profits or substantial losses. When the stock market in
VN got into some problems due to financial crisis, the VN index reduced from a peak of
about 1,000 than down to 286.85 in 2008 and just 235 in 2009, many investors got stuck
in repo contract. Due to the loss in stock investment in general, they can not repurchase
the stocks acting as collaterals, also, they are attacked by margin variation called by the
securities firm and the banks that provide funds for these repos.
3.2.2. Parties that enter a reverse repo
Security firms enter a reverse repo to provide credit for individual investors against
collateral. Each security firm has its own choice of the stocks to be accepted in its repo.
Other factors such as assessed value of the collateral, repo fee, etc. are calculated and
presented in repo contract made by each security firm. Because there has been no
official law or guidelines regulating this field so each bank has its own policy regarding
the repo activities. For example, at Sai gon –Hanoi Security firm (SHS), the value of a
loan does not exceed 40% market value of the collateral and not exceed 2 time of par
value of the securities as collateral. The list of securities accepted as collateral at SHS is
stock of Eximbank, Bao Viet Corporation, Habeco, Sabeco. The maturity is up to 6
months. Repo at Petrol Vietnam Security (PVS), however, is carried out in large block
(at least 20.000 stocks) with repo value equals par value.
In this business, Security firm will use its own fund. Many of them, however, have
cooperated with a financial institution to get fund for this service. The role of financial
institutions will be presented later in our report.
Security firm’s first motive to enter a reverse repo is that Repo is profitable field.
The interest rate is high when repo is in high demand. In 2006, the average rate is
1.15%/month.In 2007, this rate is between 1-1.15%/month (http://www.vinacorp.vn).In
2008 and 2009, the rate can be up to 1.85%/month.It is noticeable that in 2008 and
2009, although the stock market is down and repo activities is somewhat reduced, the
rate is till high because investors either unwilling to sell a large number of their OTC
stocks or unable to sell them due to the low liquidity of market.
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Morever, due to the fierce competition in the market, security firms provide Repo as
a service to attract more investors to come to trade and keep the loyal customers.
According to the published figure, up to the 30th of April, 2009, the number of security
firm in Vietnam is 105.This number is the result of of 7.5 times increase compared with
figure of 2005. These security firms have a wide network with branches and dealing
rooms. Currently, 80% of the market share belongs to 20 out of 105 biggest security
firm such as SSI, VCBS, ACBS, BCVS and SBS. (http://duthaoonline.quochoi.vn).The
rest has to compete hardy for the 20% of market share left. The firms, therefore, try to
increase the services including Repo service. In addition, in the period when the stock
market was down and full of uncertainty, a newly established security firm with plenty
of equity fund could engage in Repo to use this fund in a profitable way while waiting
for the stock market back to its normal upward trend.
3.2.3 Other finacial institutions
Financial institutions mentioned here mainly are finance companies and banks. In
Repo market, commercial banks play a dominate role. These financial institutions act as
parties which smooth the repo process. Security firms often has contract with banks to
get funds for a reverse repo. For example, AVSC had contracts with Agribank; Nam An
and Au Lac with Eximbank (http://atpvietnam.com).In case of Eximbank in 2008,
lowest amount for lending in a repo was 50 million VNV/investor and no ceiling is
applied for the lending amounts. However, if with a large repo contract, the investor has
to file for the repo with Eximbank on his/her own. The value of loan was up to 50%
market value of the collaterals.
Joining the repo process, banks often provide fund for securities firm under a agreed
credit line. Banks when performing its role as intermediaries in a repo contract, earn a
high interest rate.For example, in 2008, Nam A bank provided 100 billion VND for the
investor of BIS with the maturity up tp 3months, interest rate was 16.5%/year
(atpvietnam.com) This high interest rate partially due to the fact that the repo interest
rate is not regulated by a ceiling as a normal loan.
Moreover, on 28th May 2007 the SBV release the Instruction No.03/2007/CTNHNN on control of scale and quality of credit and loans for investment, stock business
to control inflation and to impulse economic growth (http://www.sbv.gov.vn). According
to this instruction, the proportion of loan for stock investment can not exceed 3% of the
total loan made by a bank. Commercial banks are, therefore, put under pressure to limit
its fund resources in its traditional and profit field.i.e., stock pledged. The loan market
for stock investment is then quickly exploited by Security firm through their Repo
service. By cooperating with Security firms in a Repo as presented above, these
commercial banks can somewhat maintain their benefits in the stock investment lending
but still meet the regulator’s requirements.
3.3. Law and applications
Repo is a derivative instrument that should be governed by the Security law. In
Vietnam, it is the SSC that directly manages the matters regarding securities and the
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stock market. As detailed in the previous sections, stock repo in Vietnam has attracted a
lot of attention of major stock market participants due to their own benefits in a repo.
However, stock repo has not yet had a trading platform. Therefore, this has created
some obstacles for the two counterparties in a repo process.
For security firms, they have to mange the risk on their own without a standard
among the market. In fact, each security firm has to decided on its own the kinds of
stocks accepted for repo, the repo value, the terms in its repo contract.Security firms
was considered to have taken too much risks when their customers,on a large scale,
were unable to meet the contract’s requirements. According to Ms.Vu Thi Kim Lien, the
vice chairman of SSC, the market at the middle of 2008 experienced unpredictable
downturn due to the risks from repo.
For individual investors, because there is no guidelines and rules that control their
behaviors, many investors overuse this financial leverage. In 2006 and 2007, when the
stock market had substantial growth, many investors make use of repo service and other
financial leverage such as stock pledged and margin trading to invest more in stock
market, which create a magnified demand and make investing in stock market of
Vietnam is expensive because the stock is overvalued. In 2008 and the beginning of
2009, when the market is down, these investors suffer and not able to fulfill their
obligation under repo contract.
Due to this fact, in May of 2008 the State Security Commission (SSC) has release a
official dispatch, the 990/UBCK-QLKD, which asked for the temporary termination of
signing new repo contract until the rules are to be made to govern a repo transaction.
This official dispatch only request for the cease but does not prohibit security firm from
carrying out Repo. Therefore, many security firms, after a short period of ceasing the
repo service, decided to restart this field. As a result, in June of 2009, the SSC had to
release the second official dispatch to once again ask the security firm stop their repo
service (http://www.ssc.gov.vn)
In attempt to building a trading platform of Repo activities as promised, a draft of
circular for repo transaction was made by SSC and opinion of major market participants
was collected regarding the content of the draft. In this draft, there are some conditions
for the security firm to be allowed to provide repo service and conditions for the parties
who enter a repo. Some other terms to standardize a repo contract are also stated.
Especially, four strict conditions are required for a stock to be accepted in a repo.First,
the operating period of the company is at least 5 years. Secondly, the charter capital can
not be less than 50 billion VND and that company does not have a cumulative
loss.Finally, ROE of the 2 previous years is to be greater than 10% and that company
must be a public company registered with SSC. This draft has proved a substantial
effort to standardize a repo contract and guiding security firms to make a safer repo
However, the public’s opinion, at a large proportion, consider the requirements are too
strict, which will restrict the repo development. For example, as illustrated on the
security investment (8/10/09), the condition of 5 year operation can reduce substantially
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the number of stock to be accepted for a repo because a large number of Vietnam’s
companies are newly established. Beside, there is also disapproval about the limit for
the total value of repo contracts for individual investors, which is not to be greater than
1% of equity fund of security firm and not exceed 5million VND.
While this draft of SSC was not successful, the draft of law on credit institutions,
which repo is to be subject to, arose a lot of market’s attention. This draft was presented
at the 6th section of the 12 National Assembly at the end of 2009 and will be voted
against at the 7th section of the 12 National Assembly which opened on May 20, 2010.
The second point in article 8 of the draft prohibits institutions other than banks from
activities of providing credit. Repo, actually, is the activity in which Security firms
provide credit for its customers. Therefore, repo is subject to this draft law. The draft
law however, is in contrary with the security law which allows security firm to lend
customer within a limit amount. It is therefore a question mark whether which law Repo
is to be regulated by. However, If there is no amendment, from the first of January 2011
when this law comes to effect, security firm is not likely to be allowed to continue
carrying out such activity like repo, margin trading.
While all of these laws have not yet come to effect, security firms decided on their
own to restart their repo service. After the first official dispatch of SSC about the
temporary termination of repo activity in May 2009, at the mid of August, some security
firms with the support of their banks restarted the Repo business. However, these
companies have made some changes to make repo safer with stricter criteria. Security
firms have realized the need to reduce their exposure of risk through such actions as
evaluating their customers and analyzing more carefully the behavior of collateral on
stock market.
According to Mr. Nguyen Van Trung, the deputy director of VNS, in 2009, VNS
made some changes in carrying a repo such as shorten the repo contract maturity,
reduce repo rate and stricter selection of the stocks to be accepted for a repo. VIS
chooses stocks that have high liquidity to put in its list (Vneconomy, 2009).
Nguyen Ngoc Chung, Vice CEO of ACBS reveals that ACBS only signs repo
contract with investors of good creditworthiness and willingness. Customers who own
accounts at ACBS are also given priorities. ACBS is also planning to collaborate with
CIC to improve its accuracy in judging the financial capacity and legal status of
investors (Ngoc Thuy, 2009)
Besides, Securities firms employ other methods such as limiting repo contract term
to maximum 6 months as at SHS or funding only 30-40% market value of the collateral
stocks (Ngoc Thuy, 2009)
Repo contract at this time was also considered to be safe because the stock’s price
was on the way back to intrinsic value. Also, during the 2008 and 2009, due to the
illiquidity of market, repo is considerd to be a channel for investor to get fund for long
term investment (www.thesaigontimes.vn).
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PART 3. Recommendations
1.Investors
Individual investors are considered most vulnerable when they use financial
leverage tools such as repo with a view to boosting profitability.
Vice Professor, Doctor. Pham Quang Trung, Vice Rector of National Economic
University advised investors to turn to financial leverage tools only when clearly
identifying a long term and sustainable increase in the market score. In order to reduce
risk when “surfing”, individual investors should put the leverage amount under control
and conduct thorough analysis on the movement of the market as well as the stock they
invest (TCTC online, 2009)
Acording to Dau tu chung khoan dien tu, investors should not only rely on repo as a
financial leverage tool but others such as margin to reduce risk to themselves as well as
the whole market. For example, engaging in margin, investors may deposit 70% of the
amount needed to buy securities and borrow commercial banks the rest. Should the
securities lose its price by a certain amount, the investors have to make more deposit.
Banks do not sell stock collaterals as cash is deposited so there is little impact of a
default on the market as a whole. It is also safer for investors as it prevents them from
taking excessive risk.
2. Securities firms
Many securities firms ceased repo operations in 2008. After the market signaled
recovery, this operation was revived. However, much stricter policies and procedures
have been widely applied in order to control risks associated, three main types of which
are price risk, liquidity risk and counterparty risk.
3. Government authorities
For long, investors and financial institutions have called for a legal frame for
securities investment in Vietnam. As a result, the Law of Securities was put into force
on Jan 1st 2007 and then draft of Law of Credit Institution is being scrutinized for
approval by the National Assembly on May 2010. However, one article in the Draft
concerning the activities of securities firms has been found to be in contrast with the
Law of Securities. It is necessary that two sets of law be consistent with each other for
the convenience of applying.
Besides, once the Law of Credit institution prohibits securities firms from offering
repo service, commercial banks will be the only institutions to take charge in this kind
of service. Thus, clear and thorough guidelines to increase safety in repo transactions
should be also provided by the government.
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REFERENCE
Moorad Chauldry, Bank asset and liability management
Quang Sáng, 2010, Nhận định thị trường chứng khoán 2010, [online]. Available at URL:
http://vtv.vn/Article/Get/Nhan_dinh_thi_truong_chung_khoan_2010_fcd263064d.html
(Accessed May 20, 2010)
Anonymous, 2007, 10 sự kiện chứng khoán nổi bật 2007, [online]. Available at URL:
http://tuoitre.vn/Kinh-te/Tai-chinh-Chung-khoan/236506/10-su-kien-chung-khoan-noi-bat-nam2007.html (Accessed May 18, 2010)
Anonymous, 2009, Đòn bẩy tài chính trên TTCK: Cân nhắc “liều lượng”! [online]. Available At URL:
http://www.tapchitaichinh.vn/Qu%E1%BA%A3ntr%E1%BB%8Bn%E1%BB%99idung/ViewArtic
leDetail/tabid/56/Key/ViewArticleContent/ArticleId/1148/Default.aspx (Accessed May 10, 2010)
Anh Vũ, 2009, Tìm cơ hội trong chứng khoán, [online]. Available at URL:
http://doanhnhan.asia/news/1098/tim-co-hoi-trong-chung-khoan.html (Accessed May 10, 2010)
Nhất Linh, 2007, Chứng khoán Việt Nam lập kỷ lục mới về giao dịch, [online]. Available at
URL: http://vietnamnet.vn/kinhte/2007/09/744935/ (Accessed May 20, 2010)
Nguyễn Tuân, 2009, Sàn HOSE và những cái “Nhất” trong năm 2009, [online]. Available
at URL: http://en.infotv.vn/chung-khoan/tin-tuc/40638-san-hose-va-nhung-cai-nhat-trong-nam2009 (Accessed May 18, 2010)
Bạch Hường, Ngọc Châu, 2009, 7 điểm nhấn chứng khoán 2009, [online]. Available at URL:
http://vnexpress.net/GL/Kinh-doanh/Chung-khoan/2009/12/3BA17318/ (Accessed May 12, 2010)
Tuấn Trường, 2009, TTCK và những cái “Nhất” trong năm 2008, [online]. Available at
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http://www.nguoilanhdao.vn/Details/phong-thuy/ttck-va-nhung-cai-nhat-trong-nam2008/32/37688.star (Accessed May 13, 2010)
Anonymous, 2009, Repo cổ phiếu thế nào cho an toàn, [online]. Available at URL:
http://www.vn-seo.com/repo-co-phieu-the-nao-cho-an-toan/ (Accessed May 14, 2010)
Lê Đạt Chí, Trương Minh Huy, 2010, TTCK Việt Nam qua mô hình bùng – vỡ, [online].
Available at URL: http://www.tuanvietnam.net/2010-05-04-ttck-viet-nam-qua-mo-hinh-bungvo (Accessed May 20, 2010)
Anonymous, 2008, Repo chứng khoán trước nỗi lo an toàn hệ thống, [online]. Available at
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http://www.vinacorp.vn/news/repo-chung-khoan-truoc-noi-lo-an-toan-he-thong/ct300890 (Accessed May 19, 2010)
Mỹ Hạnh, 2008, Nghiệp vụ repo cổ phiếu đang trở lại, [online]. Available at URL:
http://www.thesaigontimes.vn/Home/taichinh/chungkhoan/9455/ (Accessed May 20, 2010)
Ngọc
Thủy,
2009,
Repo
an
toàn,
[online].
Available
at
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Anonymous, 2007, Vẫn còn chỗ để cầm cố và repo cổ phiếu, [online]. Available at URL:
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May 15, 2010)
Anonymous, 2009, Repo cổ phiếu: mỗi nơi một kiểu, [online]. Available at URL:
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Anonymous, 2009, Doanh nghiệp kém hiệu quả, cổ phiếu không được repo, [online].
Available at URL: http://ww.infotv.vn/chung-khoan/tin-tuc/38002-doanh-nghiep-kem-hieu-quaco-phieu-khong-duoc-repo (Accessed May 17, 2010)
Anonymous, 2008, Thị trường giảm: Nhà đầu tư không còn mặn mà với dịch vụ cầm cố,
repo, [online]. Available at URL: http://atpvietnam.com/vn/san_hose/23073/index.aspx
Ngọc Quyết, 2007, Chỉ thị số 03/2007/CT – NHNN: Hạn chế cho vay kinh doanh chứng
khoán, [online]. Available at URL: http://www.sbv.gov.vn/vn/home/tinthoibao.jsp?tin=1075
State Agency of Securities, 2009, Công văn Ủy ban chứng khoán nhà nước về chấn chỉnh
một số hoạt động của công ty chứng khoán, [online]. Available at URL:
http://www.ssc.gov.vn/portal/page/portal/ubck/1096905?p_page_id=1096905&pers_id=109534
1&folder_id=&item_id=22467300&p_details=1 (Accessed May 18, 2010)
Anonymous, 2009, Hướng dẫn giao dịch repo: Đừng chặt quá hóa… vô hiệu, [online].
Available at URL: http://www.atpvietnam.com/vn/thuctechoick/39927/index.aspx (Accessed
May 20, 2010)
Law of Securities, 2010, Dự thảo Luật sửa đổi, bổ sung một số điều luật Chứng khoán,
[online]. Available at URL: http://duthaoonline.quochoi.vn/du-thao-luat/du-thao-luat-sua-111oibo-sung-mot-so-111ieu-luat-chung-khoan (Accessed May 19, 2010)
Anonymous, 2008, Khởi động thị trường trái phiếu chuyên biệt, [online]. Available at
URL: http://tintuc.timnhanh.com/kinh_te/chung_khoan/20080304/35A7206B/ (Accessed May
18, 2010)
Anonymous, 2010, Giao dịch repo, [online]. Available at URL: http://tailieu.vn/xem-tailieu/giao-dich-repo.205234.html (Accessed May 13, 2010)
Minh Đức, 2009, Luật Các tổ chức tín dụng “bỏ rơi” hoạt động repo và ký quỹ, [online].
Available at URL: http://vneconomy.vn/20091103034514158P0C6/luat-cac-to-chuc-tin-dungbo-roi-hoat-dong-repo-va-ky-quy.htm.
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DANCE WITH VIETNAM INFLATION 2005-2010
Written by: Nghiem Truong Son, Pham Thanh Cong (BA-08)
Le Bich Thuy (AC-07), Bui Thu Van (BA-07)
Supervisor: Pham Thi Hoa Nhai
Executive Summary
Vietnam, a rising tiger, in the Southeast Asia has been a destination for many
investment projects. With the current growth rate, Vietnam assures a promising
business hub in ASEAN community. Inflation has been, however, a factor that hampers
Vietnam’s sustainable development. To become globally competitive, Vietnam first has
to employ flexible monetary policies to curb its inflation. In this report, Vietnamese
monetary policies in the period of 2005-2010 are synthesized and analyzed to have
better comprehension of Vietnam inflation rate, which went from 8.3% in 2005 and
rocketed to 23.1% in 2008. Three periods of pre-recession, recession, and postrecession are deeply analyzed and critically dissected to offer an insight view on open
market operation, reserve requirement, and discount rate manipulation to control
Vietnam inflation. In order to achieve the aimed inflation in 2010, Vietnam needs to be
transparent in the capital and policies, further close coordination between the interest
rate - exchange rate and credit and macro intervention when necessary.
1. Introduction to Vietnam inflation rate in 2005-2010
During the time of 2005-2010, Vietnam has successfully utilized three main
measures to rein in the inflation rate in order to maintain the stable economy: the open
market, reserve requirement, and discount rate.
For the open market, treasury bonds have been issued in international and domestic
market. Vietnam treasury bonds are highly appreciated by foreign investors. In October
2005, Vietnam treasury bonds are first issued in the international capital market. All 750
million USD bonds with an interest rate of 7.125% were bought in 30 seconds after
issuing, which was a promising omen for a developing country. Recently on January
25th 2010, Vietnam issued treasury bonds for the second time in the international
market and gained success by selling 1 billion USD 10-year bonds with an interest
rate of 6.95%.
In the domestic market, Treasury bonds were auctioned for the interest rate. A par
value is 100,000VND/bond. Recently on April 24th 2010, Vietnam issued 1500 billion
VND bonds for 3 types: 2-year, 3-year, and 5-year. The 2-year bonds were bought
altogether with an interest rate of 11.3%.
For the reserve requirement, Vietnam has changed the reserve requirement rate
many times during 2005-2010. For example in 2009, required reserve rate went from
5% to 3% for loans below 12 months. In 2010, the required reserve rate goes up to 4 %.
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Under Decision No. 74/QD-NHNN, taking effect from February 1st, 2010
Deposit in foreign
currency
Deposit in VND
Types of Credit Institutions
Demand &
below 12
months
Up to 12
months
Demand &
below 12
months
Up to 12
months
State-owned commercial banks
(excluding the Vietnam Bank
for Agriculture & Rural
Development), Urban jointstock
commercial
banks
4%
including
Foreign
Banks’
Branches in Vietnam, Joint –
Venture
Banks,
Finance
Companies, Financial Leasing
Companies
2%
7%
3%
Vietnam Bank for Agriculture &
3%
Rural Development
1%
6%
2%
Rural joint-stock commercial
banks,
cooperative
banks, 3%
Central People’s Credit Fund
1%
6%
2%
Credit Institutions with deposit
balance subject to reserve
requirement below VND 500
0%
million, local credit funds,
Vietnam Bank for Social
Policies
0%
0%
0%
(Source: State Bank of Vietnam)
Table 1: Reserve required taking effect from February 1st, 2010
For discount rate, Vietnam central bank also manipulates for flexible monetary
policies. Vietnamese discount rate ranged from 5% on April 10th, 2010 to 6% at the
moment. Through its monetary policies, Vietnam inflation rate 2005-2010 has been
tightly controlled.
Year
2005
2006
2007
2008
2009
2010 (est.)
Inflation rate
8.3%
7.4%
8.3%
23.1%
6.5%
7%
Table 2: Inflation rates in 2005-2010
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Inflation rate
25
20
15
Inflation rate
10
5
0
2005
2006
2007
2008
2009
2010 (est)
Figure 1: Inflation rates in 2005-2010.
During the time of 2005-2010, Vietnam has encountered many challenges to sustain
the economy’s growth. WTO membership from 2006 has given Vietnam many
opportunities but at the same time more difficulty for Vietnam to adjust to the global
playground. Moreover, the financial recession has also struck a hard blow on Vietnam
economy. Three periods of 2005-2008 (pre-recession), 2008-2009 (recession), and
2009-2010 (post-recession) are carefully examined. In order to comprehend the whole
image of Vietnam economic development from 2005-2010, Vietnamese monetary
policies and their influences on GDP and unemployment rate in each period are
thoroughly analyzed for better comprehension.
2. Methodology
Data and materials are an essential part of a methodical and thorough report. In the
process of conducting this research, our group has chosen secondary information for
references due to the time limit and lack of human capacity.
Our group utilized Internet search tools like http://www.google.com and
http://scholar.google.com to find necessary information. Then it is our responsibility to
sort out data from research report and well known journals, websites of research
organizations and online newspapers. In addition, we also referred to annual reports by
Asian Development Bank, the State Bank of Vietnam, and World Bank for reliable data.
3. Economic period analyses
3.1. Period of 2005-2007
3.1.1 The economic condition:
In 2004, Vietnam economy developed impressionally with the new records of
export (26 Billion USD), FDI (more than 4 Billion USD), Tourism (2.9 Million of
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international tourists), overseas national currency exchange (3.8 Billion USD), and the
engagement of external aid in year 2005 (3.4 Billion USD).
To proceed the success in 2004, phase of 2005 -2007 is the stable developing phase
of Vietnam economy. Although at this time, Vietnam has to face up to the
disadvantaged condition, the growth of GDP in these years is always at the high rate,
above 8% (8.43% in 2005, 8.23% in 2006 and 8.46% in 2007). This is the second high
rate in Asia and is only lower than the growth rate of China. Besides, other components
of Vietnam economy also increase strongly and reach many huge
2007 is also the year marked a historical turning-point in Vietnam economy.
11/1/2007, Vietnam became a full-fledged member in World Traded Organization. That
event has brought opportunities as well as threats for the young-industry of Vietnam.
Figure 2: Inflation rates in 2005-2007
In that period, inflation rate in Vietnam economics developed steadily. There is no
change in the trend of inflation through each year and the inflation rate is almost lower
than 10 percent. The rate always starts at the lowest point at the beginning of year and
reaches the peak in last month of each year. Moreover the stable trend represented the
stable development of Vietnam’s economy in this period. However, there is still a
special point in the picture of inflation in the period of 2005 to 2007. Besides, there is a
special point in the picture of inflation of Vietnam this time. In December 2007, the
inflation rate increase suddenly and reach 12.6%, the highest rate within three years and
the reason is at that moment, America’s economics are being affected by financial crisis
and the crisis began to affect to other countries.
3.1.2 Monetary policies 2005-2007
3.1.2.1 Open market
In order to manage the liquidity for credit institutions, in 2005 and 2006, State Bank
of Vietnam held three open market operations session per week. Particularly, during the
last days of years and before the Lunar New Year, Open market operations were run
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daily to assist the credit institutions ensuring liability and stabilizing the money market.
In 2007, to restrict the speed of the raise in price of market, State Bank of Vietnam
increased the number of transaction sessions from 3 times per week to daily Open
market Operations transactions, increased the amount of bills to be sold, diversified
term of SBV bill from 14 to 365 days; and determined the appropriate interest rate to
withdraw money from circulation through this channel.
The scale of open market operations had been expanded, and number of new players
participating in the open market operations increased year by year. In 2007, there were
20 participants in open market operations, included state-owned commercial banks,
joint-venture banks, and foreign bank branches.
3.1.2.2 Reserve requirement
In 2005 and 2006, reserve requirements continued to be managed on the monthly
average basis to help the credit institutions using their sources flexibly. The SBV still
continued to pay interest rate for VND reserve requirement but not for excess reserves
to prevent the liquidity surplus of SBV. In 2 first years, in order to reduce the pressure
of increasing the mobilized interest in the market, to maintain the monetary stability,
and to promote the economic growth, SBV still kept the constant reserve ratio.
However, from the middle of 2007, because of the sharp increasing of inflation, SBV
had to increase the reserve ratios by 1.5 -2 times in order to withdraw money and
control total liquidity growth
Deposit in VND
Credit
Institutions
Demand &
below 12
months
2005 2006
State-owners
commercial banks
(excluding
the
Vietnam Bank for
Agriculture
&
Rural
Development),
Urban joint-stock
commercial banks
including Foreign
Banks’ Branches
in Vietnam, Joint
– Venture Banks,
Finance
Companies,
Financial Leasing
Companies
5%
2007
10%
Deposit in foreign currency
Up to 12 months
2005 2006
2%
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2007
4%
Demand &
below 12
months
2005 2006
8%
2007
10%
Up to
12 months
2005 2006
2%
2007
4%
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Vietnam Bank for
Agriculture
&
Rural
Development
4%
8%
2%
4%
8%
10%
2%
4%
Rural joint-stock
commercial banks,
cooperative banks,
Central People’s
Credit Fund
2%
4%
2%
4%
8%
10%
2%
4%
Credit Institutions
with
deposit
balance subject to
reserve
requirement below
VND 500 million,
local credit funds,
Vietnam Bank for
Social Policies
0%
0%
0%
0%
0%
0%
0%
0%
Table 3: Reserve Requirement from 2005 to 2007
3.1.2.3 Discount Rate
In 2005, SBV had three times raising discount rate of 3 – 3.5 – 4 – 4.5 percent per
year. And until the end of 2007, SBV still unchanged the discount rate of 4.5 percent.
That policy made the borrowing money of commercial banks from SBV becomes more
expensive and from that affected to almost persons as well as corporations. Increasing
discount rate also raised the loan interest rate of commercial banks, narrowed fields of
activities, and the result was decreasing in the benefit of corporations.
3.1.3 Effect
In two year 2005 and 2006, there is not too much change in the monetary policy of
SBV. The reason for this stability is stable development in Vietnam’s economics as well
as global economics. However, in the last quarter in 2007, the inflation rate of Vietnam
economics increase too fast; and in last month of this year, the inflation rate reached a
peak at the rate of 12.6% - the highest rate within three years. One reason for this
unusual trend was the effects of US crisis to Vietnamese economics. We also can see
this effect through the big trade deficit of Vietnam. The US crisis decreased the amount
of export to US market, therefore reduce the total export of Vietnam in 2007 and create
the big negative net export in this year.
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Figure 3: Import and Export 2005-2007
Although being affected by US crisis in 2007, Vietnam economics still developed
stably with timely and reasonable monetary policies. Therefore, Vietnam economy from
2005 to 2007 in general developed strongly. The GDP developed too fast, especially in
2007 GDP reached 8.46 percent – the highest rate within nearby 10 years. The
government was also very success when controlled the unemployment rate (the
unemployment rate from 2005 to 2007 is 2.5 percent, 2.3 percent and 2 percent,
respectively).
3.2. Period of 2008-2009
3.2.1 Economic condition
As global financial crisis, around the world stock markets fell, many large financial
institutions collapsed, and governments in even the wealthiest countries had to come up
with rescue packages to bail out their financial systems. That situation put Vietnam in a
great challenge with rocketing inflation rate along with escalating trade deficit and
dwindling property market. While property market was frozen in high price, due to the
volatility of the world price, trade deficit in the first six month of 2008 reached
USD14.8 billion threatening the stability of balance of payment and putting heavy
pressure on USD/VND exchange rate (VND depreciated largely in comparison with
USD, while USD depreciated considerably over other frequently-traded currencies such
as EUR, GBP, CAD and AUD). Moreover, in the first quarter of 2008 Vietnam suffered
the highest quarterly inflation rate from 1995 up to now, 9.19%.
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Source: www.tuoitre.com.vn
Figure 4: Inflation rate of the first 10 months 2008
Inflation rate in Vietnam rose so fast from only 2.38% in January 2008 compared
with December 2007 to 20.5% in September. It is obvious that the negative influences
of it on the economy as well as the living standard of Vietnamese people were not
small. GDP growth rate of the first three months 2008 was only 3.1% which was much
lower than the expected rate of government (6-6.5%). Unemployment rate also
increased sharply from 2% (2007) to 4.7% (2008).
At the end of June, the inflation rate got to 18.44% in comparison with 31th
December 2007 and at the end of the year, this rate came up to 19.8%, with the rate of
each month is stated as the table below:
π
Jan
Feb
Mar
April
May
June
July
Aug
Sep
Oct
Nov
Dec
2.38
3.56
2.99
2.2
3.91
2.14
1.13
1.56
0.18
-0.19
-0.76
-0.68
Table 4: Monthly inflation rate 2008
In order to stabilize the economy, Vietnamese government had decided to set the
targeted duty of the country at this time was reducing inflation. In January 2008, the
government applied the package of eight solutions for improving Vietnam economic
condition, which included making use of tight monetary policies, close control and
improving the efficiency of government budget, concentrating on the development of
industry, agriculture and service sector to ensure the equilibrium of goods and services,
lessening trade deficit by boosting export and restricting import, practicing
economization in both manufacturing and consuming, strengthening market
management,expanding policies of social issues, and enhancing information and
propagating to appeal to the cooperation of all citizens. In November 2008, when price
level had the downward trend, the government turned to the new package of five
solutions for dealing with recession. The next part will discuss how government used
monetary policy to control inflation, stabilize macroeconomic condition and ensure
sustainable development.
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3.2.2 Monetary Policy and its Influences
On 30th January 2008, State Bank of Vietnam announced that it would raise three
significant policy rates, effective from 1st February 2008. The base lending rate was
raised from 8.25% to 8.75%, discount rate from 4.5% to 6% and refinancing rate from
6.5% to7.5%.
Furthermore, at the same day, reserve requirement was also moved up. For VND
and foreign currency deposits up to one year (including demand deposits), the
compulsory reserve requirement was raised from 10% to 11%, and the reserve of the
deposits of more than one year was raised from 4% to 5%. Government also sold
VND20,300 billion of government bonds.
By this way, the money supply could be reduced along with the decline in
consumption and investment, leading to the fall in price level. However, due to this drop
of demand, unemployment rate climbed while GDP plunged.
After the race of raising interest rate of commercial banks, 19th May 2008, the
government introduced the use of prime rate that does not allow commercial banks
setting interest rate 150% above this rate. Prime rate was considered an effective tool
for government to manage the market rate based on the sign of anti-inflation from goods
and services market as well as money market. At this time, the prime rate was 12%.
Two months later, this rate was raised to 14% following the tight monetary policy.
In April-May 2008, the idea of using demand stimulation policy had been raised to
deal with the problem of recession. However, at the end of 2008, this policy applied. In
December, the government decided to used USD1 billion, followed by the package of
USD6 billion, for motivating investment as well as consumption, pushing up the
aggregate demand to avoid the economic collapse by compensating 4% interest rate for
small- and medium-sized enterprise. Going along with expanding export and investment
in construction, electricity, cement manufacture…, expansionary monetary policies was
also taken advantage of.
VND 20,000billion of government bonds was bought back as the intention to
increase money supply. Reserve requirement for commercial bank with over one year
deposits declined from 5% to 3%. Value-Added Tax (VAT) also diminished from 10%
to only 5% together with reduction in prime rate to 7%. Moreover, from 4th April 2009,
enterprises who borrowed medium- or long-term debt, would receive the support of 4%
interest rate by government.
According to the report of government, by using this policy, the threat of economic
recession in 2009 was not a big problem any more with 5.2% of GDP growth rate in
2008. However, analyzed by Mr. Tran Dinh Thien, President of Vietnam Institute of
Economics, the demand stimulation policy has not gone in expected direction. Instead
of going to manufacturing sectors, the capital came to stock market as well as property
market that raised VN-Index 71% and hot growth in property market with the sign of
“bubble” in April 2009. The criticism continued with the high pressure that the policy
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put on balance of payment as well as government debt by Mr. Bui Kien Thanh, an
economic expert. Furthermore, the easy monetary policy created a good condition for
inflation, raising the inflation rate of the first quarter 2009 to 14.5% compared with the
same period last year.
3.2.3 Evaluation
At a seminar on 31st December 2009, Mr. Nguyen Tien Thoa, the Director of Price
Management Department, said that thanks to the government’s efforts to forecast the
situation accurately and adopt the right policies timely to prevent escalation in the cost
of goods and services, Vietnam had successful kept inflation rate under control. Mr.
Hisatsugu Furukawa, Japan International Cooperation Agency’s monetary policy
professional, also declared that Vietnam’s monetary policy was going on the right
direction with the flexible change in interest rate and reserve requirement as well as
market liquidity rise. However, he pointed out that the weakness of Vietnam monetary
policy laid in foreign exchange market. There was a huge difference between supply
and demand of foreign currencies, especially USD. Therefore, the black market became
eventful even when the exchange rate in black market was much higher than the official
exchange rate. The government should reconsider monetary system management with
the purpose of maintaining the consistence for daily transaction.
In addition, on the word of Mr. Tran Xuan Gia, Ex-Minister of Planning and
Investment Portal, economic growth rate in 2008 was not low but the quality of market
got worse that would put severe pressure on many year later, especially the burden of
environment pollution. The monetary policy ran behind the economic condition so the
result was not high. In the end of June, some recommendation was raised to ease the
monetary policy and more idea about the necessity of demand stimulation policy and
solution for deflation, was brought up. If the government implemented this policy
sooner in the last quarter of 2008, the better result would be expected.
3.3 Period from the fourth quarter 2009-early 2010
3.3.1 Economic condition
After nearly two years affected adversely by the recession from the U.S., Vietnam
economy has been recovering step by step. The State Bank of Vietnam has tried to get
out of consequence of inflation, however, in the fourth quarter of 2009, the inflation rate
tend to increase up to now. It is seen that the CPI in February 2010 increased by 1.96%
compared to the last month and also the highest level within last 17 months. The
inflation was caused by four main reasons.
First of all, a rise in electricity and gasoline cost and some basic utilities price had a
strong influence on the cost of goods and services in the whole economy and rate of
GDP growth. For detail, there was 6.8% increase in electric price from 1st March 2010,
6.5% rise in gasoline price and 28% - 47% incremental amount of coal price, which,
accordingly, boosted almost all prices of other goods and services. Not only affecting
the production costs of other goods and services, the climb in electric price created
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negative impact on consumers’ perception that the inflation rate would be higher in the
future; therefore, the actual inflation rate was much worse. Besides, from April 2010,
the base salaries increased 5%-10% depending on areas. This also raised the production cost
of other goods and service and brought an increase in the overall prices in the market.
Secondly, the adjustment of exchange rate is one component for the inflation rate to
increase. The State Bank of Vietnam changed the exchange rate up to 19,100 dong for 1
dollar on February 2010. Vietnam is a developing country, needing many modern
machine and other high-tech products from abroad; hence, the growth in utilities price
after the adjustment of exchange rate is transparent. It is shown that the price of steel,
milk,etc. changed their prices, up by 5%-10%.
Thirdly, due to demand pulling, the prices of goods and service raised. When
consumers demanded huge amount of goods or services for Tet holidays and suppliers
could not be able to provide all at that time, it pushed the prices of food and other
utilities increase significantly. Moreover, many consumers now believe more in the
future economic growth, so they begin to buy more goods and services. Another
problem is that in 2009, using stimulus packages and increasing government purchases
urged demand of some goods. The consequence will remain in Vietnam economy in 2010.
Fourthly, the simple reason for inflation growth is the State Bank of Vietnam’s
money injection into the open-market. Credit development in 2009 went up to 37.74%,
M2 up to 28.7% and the inflation level in 2010 could be born on because the timing lag
is average 5-7 months afterwards.
3.3.2 Monetary policies
With respect to reserve requirement, Until January 18th, 2009, the reserve ratio The
State Bank of Vietnam applied is shown as follow:
All Commercial banks
except BIDV bank
VND deposit
Continuously and Over 12
under 12 months
months
3%
1%
BIDV Bank
1%
0%
Foreign currency deposit
Continuously and Over 12
under 12 months
months
7%
3%
6%
2%
Table 5: Reserve required until January 18th, 2009
However, this ratio has been changed from 18 March, 2010 for VND deposit:
All Commercial banks except
BIDV bank
BIDV bank
VND deposit
Continously and under 12 months
4%
Over 12 months
2%
3%
1%
Table 6: Reserve required from 18 March, 2010.
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Clearly, The State Bank of Vietnam has been using tight monetary policy through
increasing the reserve ratio by at least 1%, which contracts the supply of money, then
raises the interest rate.
To implement contractionary monetary policies, The State Bank of Vietnam has
applied next is raising the discount rate. According to the decree 2232/QD-NHNN
coming to effect from October 1st 2009, the discount rate that the commercial banks
bear is 5% a year. Nevertheless, from just two months later, another decree, QĐ
2664/QĐ-NHNN, made the discount rate up to 6% into effect.
To deal with inflation in next time, The State Bank of Vietnam reduced the amount
of money injected into the open-market. In February 2010, The State Bank of Vietnam
injected from VND 12 thousand billion to VND 15 thousand billion and also reinforced
the open-market oreation 2 shifts per day. However, from March 4th 2010, the amount
of money infection decreased significantly with one-shift-per-day operation.
3.3.3 The evaluation
By contracting money supply, increasing interest rate and limiting money injection
into open-market, the government is trying to restrain inflation. According to Mr. Ha
Huy Tuan, Vice president of National financing Committee, said that although
contractionary monetary policies focused on inflation problem, the government needed
to implement them flexibly, especially not contract too tightly to firms. By that way, the
government could ensure that CPI would not go up fast and still GDP can raise steadily.
Furthermore, he also suggested that The State Bank of Vietnam should combine
monetary and fiscal policies closely and consistently.
It is recommended that due to FED’s easy monetary policies over the nest time,
which will increase the price of goods and services overall, this also affects Vietnam
economy by many channels such as imports, exports, etc. Therefore, the Vietnamese
government shoud prepare and launch appropriate policies timely for Vietnam
economy, dodging to minimum of effect from USA economy
4. Recommendations
In 2009, the State bank succeeded in stimulating Vietnam economic growth rate of
5.3%, while inflation stayed at 6.5%. In 2010, the SBV is capable of meeting both
objectives, but its growth targets can be dominant because the world’s economic
situation will turn the switch more easily, creating conditions for faster growth than last
year. To achieve 6.5% growth for 2010, perhaps the SBV must accept a higher level of
inflation of 7%. An inflation of 7-9% can be acceptable. The administrative measure to
increase base lending interest rate has been regarded as one of the causes of decreasing
the abilities to mobilize capital from banks and thereby decrease liquidity in the
financial markets. Instead of using the measure, SBV should regulate interest rates
through open market operations or the sale and purchase on the valuable documents and
thus draw on a pump or the amount necessary to adjust the money supply, and then
achieve the expected interest rate. In 2010 as the economy becomes increasingly more
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stable, the central bank needs to use more monetary policy tools instead of
administrative measures, such as open market operations, discount rate, rediscount rate,
reserve required to regulate the money supply, as well as the inflation rate. The State
Bank of Vietnam should make a move to a model of a central bank of a mature
economy. Years ago, the financial indicators were considered State secrets, they have
now been publicized. However, financial markets expect from Vietnam central bank
more transparency through the publication of financial indicators such as indicators of
money supply, interest rates, exchange rates, foreign exchange reserves. The publicity
of these criteria does not only create peace of mind for the market about the SBV’s
monetary policies but also help to predict more accurately SBV’s measures of inflation
control.
For harmony between growth and inflation, it should be transparent in the capital
and policies, close coordination between the interest rate - exchange rate and credit and
macro intervention when necessary. If those relationships are settled, the inflation will
be curbed.
5. Conclusion
In this report, we would like to portray the general picture of Vietnam inflation rate
through Vietnamese monetary policies in the period of 2005 - early 2010. Vietnam has
gone through the period of stable growth in 2005-early 2008, suffered from the financial
recession during 2008-2009, and finally sustainable recovery from 2009 until now.
Thus, the inflation rate has gone up and down following the “dance” directed by the
State Bank of Vietnam. Owing to the lack of resources and limited time, some mistake
or constraint is unavoidable. We, however, believe that to some extent this report would
be useful in synthesizing Vietnamese monetary policies in 2005-early 2010. In the
future, we would like to conduct further research on this engaging topic as well as
inflation’s impacts on other macroeconomic variables and more analysis and comparisons
between Vietnam inflation rate and its monetary policies and those in other countries.
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COUNTRY RISK ANALYSIS IN VIETNAM
Written by: Nguyen Thi Dieu Tuyet (3TC07), Nguyen Van Trang (2TC07),
Nguyen Thi Bich Phuong (3TC07), Luong Thu Huong (3TC07)
ABSTRACT
In the view of the rapid growth of international lending and foreign direct
investments, the country risk analysis has become extremely important for the
international creditors and investors. The paper outlines and illustrates a framework of
country risk analysis in Vietnam that focuses on assessing political risks, financial
risks, and overall risk rating based on some recent studies of reputable risk rating
agencies. Targeted macroeconomic indicators of Vietnam and selected Asian countries
in same region were collected throughout the period from 2007 to 2009 in order to
conduct macro-assessment of risk factors as mentioned above. Analysis of secondary
data showed that compared to other Asian countries such as Singapore, Thailand and
China, Vietnam has higher risk level of political risk as well as financial risk. This
was illustrated by Vietnam’s risk rankings, which was collected from the evaluation
of famous rating institutions such as Euromoney, Coface and A.M.Best. Additionally,
with the objective to reducing the country risk level of Vietnam, this study suggests
that Vietnamese government should reform administrative procedures, and improve
the enforcement of anti- corruption program as well as maintain flexible monetary and
fiscal policies.
PART 1: INTRODUCTION
1. INTRODUCTION
The decision whether to conduct business in a particular country is fundamental to
many MNCs. Investing in the countries with excessive risk may harm the
corporation’s profits or create other potential adverse impacts to MNC’s value. That’s
why it is important for an MNC to assess country risk before making investment
decisions. Moreover, country risk analysis is not only beneficial to the case of doing
business in a new country but also advantageous to monitoring countries where MNC
is currently conducting business. In all over the world, there are many specialized
country risk rating institutions based on different criteria and weighting methods to
evaluate. Unfortunately, there are not many studies available on country risk analysis in
Vietnam. Understanding about this limitation, this research paper, based on secondary
data and macro-assessment will try to focus on analyzing country risk in Vietnam in
three aspects: political risk factors analysis; financial risk factors and giving overall
picture about Vietnam’s country risk. Our research also draws conclusion about
country risk in Vietnam and suggest some recommendations to both Vietnamese
government and foreign investors.
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2. METHODOLOGY
The purpose of our research is to analyze the overall country risk, including
political and financial risk in Vietnam. Moreover, the way to assess these risks is the
major concern of this paper.
a. Method of data collection
This research paper is based on the secondary sources: books, journals, magazines,
and primarily form internet sources.
b. Statistical Tools Used
Simple tools like bar graphs, tabulation, line diagrams have been used.
PART 2: LITERATURE REVIEW
1. DEFINITION OF COUNTRY RISK ANALYSIS
Country risk refers to the volatility of returns on international business transactions
considering several facts associated with a particular country. The concept evolved in
1960s and 1970s in response to the banking sector’s efforts to define and measure its
loss exposure in cross-border lending. It can be broken down into major components as
economic, financial, currency and political risks. Except the political risk, all of the
others are market-based and measurable. Certainly, all of the components have to be
thought not only by itself but, specially, by the outcome of their interaction. The
political risk approach is really relevant, due to most of the government decisions
affects directly the economic agents, its expectations, behavior and the landscape where
transactions are made.
MERRILL LYNCH1 in its portfolio strategy for emerging markets (equities, bonds
and commodities) uses to divide the portfolio according to its index weighting for
each country). After, considering the ongoing behaviors of the global economy and the
countries, the strategists define a recommended portfolio by adjusting the weight of
each country (market weight, under or overweight) and the respective duration (short,
neutral or long). Within the countries, similar approach is adopted for each asset. Thus,
building the portfolio, Merrill Lynch does not have an econometric model to estimate
the intrinsic risk of the countries despite following the behavior of many
macroeconomic variables and other information to define the weight of the countries in
its portfolio.
2. OBJECTIVES OF COUNTRY RISK ANALYSIS
Nowadays, investing and trade over the world is very popular, therefore,
understanding the country risk rating components, analyzing each components and
combining the results will have a lot in success of investors or trader.
¤ Direct investment
If a company looks for a place to invest, besides a normal business plan (market,
1
Portfolio Strategy, http://www.gwu.edu/~ibi/minerva/spring2001/renato.ribeiro.pdf
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suppliers, labor forces, location, energy, etc) they must concern about the legal
environment as national regulations about profit transfers, special reduced tax for
foreign investments and minimum term of them, political forces and its viewpoints about
international capital, exchange rate regime, other macroeconomic aspects and so on.
¤ Financial investment
In case of investment in the capital market, beyond some specific financial
assessments (historical prices of company’s shares, its return’s, standard deviations,
forecasts about the behavior of the market and the own company), the analysis has to
emphasize the financial equilibrium of the country, especially in the short run, like its
cash flow in terms of current account balance and reserves, besides the exchange rate
and the perspectives of changes on the legal environment as well.
¤ Trade
In international trade, exporters and importers need to look for all risks of the
country in which they have partners. Why? Because the risk of the country can affect
on the currency using in the commercial contracts or the kinds of international payment
(L/C: if exporter worry about blockage of fund transfers in importer’s country …).
3. THEORIES OF COUNTRY RISK ANALYSIS
This research paper is based on the secondary sources: books, journals, magazines,
and primarily from internet sources and focus on two main factors: Political factors
and financial factors. In this research, we have an overview of Vietnam situation,
assess all industries, and give macro assessment.
Country risk analysis rests on the fundamental premise that growing imbalances in
economic, social, or political factors increase the risk of a shortfall in the expected
return on an investment. An imbalance in a given factor produces different risks for
different investments.
According to the text book of International Finance subject: International Financial
Management - eighth edition, Jeff Madura, Florida Atlantic University, two theory of
political risks and financial risks are shown clearly again.
Political risks are the risks that come from the actions of host country’s government
and consumers in that country. An extreme form of political risk is the possibility
that the host country will take over a subsidiary. The following are some of the more
common forms of political risk:
- Attitude of consumer in the host country: is a tendency of residents to purchase
only locally produced products. If consumers are very loyal to local products, a joint
venture with a local company may be more feasible than an exporting strategy.
- Actions of host government: Various actions of government can affect the cash
flow of an MNC (impose pollution control standards, additional corporate tax…)
- Blockage of fund transfer: Subsidiaries of MNCs often send fund back to the
headquarters for purchase of supplies, remitted earning,… In some case, host
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government may block fund transfers, which could force subsidiaries to undertake
projects that are not optimal.
- Currency inconvertibility: Some governments do not allow subsidiaries to exchange
their income from host countries’ currencies into other currencies. Thus, an MNC’s parent
may need to exchange it for goods to extract benefits from project in that country.
- War: Some countries tend to engage in constant conflicts with neighboring countries
or experience internal turmoil. This can affect the safety of subsidiaries’ employees, their
business operations an cash flows generated from such countries more uncertain.
- Bureaucracy: it mentions about complicated procedures in the host country, which
take time of MNCs to get and complicate their businesses.
- Corruption: can adversely affect an MNC’ business because it can increase the
cost of conducting business or it can reduce revenue. Various form of corruption can
occur; for example, a subsidiary of an MNC can pay off the host country government to
win the projects in that country.
Along with political risk, financial risk factors should be considered when assessing
country risk, including Current & Potential state of the economy and Indicators
economic growth.
- Current and potential state of the economy: for example, a recession severely
reduces demand or financial distress cause the government to restrict MNC’s operation.
- Indicators of economic growth:
+ Interest rates: higher interest rates tend to slow the growth of an economy and
reduce demand for MNCs’ products. Lower interest rates often stimulate the economy
and increase demand for MNCs’ products.
+ Exchange rate: can influence the demand for the country’s exports, which in turn
affects the country’ production and income level.
+ Inflation rate: can affect consumers’ purchasing power and from that the demand for
MNCs’ products is also affected. Assessing inflation rate is very important because it
indirectly affect a country financial condition by influencing the country’ interest rate and
currency value. Therefore, a high level of inflation can lead to a decline in economic growth.
Most financial factors are difficult to forecast. Thus, even if an MNC considers
them in country risk analysis, it may still make poor decision because of improper
forecast of the country’s financial risk factors.
PART 3: VIETNAM COUNTRY RISK ANALYSIS
1. POLITICAL RISKS ANALYSIS
1.1 Actions of host government
Actions of host government should be considered when assessing the political
risks. A wide range of host government’s actions can affect the cash flow of an MNC
such as imposing special requirements or taxes, restrict fund transfers, subsidize local
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firms. It is interesting to note that not only strict regulations of government but also lack
of restrictions in a host country has negative influence on the performance of foreign
firms. Therefore, this paper will focus on discussing the risk of MNCs due to deficiency
of Vietnamese government’s enforcement of copyright laws. According to recent
studies, Vietnam experienced the highest software piracy rate in Asian countries, 85%2
(top 10 out of 107 countries survey, the average of 107 countries is 59.9%). This was
illustrated by this graph below
Figure 1: Software piracy rate in some Asian countries
(Source: nation master.com)
Due to the failure of Vietnamese authorities to enforce Intellectual Property Law
against local firms that illegally copy the MNC’s product, it is very risky for foreign
firms conducting business especially in intellectual industry such as software, books,
CDs. They may lose their price competitiveness over domestic firms due to their high
expenses for research and development of new products, which has negative impact
on MNCs ’revenues. According to BSA report, software producers lose an estimated
$3 billion in sales annually in Asian for that this reason, and dollar losses at over 16.5
billion in the Asian Pacific due to piracy levels.
1.2 Blockage of fund transfers
Another factor that foreign investors often pay attention when they assess the risk
of a country that is the blockage of fund transfer. When you invest abroad, you cannot
expect that the investment will last continuously or even for a very long period of time.
Normally, investors want to invest in another country, get profit and transfer it back to
the home country. Therefore, the blockage of fund transfer can eliminate their capacity
to withdraw cash back to the home country. It can be seen that the policy of host
country related to the blockage of fund transfer will affect the decision of investors a
lot in investing in this country or another. With the Vietnamese case, the blockage of
fund is not remained any more. It is a way that the government can attract external
sources of capital especially through FDI channel.
2
Piracy rate Crime in Vietnam, http://www.nationmaster.com/graph/cri_sof_pir_rat-crime-software-piracy-rate
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1.3 Currency inconvertibility
Currency convertibility is a very important factor that we need to take in to account
when consider the risk of a country. Simply, when we invest in a country, we want
to earn profit. But the profit we earn is often in the domestic currency so when we
want to transfer it to our home country, we need to convert this currency to our home
country. That is the reason why, the convertibility of the host country currency is so
important. When we consider this factor when we assess the risk of Vietnam, it can be
seen that Vietnam has a quite weak currency that bring the investors a lot of difficulties
in converting Vietnam Dong to other currency. According to Mr Phi Dang Minh,
deputy director of foreign exchange management, the percentage of dollarization of
Vietnam is 24% is at highest level group of Asia while other countries like China or
Thailand this rate is only 1% to 9%3. It is proof for the inconvertibility of Vietnam
Dong and bring disadvantage to Vietnam when foreign investors make investment
decision. When investors invest in Vietnam, they can convert Vietnam Dong to some
very strong currency like USD, Euro or Japanese Yen. Other currencies are very
difficult to exchange to VND either in Vietnam or in their country. Hence, the foreign
investors that the home country currency is not a very strong currency, they will get a
lot of trouble in converting the profit to home currency. It can loss the attraction of
Vietnam in the foreign investors’ eye.
1.4 War
To assess country risk, war cannot be omitted. War can bring loss to almost all
party, and it can bring a lot of risk to business not only in the country war happen but in
other country related. The destruction of war is so terrible that almost countries that war
is happening will get trouble with financing and also the ability of attract funds is
limited. Luckily, Vietnam is considered as one of the most peaceful destinations in the
world. As Vietnam does not have any civil war or war with outside parties and the
political situation is quite stable compared to some countries in same region especially
Thailand. According to vision of Humanity, Vietnam is ranked the 35th in 144
countries about the global peaceful index. It is quite a high rank in comparison with
other countries in Asean area and other Asian countries. The below table show the rank
and score of peace of some countries4:
Country
Rank
Score
Japan
7
1.272
Singapore
23
1.533
Malaysia
26
1.561
3
Currency Inconvertibility,
http://tim.vietbao.vn/kh%E1%BA%A3_n%C4%83ng_chuy%E1%BB%83n_%C4%91%E1%BB%95i/2/
4
Global peaceful index of some countries, http://www.visionofhumanity.org/gpi/results/rankings.php
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South Korea
33
1.627
Vietnam
39
1.664
Indonesia
67
1.853
China
74
1.921
Cambodia
105
2.179
Philippines
114
2.327
Thailand
118
2.353
Myanmar
126
2.501
Table 1: Global peaceful index of some countries
It can be seen from the table that Vietnam is evaluated as a peace country in
comparison with others in area and all over the world. Therefore, war is not a risk
that we need to consider when we judge the risk of Vietnam.
1.5 Bureaucracy
Another country risk factor is government bureaucracy, which can complicate an
MNC’s business. “Red tape”, such as procedural and documentation requirements, are
considered to be serious in Vietnam due to inefficient government governance and
cumbersome administrative procedures especially those involving customs and tax.
Much legislation takes the form of regulations and circulars that are passed down to
local level for implementation. Interpretations often differ form area to area, and much
paperwork is generated in attempts to standardize. Much administration involves
more than one ministry.
As communication is almost entirely vertical, there is little co-ordination between
different ministries and departments leading to long delays and frustration. Doing
Business in 20105 reports that it takes only one procedure, one day, and 0.4 percent of
annual income per capital to register a private limited-liability company in New
Zealand. In these top-ranked countries, an investor merely needs to register his or her
business with the registration and tax agencies before starting operations. By contrast,
in Vietnam, it takes 50 days, 11 procedures and 13.29% annual income per capital to
start a business, which is much higher than the average of East Asia & Pacific region
(Procedures (number): 8.1, time (days) 41.0, cost (% of income per capital: 25.8). The
three main procedures in this process are: applying for a business registration certificate
(15 days), obtaining a company seal (14 days), registering for a tax code and
purchasing pre-printed invoices (15 days). It leads to low rank of Vietnam in term of
the ease of business (only 116 out of 183 countries).
5
Doing Business Report 2010, http://www.doingbusiness.org/documents/fullreport/2010/DB10-full-report.pdf
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Figure 2: Ranking of Vietnam in Starting a Business- Compared to good practice
and selected economies
Therefore, foreign investors as well as MNCS will bear more risks due to the
complicated administrative procedures. Risk arises from the matter of wasting the
money and time not only before but also after the business in Vietnam, which is
illustrated by table below.
Procedure
Time to complete
Cost
After registering in Vietnam
1
Dealing with
construction permits
2
Registering property
3
Paying Taxes
194 days
57 days
248.1 (% income per capital)
1.1 (% of property value)
1050 hours per year
32 number of payments
per year
1.6 Corruption
High levels of corruption, the abuse of public power, office, or resources by
government officials or employees for personal gain, e.g. by extortion, soliciting or
offering bribes, are widely believed to be one of major sources of political risk in
developing countries. Vietnam has experienced exceptional economic growth in recent
years-with a growth rate of around 8% it was Asia’s second fastest growing economy
in 2007s. However, Vietnam’s economic rise is accompanied by rampant and rising
corruptions. According to annual report Corruption Perceptions Index (CPI)6 of
Transparency International Organization, the score of Vietnam is 2.7, ranked 120 out
of 180 countries surveyed. It can be clearly seen from the graph below, corruption in
Vietnam is much more than other countries in same region.
6
The Corruption Perceptions Index (CPI), 2009 (score range 1 10, clean score means 10)
http://www.transparency.org/policy_research/surveys_indices/cpi/2009/cpi_2009_table
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Figure 3: Corruption Perception Index Table
Moreover, Vietnam receives an overall score of “very weak” on the Integrity
Scorecard complied by Global Integrity (44 out of 100), with across-the-board poor
performances in the “Anti-Corruption and Rule of Law”, “Civil Society and Public
Information and Media”, “Elections”, “Government Accountability”, “Administration
and Civil Service” and “Oversight and Regulation” sectors. Moreover, it seems that
corruption creates a perception that they cannot run business effectively without
patronage7. According to the Investment Climate Assessment (ICA) survey for
Vietnam (ICA 2005)8, 67% of the companies surveyed reported having to make
informal payments in order to “get things done”. Therefore, foreign firms are
particularly vulnerable to administrative corruption due to their lack of knowledge of
local customs a procedures. These firms are more likely to pay for a license, even
though it might be illegitimate and unnecessary according to the law, to avoid
antagonizing the local administration. In Vietnam, the agencies that most frequently
interact with foreign businesses, such as the tax and custom department, land
administration agencies and the construction permit and import/export license
authorities were cited by the United Nation University survey, World Institute for
Development Economics Research in 20099 as the most corrupt public institutions (as
can been seen from this table below)
Types of Infomal Payment
To get connected to public services
To get licenses and permits
To deal with tax and tax collections
To gain government contracts
To deal with customs
Other reasons
Total
Obs.
298
43
213
155
23
266
998
Bribe Amount
(Per cent of total
revenues)
0.3
0.56
0.74
1.09
0.33
0.38
0.55
Per cent of bribes
paid by medium/large
firms
10
15
61
0
13
61
0
Table 2: Average size of informal payments in Vietnam
7
Vietnam Global Integrity, 2009, http://report.globalintegrity.org/Vietnam/2009
Working Paper on Firm-Level Corruption In Vietnam, www.wider.unu.edu/.../working-papers/2010/en.../wp201016/_.../2010-16.pdf
9
http://www.wider.unu.edu/publications/working-papers/2010/en_GB/wp2010-16/_files/83069119040782563/default/2010-16.pdf
8
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Although anti-corruption law in Vietnam had taken effect from Jun 1st 2006
with “3 No” campaign (no monopoly, no discretion, no accountability), corruption
remains serious and complex across many aspects of public life. In conclusion,
corruption can adversely affect an MNC’s international business or it can reduce
revenue, which may discourage foreign investors to invest in Vietnam.
1.7 Attitude of consumers in the host country
A mild form of political risk for MNCs is a tendency of residents to purchase only
locally produced goods. However, Vietnamese consumers tend to be loyalty to
foreign goods rather than the domestic goods due to low quality of Vietnamese goods.
According to Dr Dinh Thi My Loan, Deputy Chairman of the Vietnam Retailers’
Association cited the latest statistics released by a market survey firm that 77 percent
of Vietnamese consumers favor foreign products, while the average figure is just 40
percent in Asia10. Therefore, the foreign firms can take advantage of Vietnamese
consumers’ perception of high quality. Furthermore, they do not have much more
risky from national identity such as South Korea or Japanese customers.
2. FINANCIAL RISK ANALYSIS
2.1 Real GDP growth rate
The GDP growth rate is the most important indicator of economic health. It refers
to the percentage increase or decrease of GDP from the previous year adjusted for the
inflation rate. If GDP is growing, so will business, jobs and personal income. If GDP
is slowing down, then businesses will hold off investing in new purchases and hiring
new employees, waiting to see if the economy will improve. This, in turn, can easily
further depress GDP and consumers have less money to spend on purchases. If the GDP
growth rate actually turns negative, then the economy is heading towards a recession11.
Z Overview about Vietnam’s GDP growth rate
In the period from 2000 to 2007, the GDP growth rate in Vietnam was up-ward
sloping; howerver; the global recession has hurt Vietnam's export-oriented economy in
2008 and 2009 with GDP growing less than the 7% per annum average achieved during
the last decade.(source: CIA World factbook)12.
In addition, based on the article “IMF forecasts 8 percent GDP for Vietnam” from
vovnews.com “if Vietnam adopts more effective policies, it is likely to achieve an
economic growth rate of 8 percent in 2010”, says an executive from the International
Monetary Fund.
ZComparison real GDP growth rate between Vietnam and China
Like other countries world-wide in general and Vietnam in particular, China
10
http://www.vnnewstime.com/business news 2/domestic goods still out of favour with vietnamese consume
rs/
11
Kimberly Amaded, (2009), What is the Difference Between GDP and Growth Rate?
http://useconomy.about.com/od/grossdomesticproduct/f/GDP_Growth_Rate.htm)
12
Vietnam GDP-real growth rate”, http://www.indexmundi.com/vietnam/gdp_real_growth_rate.html
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economy also has been affected by 2008 global financial crisis and GDP growth rate
fell to the lowest level of 6.2% in March, 2009 since last 10 years. However, after
that it started to increase rapidly again and reached impressive level of 11.9% in March,
2010. It is also expected that this level will continue go up in the rest of this year13
With all the statistics collected, it is no doubt to state that China’s GDP growth
rate has been virtually much more higher than this Vietnam index. For example, in
2008 the ratio between China’s GDP growth rate and Vietnam one was nearly 1.46,
this ratio was up to 1.8 one year later.
Moreover, as this information was already indicated in part 1.1 China ranked at
number 3 in Asia and number 8 in over the world for GDP growth rate level while
these number for Vietnam namely were 6 and 55.
In conclusion, Vietnam real GDP growth rate has been at high level; however; it
appears less favorable compared with China
2.2 Annual inflation rate
Inflation rate refers to a general rise in prices measured against a standard level of
purchasing power.
Inflation can affect consumers’ purchasing power and therefore their demand for an
MNC’s goods. It also indirectly affects a country’s financial condition by influencing
the country’s interest rates and currency value. A high level of inflation may also lead
to a decline in economic growth.
Z Inflation in Vietnam
Vietnam is one of the countries where have high and unstable inflation rate.
After 12 year of curbing inflation (1995-2007) Vietnam has seen inflation come back
with the two- digit CPI (Customer Price Index) since December 2007. Especially, in
2008 Vietnam’s average inflation stood at 23.115 % which has been considered the
highest inflation rate since last 10 years, increased dramatically by 176.86% in
compared with the year of 2007 (source: IMF). In addition, according to statistics of
CIA World fact book, Vietnam’s inflation rate in 2008 ranked at number 11 over 219
countries in this survey; much more higher in comparison with other countries in Asia
such as China (125), Singapore(112), etc
Furthermore, the inflation rate in Vietnam is expected to continue to increase in the
year of 2010 due to the main reason of increasing in the dong/dollar exchange rate,
petrol price and tentative electric city price.(“Experts say expect high inflation in
2010”- Vietnamnet). In fact, the consumer price index (CPI) in February 2010
increased by nearly 8.5 percent in comparison with the same period of the previous
year. These are the highest level since mid 2008 (source: Vietnamnet).
Z Comparison inflation rate between Vietnam and China
Similarly to the case of Vietnam, China’s annual inflation rate is also forecasted
13
China real GDP growth rate”, http://tradingeconomics.com/Economics/GDP-Growth.aspx?Symbol=CNY)
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to be higher in the year of 2010. While this index level stayed at -0.055 in 2009, it went
up significantly to 2.4 % in March, 2010 (source: tradingeconomics.com)
To compare the differences between the inflation rate in Vietnam and China, two
aspects are examined. The first one is the level of inflation rate.
As can be seen from the chart above, China’s inflation rate has been lower than
Vietnam’s one for most periods of time; even it reached to the negative value in many
years. For example, in the recent year of 2008 the inflation rate of this country was
5.92% just approximately to one-fourth in comparison with the level of Vietnam.
The second measure used is the annual inflation rate volatility
The chart above illustrates the annual percent change in inflation rate compared
with the previous year's inflation rate. It is clear to realize the percentage change in
inflation rate in Vietnam was extremely larger than China’s in 2002; however; from
2003 to 2009 China’s index seemed to be more volatile than Vietnam one.
In short, Vietnam‘s inflation rate has been at high level, unstable and expected to
increase. This problem puts the Vietnamese government under a lot of pressures and
threatens the foreign investors.
2.3 Exchange rate
Exchange rate is an important factor, which impacts the demand of customers,
profits of Multinational companies located in Vietnam. A strong home currency may
reduce demand for the country’s exports, increase the volume of imported goods, and
therefore reduce the country’s production and national income. A very weak currency
can cause outflows motive and reduce the amount of funds available to finance growth
by business.
Exchange rates change every day, every hour; by analyzing them, we can find out
clearly whether or not the risks accompany with the foreign investment projects in
Vietnam.
2008 is the year that exchange rate happened unusually. According to
APTVietnam, in the three-month period from January to March, USD price is in
decreasing trend, with the reduction of 1.8%.
Four months following (April- July), the USD continued to increase, with an
increasing rate 9%. The rise of the USD during this period encouraged exports, limit
imports and keeping trade deficit. Otherwise, the difference between free market and
official market is very high, sometimes up to above 2,500 VND / USD.
The next three months (Aug- Oct), the USD fell, with the reduction of 3.74%. The
last two months of the year, the USD increased again, with growth rate 3.26%. It is
a result of three factors. Firstly, the financial crisis and global recession impact on
our country makes exports fall, imports rise, affecting the consumption of domestic
production, causing economic failure. Secondly, the demand for foreign currency for
import goods last year is usually higher than other months. Thirdly, price of USD
increases in many countries, so our country has to adjust accordingly.
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Over the year, the USD growth rate is 6.31%, the highest from 1999 till this
time. In this year, the change in exchange price is very fluctuant, and it created a lot of
risk for enterprises in doing business with converting currencies if they did not use
derivative instrument.
In the securities magazine N0 11, November 2009 of State securities commission of
Vietnam, changing in USD price was analyzed carefully; the end of October 2009, the
average bid rate of commercial banks at 17,861 VND / USD, up 0.11% over the
beginning of the month and increase 2.47% from early 2009. While the average ask
rate of commercial banks at end of Oct- 2009 was 17,862 VND / USD, up 0.11%
over the month and increase 2.16% from early 2009.
Exchange rate in 2009 had increasing trend, the reason for that was commodity
prices in the world affect changes in prices of crude oil, rice, steel, precious metals,
fertilizers... often associated with changes in inflation. Because prices of goods that
have direct impact on import and export value of Vietnam, this may affect the overall
balance of payments and putting pressure on the exchange rates.
Figure 9: Movements of Exchange rate
In addition, TuanVietnam.net mentioned November 2009, State Bank applied a new
exchange rate, with narrow margin from + -5% to + - 3%, while increasing exchange rates
from 17,034 VND/USD (25/11/2009) to 17,961 VND/USD (26/11/2009) made 5.44% rate
increase, combined with the changing of base rate from 7% to 8% per year.
The changed rate is evaluated as an important step to change the imbalance between
official foreign currency market and black market. At the same time it also increases the
competitiveness of Vietnam's goods compared to imported goods, increases demand for
MNCs’ products produced in Vietnam.
On the other hand, the policy changes immediately create trouble or risks for
enterprises which have foreign currency loans in operating businesses without enough
time to implement derivative operations for these loans; the case of Pha Lai Thermal
Power Corporation- PPC with loans in Yen for investment activities to expand their
factories is a typical example.
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In 2010 plan, the FDI disbursement is expected to reach 10 billion USD, ODA
commitments in 2010 with U.S. $ 8 billion, plus $ 1 in issuance of government
bonds and other sources of income: portfolio investment, tourism,... Thus, overall
supply and demand of foreign currencies in 2010 is not too difficult when the deficit
target this year is about $ 12 billion while the supply is approximately $ 20 billion.
However, due to capital flows differ in time, this will make the exchange rate has some
fluctuations. It is forecasted to make the risk in investing in Vietnam decrease.
Figure 10: Exchange rate USD/VND
Figure 11: Consumer Price Index
The official rate announced by SBV each month:(0: very bad, 10: very good)
Exchange Rate Stability
Month
6/ 09
7/ 09
8/ 09
9/ 09
Exchange rate
16,938
16,948
16,960
16,967
% Change
Point
0.05903885
0.07080481
0.04127358
10
10
10
10/ 09
16,985
0.10608829
10
11/ 09
17,002
0.10008831
10
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12/ 09
17,171
0.99400071
10
1/ 2010
2/ 2010
17,942
17,941
4.49012871
0.00557351
10
10
3/ 2010
18,225
1.58296639
10
4/ 2010
18,544
1.75034294
10
5/ 2010
18,544
0
10
Source: State Bank of Vietnam
In conclusion, the change in exchange rate is becoming more consistent, and in the
trend of increase in price of USD; therefore with the preference of using products made
in Vietnam, the demand for domestic goods will increase. Besides, the operating costs in
investing in Vietnam will go down; foreign firms can invest in Vietnam with lower
costs, and export their products to other countries for higher prices, earning higher
profits. Thus, the risk in investing in Vietnam, with assessing exchange rate
perspectives, will decrease. However, some foreign firms will find investing in Vietnam
so risky, because all revenues are calculated in the domestic currency, with lower
domestic currency means lower revenues in USD.
2.4 Interest rate
2009 and 2010 are two years that have some special changes in interest rates, both
deposit rates and lending rates. Recently, Vietnam Banks Association has a written
agreement calling for members to apply deposit interest rates were around 11.5% and
terminate other forms of promotion as reward money. According to the Banking
Association, this interest rate is appropriate in the current conditions to ensure that
commercial banks face by pulling down lending interest rates, while ensuring
harmonious interests of depositors and banks.
Figure 12: Interest Rates
Lending interest rates in the early 2010 have some special change. With lending in
VND, notified by the central bank, lending interest rate was increased by the
commercial banks, especially joint stock banks. Accordingly, interest rates for mediumlong term business under the new rates fluctuate around 12-14% per year, joint stock
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ranges 15-17% and the highest is 18% per year. In the article “Lãi suất cho vay:Xu thế
giảm dần” - 12/03/2010, Mr.Ly Xuan Hai, general director of ACB, said that VND
amount of this bank is in excess of over 30,000 billion VND to support business
loans, interest rates for mediumlong term at 15 to 16.5% and can extend the loan
from 7 years to 10 years. However, 3-4 months ago when the market lacks liquidity,
borrowing firms suffered higher cost of business than at present. Thus, the current
interest rates relatively reasonable compared with rates in the general mobilization.
With the advantages of raising cheap deposits, the state commercial banks are
beginning to compete to reduce lending rates. Mr. Nguyen Truong Giang, deputy
director of VietinBank- third branch, said the lending rate floor agreement here applies
to all kind of enterprises is 14.5% per year, not too large of changes compared with the
past. In addition, Trading Room VCB leaders said interest rate is at 14.09% years for
large companies have long relationship, bringing more service revenue for banks.
Particularly, small enterprises, with little collateral, will have to pay higher interest
rates, approximately 15% per year.
From 1st May, the State agreed to reduce commercial bank lending rate to 0.5% 1% per year for the borrowers under the direction of the Government in No. 18 /
NQ-CP. The maximum lending rate is 13% per annual for agriculture-forestry- fishing
businesses, exporting enterprises and producing costs of medium or small enterprises.
For loans of real estate business, securities business and consumers, state commercial
banks lending interest rate applicable under the agreement in accordance with supply
and demand of funds and ability to pay debt of customers. (Decree 18/NQ-CP) In case
of lending in foreign currency, the interest rates are decreasing.
Several months ago, the USD deposit rates of major commercial banks ranges from
2.5% to 3.5% per year, small banks from 4% to 4.5% and lending rates from 6.5 to
7% per year. But recently, many banks have massively reduced lending USD interest
rates down, only from 4% to 4.5% per year for large businesses, and from 5 to 5.5%
per year for small businesses, interest rates were nearly equal medium or small joint
stock commercial banks. Explaining this, a financial expert stated that: The foreign
currency interest rate of the economic organizations only 1% per year has helped reduce
the interest rate of banks lending dollars; especially state banks have business
customers which have a large amount of foreign currency deposits.
In addition, the state allows to reduce the compulsory reserve ratio of foreign
currency from 7% to 4% for maturity of less than 12 months, from 3% to 2% for 12
month term loan, made the supply of USD lending amount increased, banks can
decease the dollar deposit rate about 0.1%. Many experts expect interest rates to
mobilize dollars is hard to rise, overall demand for business loans is up but still not
great as foreign currency earned from export is major but demand for foreign
currency loans for imported raw materials does not grow strongly. Interest rates for
VND loans are higher than interest rates in U.S. loans 10-11% per year. However, the
business can also create risk for both enterprises and banks as interest rate differences
can not offset the exchange rate price fluctuations.
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To sum up, deposit interest rates are quite low, it will create more demand in
consumption as deposit money in banks now can not attract people, they will spend
money for consumption; furthermore, lending interest rates are decreasing, it will
improve the investment in over the country, make the economy going up. Foreign
investors who worry about host country takeovers can borrow capital in Vietnam banks
with low costs and use these funds to invest. In overall, lower interest rate often stimulate
the economy and increase demand for the MNC’s products, lower country risk.
In the case of China‘s monetary policies:
The article “The China Bubble's Coming -- But Not the One You Think” published
on the Foreign policy magazine by VITALIY KATSENELSON, the monetary policy of
China and all of its effects were showed clearly.
It is evident to see that the Chinese economy has shown incredible resilience
recently although its biggest customers, the United States and Europe, are struggling.
The most recent estimate put annual growth at nearly 8 percent. Some people wonder:
Is the Chinese economy operating in a different economic reality? Will it continue to
grow, no matter what the global economy is doing? Of course, the answer is no.
In the monetary policy of it own, China bought a massive amount of US Treasury
bonds in order to undervalue of RMB.
In fact, The United State borrowed Chinese money to buy Chinese goods, which
means that Chinese growth was dependent on that borrowing. Now the United States
and the rest of the world are retrenching, corporations are slashing their spending, and
consumers are closing their pocket books. This means that the consumption of Chinese
goods is on the decline. But the Chinese central bank has a significant advantage over
the U.S. Federal Reserve. Chairman Ben Bernanke and his cohort may print a lot of
money (and they did), but there's almost nothing they can do to speed the velocity of
money. They simply cannot force banks to lend without nationalizing them (and only
the government-sponsored enterprises have been nationalized). They also cannot force
corporations and consumers to spend. China's communist government owns a large part
of the money-creation and money-spending apparatus. Money supply therefore shot up
28.5 percent in June 2009. Since it controls the banks, it can force them to lend,
which it has also done. China can force government-owned corporate entities to borrow
and spend, and spend quickly.
But don't confuse fast growth with sustainable growth. Much of China's growth
over the past decade has come from lending to the United States. The country suffers
from real overcapacity. This growth will result in a huge pile of bad debt. The list of
negative consequences is very long. The only question is when and how much.
Another casualty of what's taking place in China is the U.S. interest rate. China sold
goods to the United States and received dollars in exchange. If China were to follow
the natural order of things, it would have converted those dollars to renminbi (that is,
sell dollars and buy renminbi). The dollar would have declined and renminbi would
have risen. But this would have made Chinese goods more expensive in dollars --114-
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making Chinese products less price-competitive. China would have exported less, and
its economy would have grown at a much slower rate. But China chose a different route.
Instead of exchanging dollars back into renminbi and thus driving the dollar down and
the renminbi up- the natural order of things - China parked its money in the dollar by
buying Treasuries. It artificially propped up the dollar. Thus, China is sitting on 2.2
trillion of them. Now, China needs to stimulate its economy, it needs the domestic
currency to finance its continued growth. However, if it were to sell dollar-denominated
treasuries, several bad things would happen. Its currency would skyrocket -- meaning
the loss of its competitive low-cost-producer edge. Or, U.S. interest rates would go up
dramatically, not good for its biggest customer, and therefore not good for China.
Therefore, it is evident to see that China‘s monetary policies are strictly
controlled by the government to protect exporting industry. Although in these policies
still have some problems, but a lot of things in these that Vietnamese government need
to observe, so in comparing monetary policies, investing in China is considered more
attractive than Vietnam.
3. VIETNAM OVERALL RATING IN THE VIEWS
SPECIALIZED COUNTRY RISK RATING INSTITUTIONS
OF
SOME
One of the common approaches to evaluate overall level of country risk is based on
the risk assessment of some reputable country risk rating agencies such as Euromoney,
Coface’ratings, and A.M.Best’s assessment. Therefore, this paper will summarize some
recent survey of these agencies with the aim to position the risk level of Vietnam.
First of all, in term of Euromoney assessment14, semi-annual country risk ratings of 185
countries scores between 100 (excellent) and 0 (considerable risk). As can been remarkably
seen that, not only the overall risk but also political risk in Vietnam were evaluated higher
compared to others countries below except Indonesia, Philippines and Cambodia.
Figure 5: Country Risk Overall Results Index, 2008
Secondly, according to the rating of Coface, 2009, Vietnam are classified as B, investment
grade, which indicates the unsteady economic and political environment.
14
Country Risk Overall Results Index Table, 2008, http://www.euromoney.com/Article/1898962/Country risk
2008 overall results index table.html?Type=Article&ArticleID=1898962
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Countries
Overall rating
Implications
Australia
A1
Steady economic and political situation
New Zealand
A1
Steady economic and political situation
Hong Kong
Japan
A2
A2
Weak default probability
Malaysia
A2
Singapore
A2
South Korea
Taiwan
A2
A2
China
A3
adverse circumstances may lead to worsening payment method
Thailand
Indonesia
A3
B
adverse circumstances may lead to worsening payment method
Philippines
B
Unsteady economic and political environment
Vietnam
B
Cambodia
D
High risk profile and very bad payment method
Lao
D
Myanmar
D
Table 1: Coface’s Ratings Table
Other well-know approach is The Country Risk Tier (CRT), which reflects
A.M.Best’s assessment of three categories of risk: Economic, Political and Financial
risk. Vietnam has high levels of risk across all three categories of risk assessed. A.M.
Best considers the majority of countries in Southeast Asian to be categorized as CRT-3
or CRT-4. The exceptions are Vietnam, the sole CRT-5, and Singapore the sole CRT-1.
Country Risk Tiers
CRT-1
Definition
Predictable and transparent legal environment, legal system and
business infrastructure; sophisticated financial system regulation
with deep capital markets; mature insurance industry framework
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CRT-2
Predictable and transparent legal environment, legal system and
business infrastructure; sufficient financial system regulation with
deep capital markets; mature insurance industry framework
CRT-3
Developing legal environment, legal system and business
environment with developing capital markets; developing
insurance regulatory structure
CRT-4
Relatively unpredictable and nontransparent political, legal and
business environment with underdeveloped capital markets;
partially to fully inadequate regulatory structure
CRT-5
Unpredictable and opaque political, legal and business
environment with limited or nonexistent capital markets; low
human development and social instability
To sum up, the level of uncertainty in Vietnam is evaluated more significantly than
others in same region such as Thailand, China, and Singapore.
PART 4: CONCLUSIONS AND RECOMMENDATIONS
1. CONCLUSIONS
To sum up, our research has been deliberately made up to gain a better
understanding about Vietnam’s country risk situation. Based on findings from all
previous parts, corruption, bureaucracy as well as high inflation rate would be
considered as high country risk factors in Vietnam. Because the time and resources are
limited, this paper has just accessed the Vietnam’s country risk in terms of macroassessment; therefore; we hope that our research will be developed in the near future
and analyzed more in terms of micro-assessment.
2. RECOMMENDATIONS
As mentioned above, in order to attract more FDI, Vietnamese government should
try to minimize the political risk MNCs have to bear due to bureaucracy, corruption
problems. Firstly, with the aim to the bureaucracy issues, Vietnamese authorities had
better to continue reform administrative procedures and improve the governance
efficiency. Moreover, coordination between different ministries and departments are
required to avoid long delays and frustration.
Secondly, enforcement of anti-corruption program should be enhanced. According
to Global Integrity15, despite strong score anti-corruption law (100 points), the
enforcement of this program received low score 52 out of 100 points. With the
objective to improve the effectiveness of this program, the public information and
media should be allowed to coordinate with the competent authorities to investigate
corruption case (the score of public information and media only ranked as 22 out of
100 points). Furthermore, the salary or living conditions of civil servant should be
improved more. According to recent survey, Vietnamese civil servants are extremely
15
http://report.globalintegrity.org/Vietnam/2009
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poorly paid, whether they work for the central government or local. A new hire
(university graduate) typically gets 15 to 20 USD monthly, a 40 year old gets 60
USD. Therefore, if they cannot live on the official salary, the corruption would never
disappear. Additionally, reducing the administrative procedures is one of key
solutions. The reason is that the World Bank’s investment climate department (CIC)
found that there exists positive correlation between corruption and restrictive
regulations16.
In addition, in terms of Vietnamese government, it is important to figure out
flexible monetary and fiscal policies in order to curb the inflation rate as well as ensure
high economic growth. Firstly, the Vietnamese currency is very weak now, that is a
need that Vietnamese government has to strengthen the Vietnam Dong. To make the
Vietnam Dong stronger and can be come a kind of currency using in international
trade, Vietnam Dong should be freely traded with other kinds of currency. Hence, the
government should not use direct intervention in controlling the foreign exchange rate.
Secondly, Vietnamese government is intended to remove the base interest rate that
makes the interest rate fluctuate so much. It will increase the risk to investors due to
the increasing fluctuation of interest rate. Therefore, the new policy that removes the
base interest rate will raise the country risk in term of financial risk of Vietnam.
Moreover, interest rate of Vietnam is quite high in comparison with other countries in
the world. The state bank should maintain a relative low interest rate so that we can
attract more investors. Besides, any changing in monetary policy needs to be
announced before implementation with enough time for enterprises to prepare actions
(in case of PPC).
In terms of foreign investors, they should collect all information about Vietnam
market, analyze carefully the country risks and have suitable adjustment of discount
rate and estimated cash flows.
REFERENCES
Burton, F. N. and Hisashi Inoue, 1983, “Country Risk Evaluation Methods: A Survey of
Systems in Use.” The Banker, January, 41-43.
Cosset, J. and J. Roy (1991), “The Determinants of Country Risk Ratings.” Journal of
International Business Studies, 22(1), 135-142.
Harvey, C.R. (1996), “Political Risk, Economic Risk and Financial Risk” Country Risk Analysis.
Madura (2003), Country Risk Analysis, International Financial Management, 8th, p247-306
“Doing business 2010”, http://www.doingbusiness.org/documents/fullreport/2010/DB10-fullreport.pdf. Retrieved on date May 8th 2010
“Vietnam: Integrity Indicators Scorecard” http://report.globalintegrity.org/Vietnam/2009/scorecard
Retrieved on date May 6th 2010
“Domestic
16
goods
still
out
of
favor
http://psdblog.worldbank.org/psdblog/corruption/
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Vietnamese
consumers”
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http://www.vnnewstime.com/business-news-2/domestic-goods-still-out-of-favour-withvietnamese-consumers. Retrieved on date May 8th 2010
“Diễn
biến
giá
USD
năm
2008
và
dự
báo
cho
năm
2009”
http://www.atpvietnam.com/vn/thongtinnganh/24339/index.aspx Retrieved on date May 5th 2010
Thanh Binh (2010), “Kịch bản kinh tế Việt Nam 2010 có thể dự báo?”
http://www.tuanvietnam.net/2010-02-09-kich-ban-kinh-te-viet-nam-2010-co-the-du-bao
Retrieved on date May 8th 2010
“Lãi suất cho vay: Xu thế giảm dần” http://doanhnhantimes.com/S43N4063/Lai-suat-chovay-Xu-the-giam-dan.html Retrieved on date May 4th 2010
VITALIY KATSENELSON (2009), “The China Bubble's Coming - But Not the One
You Think” http://www.foreignpolicy.com/articles/2009/07/23/the_china_bubbles_coming_
but_not_the_one_you_think Retrieved on date May 6th 2010
“Euromoney”, www.euromoney.com/Article/1898962/Country-risk-2008-overall-resultsindex-table.html?Type=Article&ArticleID=1898962 Retrieved on date May 8th 2010 “ICRG
Methodology”, http://www.prsgroup.com/ICRG_Methodology.aspx#PolRiskRating. Retrieved
on date May 6th 2010
Ministry of natural resources and environment, 2010, “IMF forecasts 8 percent GDP for
Vietnam”, [online]. Available at: http://www.monre.gov.vn/monreNet/default.aspx?
tabid=253&idmid=&ItemID=81717 (access ed 10, May 2010)
About.com, 2009, “The differences between GDP and GDP growth rate”,[online].
http://useconomy.about.com/od/grossdomesticproduct/f/
Available
at:
GDP_Growth_Rate.htm (accessed 10, May 2010)
Vietnamnet.vn, 2010,”Many factors have been cited by experts as the main reasons why
they believe we can expect high inflation in 2010”, [online]. Available at:
http://www.vnnnews.net/experts-say-expect-high-inflation-in-2010 (accessed 10, May 2010)
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THE IMPORTANCE OF PHYSICAL EVIDENCE
IN SEVICES ORGANIZATION
Written by: Le Tuyet Lan, Thieu Thi Thuy Linh (BA08)
Luu Dieu Linh, Nguyen Thanh Huyen (BA08)
Supervisor: Tran Tuan Anh
EXECUTIVE SUMMARY
In such an increasingly aggressive and growing industry, human beings are
witnessing the non-stopped prosperity of the service sector. Physical Evidence or
Servicescape framework is known as one of the leading marketing strategies promising
the success for service businesses.
This study begins with the profound analysis toward the strategic influences of
servicescape in scores of service dimensions. Physical facilities convey the intended
images, at the same time, create core values and values added as a facilitator. Distance
in terms of relationships, statuses, behaviors between two parties customers and
employees can also be reduced with the presence of a good servicescape system as a
socializer. In addition, physical evidence carries the powerful potentials which help the
service company differentiate itself from any competitor.
Then the research continues with the drawbacks of physical evidence’s inefficiency
and deficiency. Accordingly, customer and employee dissatisfaction are the two most
severe consequences due to bad physical environment.
On the basis of theoretical fundamentals, a real case application was conducted with
the study object - Hanoi University (HANU) which is located in Nguyen Trai Road,
Thanh Xuan District, Hanoi. A sample size of 65 students was randomly select to be
included in the survey. The questionnaire was designed with four evaluation questions
and the last one was used to collect respondents’ recommendations about HANU’s
physical evidence.
Finally, through some necessary calculations, statistical data were exploited to draw
conclusions and suggestions. A majority of students are content with the quality and
quantity of existing HANU’s facilities. However, some essential facilities such as
chairs, tables, whiteboards, computers… and peripheral physical evidence like the library,
dormitory and student’s cafeteria actually need to be upgraded the sooner the better.
INTRODUCTION
Many people tend to think that the product or service’ intrinsic quality is all that
really matters to the success or failure of a business. That turns out to be untrue in the
modern background. Business organizations nowadays are making more efforts than
ever to improve its marketing strategies of attracting the customer to their
products/services. The big question is “How do firms persuade customers to purchase
their product/services before they actually experience the product/service and trust its
quality?” The answer will be all about the impression the business made on the
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customers, the presentations and proof of the product/service’s quality or of the
company’s credibility that the customers themselves see and feel before they use the
product/ service. Yes, we are talking about Physical Evidence or Servicescape in
marketing. Physical Evidence is a newly-born concept established by Booms and Bitner
in 1981. It proves to be a very important element in the extended marketing mix for its
powerful influence on the buying decisions of the customer. The large majority of the
most successful business organizations all over the world possess an excellent system
of servicescape. Creating effective physical evidence is truly a new challenge in the
modern business patterns today. There are a lot more to discover about this topic. Later
parts of this report will discuss about theoretical view on this topic and the practical
case of our university.
GENERAL UNDERSTANDING OF PHYSICAL EVIDENCE IN MARKETING
Marketing mix is the combination of controllable elements that organizations will
be using to successfully influence the customers to purchase their products/services.
Marketers should be quite familiar with the ‘4Ps’ concept for Product, Price, Promotion
and Place (Lilien, GL, Kotler, P., Moorthy, 1992.)
However, in the modern global multifaceted marketing environment today, the
‘4Ps’ seem to be too simple or limited in terms of effective reflection of the entire
marketing mix of an services organization. There’ are a number of other key factors that
also significantly influence the marketing strategies as well as the customers’ behaviors
toward a service. The Extended Marketing Mix was born then, called the ‘7Ps’
including 7 elements of the marketing mix: Products, Pricing, Promotion, Place, People,
Physical evidence and Processes (Bernard H. Booms and Mary J. Bitner, 1981)
Physical Evidence is one of the 7Ps that could persuade the customers about the
value/quality of the services through the physical facilities that they are actually
experiencing.
In the early days when Industry of manufacturing dominated the global economy
the physical evidence of production units such as factories and production line
equipment was not very important to the end consumer because they never went inside
the factory. However, today consumers typically come into direct interaction with
products/services in retail units or agents of the organization - and they expect a high
level of presentation in those modern representatives of the organization - e.g. record
stores, clothes shops, travel agencies, banks etc. Not only do they need to easily find
their way around the store, but they also often expect a good standards or presentation.
The importance of quality physical layout is important in a range of service providers,
which can be illustrated by several typical examples:
Students going to college or university have far higher expectations about the
quality of their accommodation and learning environment than in the past. As a result
colleges and universities pay far more attention to creating attractive learning
environments, student accommodation, shops, bars and other facilities.
•
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Air passengers expect attractive and stimulating environments, such as
interesting departure lounges, with activities for young children etc.
•
Hair dressing salons are expected to provide pleasant waiting areas, with
attractive reading materials, access to coffee for customers, etc.
•
Physical evidence is not only relevant to stores, which the customers visit, but also
to the layout and structure of virtual stores, and websites, and other interactive channels
between the services organization and its customers.
The intangible nature of a service means that Potential customers are unable to
judge a service before it is consumed. That fact increases the riskiness inherent in their
purchase decision. This 6th P- Physical Evidence of marketing planning, thus, is to
reduce that perceived risk in the customers’ mind (Palmer, A. 2008). Through the
physical facilities that customers can actually see or experience when they use a service,
they will have cues to position the services in their own mind.
Physical evidence can be generally classified into 2 types: peripheral and essential
(Shostack, G.L. (1982)). Essential physical evidence is by tangibles, which is essential
and vital to the basic operation of the service. Instant examples for essential physical
evidence are a bank’s computer systems, clinic’s professional equipments, a school’s
buildings and yards, etc. Peripheral evidence is represented by tangibles provided by
service providers as value-added facilities/commodities or gifts for customer’s greater
convenience and satisfaction. There are plenty of important benefits that physical
evidence can offer an organization. It enables the organization to increase employee
productivity and provides effective management of service quality. Physical evidence
creates good impression as well as repositioning in customers’ mind, increasing
credibility of the service provider. Moreover, one of the very unique capabilities of
physical evidence is that it acts as a very powerful tool for differentiation from
competitors.
IMPORTANCES OF PHYSICAL EVIDENCE IN SERVICES ORGANIZATIONS
In services organizations such as hotels, restaurants, professional offices, banks,
retail stores, hospitals… physical evidence or servicescape has very powerful impacts
on customers’ evaluation and perception of quality. Because of the abstract and
intangible nature of services, a customer relies mostly on peripheral cues that represent
and visualize the service to appreciate its invisible aspects. Hence, for organizations
delivering high contact services or leisure services, the design of the service
environment performs scores of crucial roles. Four of the most significant ones are:
i. Packaging the services
ii. Facilitating the flow of the service delivery process
iii. Socializing customers and employees alike in terms of their respective roles,
behaviors and relationships
iv. Differentiating the company from its competitors
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Service packaging
The first strategic role of servicescape is to convey the corporation’s image (quality,
features and values) to its target customers. Physical surroundings is considered as
“quality cues” that set up customer satisfactions, forms initial impressions as well as
influence their perceptions (eg. reduce perceived risks). Any risk including financial,
performance, physical & psychosocial risk is always inherent with the purchase of
services due to their unique characteristics. Services tend to be intangible and nonstandardized offerings; therefore, perceived risks are more highly associated with sales
in services organizations than in production firms. As a result, the physical elements of
servicescape are the most valuable visible aspect of service offering that the marketers
should take advantage to create the desired impression on their customers.
Taking a patient who wants to visit a dentist as an example; obviously, the patient
can not evaluate the service offering prior to the accomplishment stage. The situation
implies that the patient is facing with some certain perceived risk. However, a
professional dental clinic with professionalism would know how to improve the
customer credence and trust by providing the most modern equipments in his office, as
well as other supporting facilities that may improve customers’ satisfaction like
comfortable seats in waiting room, newspapers, air conditioner, etc. Moreover, his
patients will be likely to feel more reliable on the quality of the dental clinic on
witnessing the professional certificates and high qualification degrees displayed on the
wall. Definitely, the physical layout in the dentist’s workplace conveys positive messages
to his customers- that is the image of a high-class and professional dental clinic.
Facilitating the flow of the service delivery process
As a facilitator, physical evidence often dictates the flow of the service delivery
process by incorporating design elements like signs and cueing formats that
communicate to customers how the service process work (Solomon, 1985).
On one hand, a facilitator acts as a determinant of the service operation. In this case,
servicescape comprises core equipment that is vital to any service provider. For
instance, a professor can not teach his students with the absence of boards, boardmarkers, chairs & desks. A hairdresser will not be able to serve her customers without
scissors, hairdryers, hair dyers, shampoos…
On the other hands, Servicescapes can be so designed that they facilitate service
providers and consequentially also increase productivity. In teaching, the deficiency of
projectors, computers, air-conditions can not completely disrupt the education process,
however, the presence of these supporters can enhance remarkably the students’
understanding, satisfaction and excitement during the lecture.
A large number of researches suggest that the physical facilities with the role of a
facilitator may influence the customer's ultimate satisfaction and employees’
satisfaction, loyalty, productivity, and motivation (e.g., Becker 1981; Davis 1984;Steele
1986; Sundstrom and Altman1989; Sundstromv and Sundstrom 1986; Wineman 1986).
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Goood servicescape helps to reduce turnover rate of both employees and customers. The
reason is services generally are purchased and consumed simultaneously, and typically
require direct human contact, customers and employees interact with each other within
the organization's physical facilities. Thus, the organization's environment should
support the needs and preferences of both service employees and customers to meet
their satisfaction and boost up the services sales.
Socializing employees and customers
Physical evidence socializes employees and customers toward their respective roles
behaviors and relationships. It gives the employees and customers clues and implicit
directions about their roles, how should they interact appropriately in the
communication environment. Having some certain understanding in advance should
help two sides (the organization and the customer) socialize much better with each other,
reaching a win-win negotiation and build a good relationship between the two sides.
A typical customer would react in a better way, trying to be polite, calm and
cooperative in the way they communicate with the organization’s staff if they realize
that they are sitting in a background of a high-class office well equipped with excellent
servicescape. Other internal physical evidence like uniforms and proper systematic
design of a organization’s office layout, etc. could make its employees to feel a sense of
belonging and connected with others people who work for the organization.
A practical example is the comparison between the servicescape of state-owned
banks with that of private banks in Vietnam. In state-owned banks, a large part of the
floor is marked as restricted, leaving little space in the form of a narrow aisle along the
outer walls of the hall for customers. The message is clear –customer must not enter the
restricted area, which is where the most important job of the bank, internal operations, is
conducted and by entering that area, customers will be interfering with their task.
However, private banks approach customers with conviviality. The air conditioned
lounge with comfortable seats and a cold water dispenser as you pass through a
spotlessly clean glass door, makes customers feel more welcome. Customers are
allowed with more space to move and occupy a seat across from executives’ desks. The
physical layout design of the office suggests that customer is indeed central to all
activities. They can see how the bank tellers proceeds customer’s order, how the
cashiers work with their tasks, etc. Everything seems clear and open to the customer.
Perceived risk that customers face when using private banks’ services is much lower
than state-owned banks. There’s no wonder why private banks are getting more and
more successful over state-owned banks in Vietnam
Acting as a tool for differentiation
Physical surroundings are regarded as a means for differentiation that distinguishes
a service organization from its competitors. A restaurant with candles in tables and
smooth classical music differentiates a restaurant from one with blasting music and
stylist pictures on the walls. Also, the style of uniform and the facility designs are the
two concrete tools used for building up the exceptional features of the corporation.
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There are a large number of firms operating in the same field of business, or
providing \the same type of services. Any of them would wish to be positioned in
customers’ mind as a outstanding, unique and different from the rest. Never before has
differentiation become so crucial as nowadays, since competition between services
organizations is getting harsher and harsher in this modern economy. Firms may find
out many ways to achieve differentiation. However, the most effective and conspicuous
one is using servicescape. The design of the office layout, the color tone for the whole
system of branches and agents, the website, employees’ appearance, equipment, etc.
will all matters to almost all of the customers. It defines the style of the organization, the
professionalism it holds, importance of customers to it, even its credibility… Obviously,
the services organization can control the positioning of both its perceived service quality
and its business culture in customers’ mind through physical evidence.
In general, there is a high degree of uncertainty for consumers when purchasing
services because of their experience, credence and search attributes. Thus, physical
evidence is a package visualizing the intangible property, a facilitator aiding in the
service delivery, a socializing tool striking to balance the roles, relationships between
customers and employees, and lastly a differentiator making the differences among the
businesses.
EFFECTS OF POOR PHYSICAL EVIDENCE
As mentioned in the prior parts, the role of Physical Evidence/ Servicescape in
service marketing is very crucial and tactic in every service organizations. If a new
established service firm wants to expand and create its value perceived by customers,
there are few choices but to strongly attempt to grasp customer’s attention by improving
its physical environment. However, as the marketing environment is changing to be
more multifaceted and aggressive, there have been a large number of failures in the
process of managing physical facilities. So what are the effects of a bad Physical
Evidence? With the purpose of demonstrating more the importance of Physical
Evidence in service marketing, this part will focus on the other side of the problem by
giving out the consequences of having poor Physical Evidence.
As stated in the empirical research of K. Douglas Hoffman et al named “A CIT
investigation of servicescape failures and associated recovery strategies”, there is
supposed to have 3 main types of servicescape failures including: Mechanical problems
(e.g. airline engine problems), cleanliness issues (e.g. dirty hotel rooms) and design
issues (e.g. poor décor style). These failures in controlling the environmental settings
really lead the managers to expose to the risk of demarketing which will certainly
experience an unexpectedly tremendous decrease in the demand and involvement of the
customers.
In this research, the effects of a deteriorating servicescape will be highlighted in
reference to the impacts on the two main participants in service transaction: customers
and employees. As suggested from other researches: whether customers, employees, or
both are present within the servicescape also determines the types of objectives a firm
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might expect to accomplish through its physical environment, this research goes on
examining the bad effects on the individual behaviors of customer and employee along
with the effects on the interaction between them.
The influences of poor physical evidence on the customer can be viewed from the
impacts on the customer’s perception and customer’s satisfaction to the service
offerings. Targeting physical surroundings to get the customer’s positive quality
perception and customer’s satisfaction is the first magnitude of the self-serviced firms
such as goal land and movie theatre … The very first and easily to be detected result
from a poor servicescape is the deteriorating company’s image conveyed to the
customers, especially to the new build-up firm targeting to create a specific image. It
can be easily to imagine the case of a small fashion shop as the shop owner offer the
‘golden’ tempo background that almost drives away the youth market segment. Here the
inappropriate selection of music stimuli acts as ambient condition of physical evidence
that in fact damages the image of the shop. Beside the negative image affection, the
failures in sevicescape also constrain customer in terms of leading them to the confusion
about what really the firm provide. The vague initial impression aroused from the
physical evidence of the service company may keep customer from approach behaviors
which were suggested by M.J.Bitner (1992) to consist of attraction, stay/ explore, spend
money, return and carry out plan. Moreover, it definitely cannot be denied that the
customer’s satisfaction is significantly constrained by the bad performance of physical
evidence. As a result, the repurchase and re-patronage intentions are also strongly
affected by the level of physical setting. Therefore if the marketers cannot control the
deteriorating in the physical evidence, the whole firm is exposed to mislead customer’s
perception as well as the loyalty regardless of how better they perform in the building of
tangible cues (even the price and the quality of the service itself). That means some
firms commit a huge mistake if it only focus on developing its core service provided to
the customers but neglecting the importance of building up its physical facilities that put
the very important first impressions on the customer’s mind. The price paid to that kind
of mistake is truly unpredicted: the company will have to face with a very high risk of
temporary close or even bankruptcy as its revenue will be very low and cannot cover the
cost to run the operation.
According to Baker, Berry and Parasuraman (1988), the same physical setting that
communicates with and influences customer may affect employees of the firm. The
servicescape facilitating the performance of employee is in the concern of almost
service organization but it’s indeed the dominant role for the remote service
organizations like insurance firms, telephone offices and other similar professional
agencies. The bad working environment can lead to frustration and actual discomfort
among workers. Let consider a simple case of 2 law firms where one can facilitate
employees with good air condition, ordered working place and the other firm without
the good working assistance. The unavoidable outcome is the bad working environment
firm can have high rate of turnover because their employees hardly find motivation,
interest and loyalty in the company (especially while other competitors of the company
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are offering much more). It can be concluded that the improved physical surroundings
can help the worker make more efforts and assist them in achieving success in their
performance when the bad physical facilities turn out to severely affect the quality of
service firms through deteriorating the employees who transfer service to the customers.
Finally, the interaction of customer and employee in service occurrence can be
deferred by the problems during managing a servicescape. Prior researches show that
the service design can aid in socialization, in that both participants can understand their
expected roles and relationships. For instance, an employee in a store is interested in
helping customer in order to build a long maintain relationship when in return a
customer in relaxed mood also wants to communicate with a salesperson to help them
fulfill their purchasing intention. However, the bad physical surroundings really distract
employees from focusing on their task and they can ignore the customer or serve them
in a bad appearance or attitiude. Likewise, it can minimize the customer’s interest in
buying. The result is the interaction between them is corrupted and lead to the failures
of sales revenue.
In conclusion, the failures in building an good servicescape can result in the
misleading customer’s perception of the service offering and customer’s satisfaction at
the same time as the lower performance of the firm’s employees. Moreover, they may
defer the interaction between these two main participants in the service encounters. That
fact also means the company has to bear the risk of lowering customer’s retention rate,
the most influential dominant of any services organization.
PRACTICAL CASE: PHYSICAL EVIDENCE IN HANU
Methodology
Putting theory into practice, we have done some research into the condition of
Hanoi University’s servicescape. There are many ways as well as many aspects to
examine the physical evidence; however, in this research we only conducted a survey on
evaluation of the quality of HANU’s physical facilities from the students’ view. The
questionnaire consists of five questions which are designed mostly as ranking ones since
we want to know the different evaluation of students about various kinds of physical
evidence in Hanoi University. There is also a question asking for their recommendations
to improve Hanoi University’s image in their eyes. The research includes 65 students
from Hanoi University, the majority of them are from K07 and K08 students. Most of
the survey samples are delivered during breaks between lectures and tutorials and
collected at the end of each study sessions. It took us 4 days to completely gather 65
answered questionnaires from all the survey takers. Following are the findings and
analysis we have drawn from them.
Limitations
In this research, a survey was carried out within a small sample of only 65 random
HANU students. The limited size of the sample in comparison to a large population of
HANU’s student body may cause some bias in the result. Moreover, HANU is a special
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services organization since it is a state-owned one in the field of education. Its typical
servicescape system is supposed to be much different from organizations of other fields.
Thus, some of the findings from our analysis may not be widely applicable to other
profit-oriented services firms. Another limitation is that the background of HANU’s
students varies. A large proportion of them comes from rural areas while many comes
from modern cities. Their expectation of the university’s physical facilities therefore
may vary as well. Hence, the satisfaction and evaluation on HANU’s servicescape is
immensely affected by that fact, resulting in limited applicability of the findings as well.
Last but not least, this research is carried out by a group of only 4 students in a short
time of several weeks. The shortness of time and human resources as well as the lack of
experience and further professional knowledge can be huge barriers in the process of
conduction of the research.
For deeper understanding of the situation and analysis as well as to make any
further step based on research results, more efforts and careful researches are highly
recommended.
Analysis
Figure 1: First impression on HANU
Educational facilities
Supporting facilities
Teachers/ Staff's
professional appearance
Websites, forums,etc
Others (2 or more
options mixed)
As expected, educational core facilities and teachers/staff’s professional appearance
are the parts that take most of the first impression of HANU on its students, accounting
for over 60% as a whole. First year students in HANU mostly study entrance subjects,
whose teaching staff are teachers at young age that they can easily understand what
students feel and even sympathize and encourage them in their studying. A small
internal research in this department itself has revealed that the mean age of the teachers
is 24, much younger than teachers in other faculties in HANU. Moreover, their
appearances as well as dressing style are much matched with the students’ “taste of
fashion”.
Entering the university, students come in contact with not only new friends, teachers
but also new teaching and studying style. Study rooms are quite similar with those of
high schools but lecture halls with projectors, microphones… certainly make freshmen
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impressed, worried and eager at the same time. Physical subject particularly surprises
students with the intense of exercises and the hugeness of the stadium. Whenever
describing HANU, students mention the large “green” campus and the great stadium as
an outstanding feature of HANU’s physical evidence that not many other school have.
Back to the early time, the university’s management staff had decided to invest a great
amount of money in building up the stadium, hoping that students would have the
chance to practice curricular subjects as well as extra sports activities. Furthermore, the
security staff works quite diligently to protect the stadium and take care of the trees,
which enhances the HANU’s servicescape image in students’ eyes. Every afternoon,
HANU’s “playground” is full with students enjoying different track-and-field events. As a
result, HANU has successfully built a good impression in this term of physical evidence.
Actually, the problems regarding the quality of higher education have for long been
the concern of the society. After visiting many universities in Vietnam, there have been
reports about the bad condition of the educational foundation facilities. Ms Tran Thi Ha,
Chief of the Department of Education University (MOET) raised a question ‘’With the
facilities and teaching staff like that, what could schools rely on to develop stable and
sustainable background for students?’’(M.Giang 2010). After all, it cannot be denied
that the two factors, physical condition and teaching capacity, are of utmost importance
when building up any academic institution’s image. In the latter question, the views of
HANU students about these will be clarified more clearly.
Besides, colleges nowadays are increasing the usage of information technology to
effectively reach the students’ issues and opinions. This is definitely a good method to
control the management process of the whole school. HANU is a multi-major university
and each faculty has an internal website address, for example Faculty of Management
and tourism http://web.hanu.vn/fmt/ or Foundation Studies Department
http://web.hanu.vn/fsd/. Though most students did not pay too much attention to the
websites at first, gradually, they have found out the necessity of having access to them
because all the notices, declaration as well as legal documents and study results will be
broadcasted through this channel.
Peripheral physical evidence or supporting facilities, as its name mentioned, just
serve as an aid to the performance. In HANU specifically, these include dormitories,
parking areas, cafeteria, etc which help boosting up students and teachers’ efficiency.
However, this element influence much on the student’s lifestyle and educational
environment of the university
After looking through the first impression of students on HANU as a whole, we
spent more effort researching the opinions of undergraduates towards each and every
dimensions of the school’s physical evidence. The first and foremost finding is about
current educational facilities condition.
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Figure 2: Satisfaction level with HANU's
current educational facilities
Exceed expectation
Good
Neutral
Under expectations
Bad
The overall comment is that students quite satisfy with the current physical
condition of HANU which is the core of HANU’s service. Study rooms are of
reasonable brightness quality and equipment. However, some lecture halls still in lack
of desks, chairs and air conditioner, or they have ceased operating already, which made
students feel uncomfortable while taking part in educational activities.
The survey result of this question suggests a good sign that HANU is creating a
good image in the customers’ eyes. However, if the university wihshes to maintain the
appeal, then they still need to improve the current equipment. All broken facilities need
to be reported to the corresponding staff and be repaired as soon as possible.
Afterwards, other types of servicescape such as supporting amenity, teachers’
appearance and some interactive channel of HANU are being taken into consideration.
The results are as follows
35
30
25
Teachers'
appearance
Interactive channels
20
15
10
5
0
1
2
3
4
5
Figure 3: Evaluation of the tangibles’ quality
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The most common range of mark is from 2 to 4, which means that these are
acceptable, albeit not very good. Students mention quite much about the quality of some
supporting services like dormitories, cafeteria. The condition in most dorm rooms at
present is good; however, when the dry season comes, electricity and water cut-off
happen quite often. What is more, during the last rainy season, the whole dormitories
were flooded, which made students escape from their shelters and go home, as a result,
they could not concentrate on studying completely. Some infective diseases took the
chance to spread throughout the dorm areas; eventually, the dorm staff had to use many
methods to get the condition back to normal.
Cafeteria’s foods receive the most complaints from students. Regarded as a top
supporting servicescape of a school, foods and drinks services are considered quite
important. Nevertheless, the quality of HANU’s restaurants has not come up with the
students’ expectations. In the school-run cafeteria, the foods and smells are not very
pleasant, let alone the high price. S-club attracts pupils because of delicious foods and
drinks, but the price doesn’t seem to fit the student’s allowances enough.
Library is also an important physical evidence of a school. HANU’s library is in
acceptable condition with many sources of referencing materials and good air
conditioner operation, notwithstanding the old versions of some computers and the
hostile attitude of the staff. Many students say that if the library staff were friendlier,
they would come here more frequently because the study atmosphere is very
encouraging. Therefore, the university should consider getting this problem solved.
HANU is a university with a long history of development; therefore, it has had
chances to improve both physical and teaching staff’s quality. Nevertheless, the number
of low-quality colleges is rising quickly, of more than 400 college and colleges across
the country, more than 300 schools have been established, upgraded in 11 years. The
expansion of this field has caused rumors among people about the quality of higher
education (Tien Dung 2010).
The next part of this research will discuss which parts in the physical evidence
should be considered for improvements.
Figure 4: Factors need improving the
most
Educational core facilities
Staff professionalism
Interactive channels
Others
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It is no wonder that teaching staff has been voted as the factor worth improving the
most. Any students will look up to their teachers and certainly teaching staff also have a
considerable effect on them. Most of HANU’s teachers are qualified with at least
Bachelor and even Master and Doctor Degrees. The advancement of lecturers definitely
brings about customers’ satisfaction (students’ eagerness) to study more effectively, as
the purposes in theory part have suggested. However, the teaching method is still a
problem as some teachers do not know how to communicate with students effectively,
thus leading to miscommunication and unmotivated lecturers.
Supporting facilities come second in this list with 20% of the students favor the
change in them. Specifically, they want to have better quality dormitories and cafeteria
as well as free parking spaces. Moreover, all of the problems mentioned above
regarding the dorm areas and the quality of foods in the cafeteria also should be
considered improving. Though these are understandable desires, it will take such a long
time to fulfill all.
Interactive channels and educational facilities represent 32% as a whole; in other
words, about 21 out of 65 students interviewed agree that developments in these fields
are priority. As a matter of fact, HANU staff often makes frequent check-up at the
rooms to fix any problems regarding the chairs, desks or other utilities. Moreover, the
websites have also been taken care of and update everyday. As a result, HANU may
have been in the process of augment these issues already.
There are some other factors that students have mentioned like clubs or events,
teachers’ knowledge and several students’ services at ‘’students’ price’’ should be
expanded to meet their needs and wants.
Recommendations
As noted in the discussion part about the role of servicescape in service firms, the
customer’s perception about the service offerings is mostly determined by the service
surroundings. Therefore, HANU should have effective plans to enhance its image
perceived by students and other stakeholders of the university. These plans are
suggested to concentrate on dealing with the disadvantages of the core facilities and
supporting facilities that have clarified in the previous part which includes the
information getting from the survey.
•
Recommendations on the essential physical evidence
With no dout that the core facilities are in the very heart of the quality of any
education organisation in the world, Hanu is on its way to step-by-step improve its
educational facilities to best assist the student’s performance. However, it seems that
there are some necessary changes that Hanu should follow to reach its goals:
The studying stationaries such as chairs, tables, whiteboards need to be improved to
get a better studying condition for the students. Hanu can consider ordering some new
chairs and tables and making effort on fixing some bad stationaries. In addition, they
should reinforce the student’s attitude to protect the university’s facilities as the useful
life-time of any public facilities mainly depends on the usage of people. The small
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notice piece of paper on the wall of any classroom could have an unexpected effect that
the university shuold take care about
Besides, the problem arouses that the head projectors, computer system and labrooms are reported to have poor perfomance that really constrain the quality of many
lectures should be highly considered by the management board. Hanu should call for the
sponsership of other organization especially the technical firms to give it a hand to
upgrade such core facilities of the university
•
Recommendations on the peripheral physical evidence
In terms of supporting facilities, Hanu is supportes to quickly address some
problems in relation to the library, dormitory and student’s cafeteria
As mentioned above, the library is evaluated to be less attractive as the consequence of
the poor attitude of the library staff. The questioned arisen here is whether Hanu’s managers
have a regular check on the performance of such staff to quickly identify the inappropriate
working attitude? Therefore, to confront with that Hanu should seriously make a plan to
build an investigation team to catch up with the emergence of negative issues.
The dormitory and cafeteria for students are in urgent need of improving as most of
students consider them as below standard conditions. The dormitory should be
furnished with moderner facilities when the cafeteria is supposed to get better in the
nutrition of the meals and the cleanliness inside the cooking area. In order to fulfil these
tasks, Hanu should seriously take care of the problems and constantly evaluate the
service quality offerings and student’s level of satisfaction.
In general, in order to enhance the image and attraction conveyed to students,
potential students and other sponsors, the most important solutions’s basis is the regular
input seeking from both student and its staff as to what improvement can be made in the
service process to get the best satisfaction from its students.
CONCLUSION
Being one of the seven Ps in marketing mix, Physical Evidence is increasingly
attributed to be on top priority in building an effective service system. This research,
with the purpose of demonstrating the tactic role of Physical evidence in service
marketing, has provided the broad view of the purpose, importance of a physical
environment as well as the discouraging influence of a bad servicescape. It can be stated
that the servicescape acts as a strategic bone of a service organisation when it can make
the service with the originally intangible characteristic turn to be more tangible. In other
words, it can definitely blur the difference between good and service to the customer’s
perception and create the positive customer behaviours toward it supplied service.
However, the unexpected bad performance of servicescape dimensions really can ruin
the whole thing that remind marketers of carefully selecting the right strategy to
establish the most appropriate servicescape process. Moreover, this study also has taken
into account one specific reference to Hanoi University with the aim to analyse the
presence of physical evidence that the university supply to facilitate the study of its
students and other stakeholders. It is clearly justified in the research that Hanoi
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University has quite good physical surroundings but still be far away from performing
the expected servicescapes like the other universities in the developed economy
countries. Some recommedations are also brought up to provide cues to assist the
Hanu’s board of management on their way to reach their goals of best improving
Hanu’s quality and image.
This research contributes an imperative material to the future in-depth researches
and analysis to link the role of Physical Evidence to the impacts on customer’s
perception and satisfaction of the service offerings. Thus this research opens up a gamut
avenue to the future accomplishments which will generate more multifaceted and
thorough understanding about the servicescape in relation to build up better physical
environment settings to achieve the service goals of the organization.
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Bitner, M.J. (1986), "Consumer responses to the physical environment in service settings",
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American Marketing Association, Chicago, IL, pp.89-93.
Solomon, M.R. (1985), "Packaging the service provider", Service Industries Journal, Vol. 5
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The Times 100, The Extended Marketing Mix (7Ps) p.2, viewed on May 12th 2010.
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Tien Dung 2010, ‘’Phai dong cua cac truong dai hoc kem chat luong’’, 17th April 2010,
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Palmer, A. (2008) Principles of Services Marketing, 5th Edition,, Maidenhead, McGraw Hill, 10-13
John, J.D. 2003 “The effects of the employee service quality provision and customer
personality traits on the customer participation, satisfaction and repurchase intentions”,
Agricultural and Mechanical College, 11-23
Bitner, M.J.1992 “Servicescapes: The impact of physical surroundings in customers and
employees”, Journal of Marketing, 56: 57-71
Baker, Leonard L. Berry, and A. Parasuraman (1988), "The Marketing Impact of Branch
Facility Design," Journal of Retail Banking. 10 (2), 33-42.
Tripathi, S.N, Siddiqui, M.H (2007) “The impact of servicescape on quality perception and
repatronage intentions of customers-with specific reference to shopping malls”, vol 4, 12-16
Lilien, GL, Kotler, P., Moorthy, KS. "Marketing Models", 1992. Prentice-Hall
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Chicago: American Marketing Association, pp47-51.
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MARKETING AFTER CRISIS
Supervisor: Ngo Phuong Dung
Written by: Nguyen Thi Thu, Nguyen Thi Hoa (TR-06)
Vu Thi Thin, Hoang Thi Thanh Huyen, Do Thi Phuong (TR-06)
I. Introduction
There is no doubt that tourism nowadays becomes one of the most key industries in
the economic development strategy of each country. However, tourism also is an easily
vulnerable industry due to a wide range of crisis, ranging from the socio-economic crisis
to political crisis, from disease impacts to natural disaster...etc. In particular,
destination’s image is firstly suffered from negative impacts of this crisis. The level of
influence of such adverse attack on the tourism industry depends on many factors in
which how the destination get ready to encounter and how the tourism authorities
response actively response to the crisis.
With the aim of having a comprehensive outlook about the impact and destination
marketing campaign after crisis, our research concentrates on 4 types of crisis:
economic, political, disease and natural crisis in the case of Cambodia, Bali, Hong Kong
and China. The findings of the research will be the valuable reference for Vietnam
tourism in the term of better preparing toward any kinds of crisis.
II. Findings
1. Economic crisis – Cambodia case
1.1 The impact of crisis
a) Pre-financial crisis
The second generated economic sector, tourism, has obviously demonstrated its
position from flying higher and higher with the huge amount of tourist income
especially after suffered from insecure politic. Indeed, in spite of decades of civil war,
and particularly the genocidal regime of the Khmer Rouge in 1960s that destroyed the
tourism industry, Cambodia seemed to recover its position after conflict ended in the
early 1990s. Since then, thank to the high-speed development, tourism has become not
only the country’s engine for economic growth, but also for the political legitimacy and
the national and cultural identity of Cambodia (Chheang, 2008). In the 1960s,
Cambodia was one of the most popular tourist destinations in Southeast Asia, with
between 50,000 to 70,000 annual visitors (Lam, 1996). After that it changed
themselves gradually due to insurgencies, civil war, and the killing fields, it was
recovered by increasing nearly ten times from the 1990s with more than 200000
visitors arrivals (218,843 in 1997) to 2,015,128 in 2007 that concretized by revenues
increasing from 103 million USD in 1997 to 1400 million USD. In addition, it made a
enormous contribution easing a huge number of jobless by creating 1,102,000 jobs (2008)
15.4% of total employment, or one in every 6.5 jobs (Chheang, 2008)
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b) After-financial crisis
¾ The collected-data has illustrated dissatisfactory result due to enormous decline
in tourist arrivals from 2004 to 2009 with the statistic of roughly plunge from 22.3
million visitors to only 8.6 million ones (Figure 1) within 5 years that lead to a certainly
considerable shrink in the number of international tourist. (Source: Ministry of
Cambodia tourism) Cambodia Association of Travel Agent president, Mr. Vandy Ho,
told TTR Weeklya global economic crisis forced a slump in demand, especially from
markets in Asia. Arrivals from China dropped 10% in the first seven months, Korea
dropped 30%, Japan dropped 14%, while Thailand dropped 20 to 21% this year
(Sawapat Pimchaichon, 2009). Generally, expanding tourist coming quantity is defined
progressively before crisis but plummet after that 32% from 50.53% in 2004 to 18.53%
in 2007 and 5.48% and 1.7% in 2008 and 2009 respectively (Source: Ministry of
Cambodia tourism). More detailed, the extraordinarily changeable statistic belongs to
Siem Reap in which site of the world famous tourism attraction – Angkor Wat Temples,
with tourist arrivals falling and some luxury hotels temporarily shut down, local media
reported. “Last year, we could get about 30 US dollars per table, but now it is
completely different. Now some people spend only one dollar for a Coke and then leave
the restaurant." said Ms. Chanthorn witnessed 16 percent decrease tourist arrivals in the
first quarter of 2009 (Cambodia Daily, http://balita.ph/2009).
% growth
Figure 1: Growth of tourism sector
( %) 2004-2009
25
20
15
10
East
5
0
2004 2005 2006 2007 2008 2009
year
Source: NIS and EIC data as cited in Cambodia
Economic Watch (2009).
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Figure 2: International visitor arrivals to Cambodia 2004-2009
• The ebbing of measured-number also lies in faded- flight movement statistic
which illustrated in term of percentage change in two main airports in Cambodia. The
chart recorded the significant drop in growth of passenger traffic at Phnom Penh
International Airport, from 21% in May to a mere 3% in September 2 0 0 8 .
B e s i d e s , the situation at Siem Reap International Airport has been even worse,
with the same statistic reaching-10% in September 2008. Consistent with this, flight
movements at both airports were considerably lower in 2008, and expectedly also in
2009 compared with previous years. Incidence of domestic flights actually shrank
by 22% in Siem Reap for the period January-May 2008 over the same period in
2007, and by 10% in Phnom Penh for the period January-September 2008 over the
same period in the preceding year. Most airlines have already made plans to cut
capacity on existing routes, especially in 2009.
Figure 3: Flight movement (% change)
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• “I am worried about that if the hotel business is good, we are good. If it's down,
we are down." Said Thy Sok Mony, front office manager at the Prince D'Angkor Hotel.
Definitely, the 4% contributed GDP accommodation industry actually stagnated due to
tourist arrival decreasing and their short average length of stay. (www.ilo.org) “Only 56
rooms out of 222 are currently occupied, down from last year's low-season average of
100” said Thy Sok Mony again. (www.balita.ph/2009/) especially the real number
shows the over-shock decline of 30-80% in 2009 compared with 2008 (www.ilo.org).
As the result, the impact still has not stopped till making slightly down in tourist receipt
from $ 1595 USD to $1561 USD in 2008 and 2009 respectively (Source: Ministry of
Cambodia tourism)
• The multiple-services characteristic has created a numerous labour force such as
hotels, guesthouses, restaurants, massage parlors, travel agencies, tour operators,
airlines, Tuk-Tuk, souvenir shops, food vendors, etc. Certainly, the vast change at least
in labors structure can be noticeable. And, employment opportunities were created for
more than 100,000 people and increase 20% annually. However this expected percent
was plummeted under 0%, account for -3% in 2009 that means a huge lose of 63000
tourists $ 50USD in revenue and 10000 direct job and if a tourism job can help 3 locals,
then about 30,000 locals face living difficulties. An observable example about Tuk-Tuk
a kind of motor Dup street vendors, considered the special character in Siem Reap,
Phnom Penh and Sihanouk Ville, key tourist attractions, are seeing a major slowdown
in tourists. In Siem Reap, Tuk-Tuk drivers earned around $15 per day during this
season in the past, but now, they earn only $5 per day. Similarly, those in Phnom Penh
use to get $15-20 per day, but have seen their earnings drop to just $2.50 per day in
recent months. There is approximately 14,000 Tuk-Tuk drivers; 6,000 in Siem Reap
(50% are migrants from nearby provinces such as Kampong Thom, Oddar Meanchey,
Kampong Cham) and 8,000 drivers in Phnom Penh (almost all are migrants from
provinces such as Prey Veng, Takeo and Kampong Cham). Even though their income is
declining, Tuk-Tuk drivers said they have no plans to change their jobs or return home
because the chances of earning money in the city is higher than in their villages.
1.2 Marketing strategy
Segmentation strategy
After the financial crisis, Cambodia has been working on the recovery plan of its
tourism sector. The policy mix administered to rekindle tourism in this country has
constituted a relatively bigger, more diversified and more visible set of responses. the
immediate strategy seems to have been to focus on reviving the number of tourists
coming in through regionalization and vamped-up marketing, Consequently, the target
segmentation of the main sources of Cambodia tourism listed the emergency source
needed recovering. A great deal of contributed revenue principally comes from the
international tourist particularly main sources like Vietnam 14.63%, Korea 9.15%,
USA 6.87, Japan 6.77 % etc (Source: Ministry of Cambodia tourism 2009). In a
nutshell, the longer-term strategy refocuses on pushing the quantity of tourist specially
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international one and enhancing the quality of the tourists (e.g. targeting better
spenders) and products and gearing up to tap other tourist sites and markets, As the
result, some of the promotional strategy was started activating
Pricing strategy
• To stave off the further ebbing of the tourism sector, the Cambodian
government’s proposed chief strategy is to boost the total number of tourists from last
year by 5-7% by enhancing the number of national tourists and tourists from the
ASEAN region, the Middle East and Russia. “If we could add two more flights daily
from Bangkok to Siem Reap, we could potentially bring in an extra 39,000 tourists per
year and 59 million U.S. dollars," said Pascal Deyrolle, vice president of the
Cambodian Hotel Association and general manager of a hotel in Siem Reap (Xinhua,
2009). Indeed, reducing package-tour prices would foster growth in international travel,
while some persons operating hotels believed that more flights from more carriers
would help growth. Meanwhile, a 10% to 20% reduction in the price of tourism
services, including accommodation, food and transportation, has reportedly been
undertaken by the private sector, with 30% to 40% of travel agencies operating in the
country having slashed prices of package tours (MoT, 2009). The reduction price
strategy also has been proven through lowering of fees at tourist sites: “three million
VND touching the wonder” (Huu Vinh, 2009) has shown the surprised entrance fee in
Angkor Wat with only $15USD included $ 165 USD package tour to the famous
tangible cultural heritage in Siem Reap, Cambodia. Going with this flow requesting
hoteliers to cut their rates, since 50-70% of tourism spending is on accommodation also
draw the lower package tour.
Product strategy
• Tighten the cooperation between the stakeholders and the tourism private sector,
the Tourism Working Group of the Government–Private Sector Forum (GPSF), the
Cambodia Association of Travel Agents, hotel and restaurants associations, the Société
Concessionaire des Aéroports (SCA), opposition groups and independent analysts, have
implemented a series of strategy related to recover tourism product. In the effort of
bringing Cambodia image and also raising international tourists’ awareness, new slogan
“Visit Cambodia, Kingdom of wonder” tends to ease the horrible image of a spoiled
country by civil war, political infighting and massive corruption resounds loudly in the
international community so that it can actually hit the degree of tourism affect.
Additionally, for further serving and facilitate tourists’ touring process, facilitation
of transportation services was implemented in term of freely allowing 150 vehicles,
both passenger and cargo carriers, from countries that have land borders, for one week
etc. Besides, boosting of budget and direct flights, especially from European countries
(the country’s airports are said to be capable of accommodating eight times the current
traffic); in connection with this, is enlarging and adding the necessary infrastructure to
airports made smooth the process of air-traveling especially among Asian country.
Concurrently, the RGC (Royal Government of Cambodia) has initiated maintenance
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and repair works that have a direct bearing on travel facilitation. For instance, national
roads leading to key border checkpoints have reportedly been restored. Tapping other
tourist sites and non-traditional tourist markets has also been high on the agenda,
although such diversification seems to have been the hardest to concretize. Angkor Wat
specifically, but the Siem Reap–Sihanoukville–Phnom Penh triangle generally, remains
the key pillar of tourism. Given the underdevelopment of other areas and the traditional
fixation on Angkor Wat, both of which discourage investors from undertaking risks and
venturing into other areas, it will take time and a great deal of persuasion by tourism
reformers realize this objective.
• Simultaneously, Tourism law was launched in 2009 tighten the tourism
controlling of all private and public sector, insuring that establishments working in the
industry have formal licenses that are renewed on a yearly basis and helping them meet
the required standard as well. “the purpose of the law is namely about developing the
tourism industry, which in return will help reduce poverty” Thong Khon, minister of
tourism, said (Xinhua, 2009). For approaching the law Ho Vandy, co-chairman of the
government private working group on tourism, attributed this year's tourism decline to
the global economic downturn, which, he said, had already forced several hotels to
close and several others to reduce their employees' hours and also crack down on
unlicensed agents and hotel and restaurant operators that do not meet relevant standards
(Xinhua, 2009).
Promotion strategy
• As stated the slogan “ Visit Cambodia, kingdom of wonder” takes the main role
forming the first impression opening new page of tourism development by broadening
Cambodia’ reputation becoming a cradle of ancient temples and pagodas Accordingly,
a marketing campaign conducted to be adverted on international channels such as CNN
with the huge amount invested of US$340,000 (http://www.cambodia-tourism.org),
international television, and print media, featuring Angkor Wat alongside images of
eco-tourism sites, Apsara dancers, beaches and shadow puppets. The ministry's
campaign was welcomed by Luu Meng, the president of the Cambodian Hotel
Association. He said television advertising and this week's launch of national carrier
Cambodia Angkor Air would both represent a welcome help. "And we hope the number
of tourists visiting Cambodia will pick up from the end of September, because that is
the start of the tourism season," Luu Meng said. He added that moves by hotel operators to
cut staff numbers and working hours would work as a short-term solution to combat the
problem of lower visitor numbers. "There will be nothing to worry about provided they
don't actually close down their hotels," he said. (http://www.cambodia-tourism.org)
• In parallel with reducing the package-tour price facilitating the touring process
will be the added factor creates the highest level of tourist’s convenience and
satisfaction. Indeed, a tourism stimulus package has been spoken of but the government
has sought to downplay expectations about its breadth in advance, as it ultimately
depends on up to how much the government coffers can accommodate. Caution has
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also been expressed with regard to the easing of visa requirements especially the visa
exemptions for fellow GMS (The Greater Mekong Subregion) countries Vietnam and
Lao PDR and ASEAN countries Singapore, Malaysia and the Philippines.
Consequently “The government seems to be more optimistic and emphatic about the
fact that, while less compared with previous years, sector growth remains and will
remain positive. It has set recovery by 2011 or earlier” (Chun, 2009).
• Additionally, an attractive promotional campaign was designed and launched
from the first appearance throughout 2007 up to now. The “Stay another Day” initiative
supports from the idea of sustainable and socially responsible tourism aligned to other
promotional tourism initiatives such as ‘Kingdom of Wonder’, which looks at the
branding of Cambodia as an international tourist destination with distinct features
compared to neighboring countries. Driven by responsible Cambodian company
owners, the campaign initially (2007 and 2008) was jointly published and financially
supported by the International Finance Corporation (IFC) and GTZ-PSP but after that
get going on by itself. With the aim at raising tourists’ awareness about so far unknown,
alternative tourist-destinations, activities and as a result, probably increase the average
number of days, “stay another day” has proven its distinctive power in attracting more
and more tourist to Cambodia.
1.3 The result
• As the result of all the implemented strategy Cambodia is still an attractive
destination due to be cradle of ancient value and beauty. It has been demonstrated
perceptibly the recover in the actual data. Figure of 4.75 % rise in flight arrival year on
year in January released by the Ministry of Tourism Thursday suggested Cambodian
tourism is starting to recover after a difficult 2009, as total visitors rose an annualised
6.36 percent in January, which included a nearly 5 percent increase in all-important air
arrivals. The statistic of tourist arrival at airport also recorded speedy recover: Phnom
Penh International Airport saw arrivals rise 7.56 percent in January year on year, the
figures showed, while Siem Reap arrivals climbed just 2.73 percent Data also showed a
dramatic rise in tourists from Cambodia’s two main sources – South Korea and
Vietnam.” We have already received the impact from the crisis. And now it is over, so
the sector is on the way to recovery,” said Kong Sophearak, director of the Statistics
and Tourism Information Department. South Korean Airlines Asian, which declared
39% rise in traveller suspended flights to Siem Reap from Incheon for nearly three
months ahead of the tourism high season at the end of last year, saw full loads on its
flights four times per week in January to Cambodia’s main tourism hub, Nhim Kimny,
the airlines sales and marketing supervisor, said.
• In addition, however, analysts said the figures were positive, and that a firm
recovery would likely take hold throughout the remainder of 2010. “This year, we are
confident of increasing tourism arrivals to Cambodia because the country has an
advantageous relationship between quality and price, good customer service and a
diversity of offers,” said Mohan Gunti, an adviser to the Cambodian Association of
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Travel Agents. Indeed, the new page of Cambodia tourism has changed themselves to
become “kingdom of wonder” instead of the destroyed country in civil war and steer
forward to be the target destination in 2011 in Asia.
2. Political crisis – Bali case
At approximately 11:20 pm, Saturday October 12, 2002, the idyllic island paradise
of Bali was rocked by a series of devastating explosions. Paddies Bar and the Sari Club
on the main street of Kuta bore the brunt of the impact. Both entertainment venues were
packed with unsuspecting tourists, staff and revelers; many others were in the vicinity.
Despite medical and emergency response efforts, 202 people died as a result of these blasts
and hundreds more were injured - with varying degrees of severity (ABC Online 2003).
Figure 4: Deaths by country of origin
2.1 Impact of the crisis
Tourism demand slumped dramatically following the Bali bombing. In September
2002 direct international visitor arrivals to Bali stood at 150,747. In November it
dropped to 31,498 arrivals (Terrorism and Poverty: Causes and Impacts) (figure 5)
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Figure 5: Tourist arrival 2001- 2002
Hotels and restaurants alone employed 58,000 people (3.3% of the labor force), but
contributed 21% to Bali’s provincial economy. If retail trade, manufacturing, and
construction are included, tourism can be argued to generate over half of Bali’s income.
The week before the bombing occupancy rates at starred hotels ranged from 65 to
100%. With the slumping in number of tourists after the bombing, by the end of
October 2002 they had plummeted to 10% as the exodus ensued (After the Bali).
As a result, when the main source of income suffered from a big tragedy, a number
of coping strategies at the village level were run including reducing expenditures,
selling assets (16%), scaling down remittances to villages, and return migration to the
home villages as a social safety net (32%). And 100,000 had already lost their jobs—
most from the informal sector. Many businesses encouraged staff to take unpaid leave,
scaled back working hours and reduced salaries in attempt to remain operational.
That revealed the relative instability of the tourism industry and the vulnerability of
those dependants on the revenue it generates.
Moreover, the image of Bali has been stuck with the memory of October 2002. That
creates the suspicion of tourists about the safety and prevents them to travel to Bali.
Furthermore, since October 2002, a number of countries, including Australia, Japan, the
United States, Britain and other European countries have imposed travel warnings
against their citizens who plan to travel to Bali and other places in Indonesia.
2.2 Marketing after crisis
Segmentation
The fact that the tourists from Australia and other Western countries hesitated to
come to Bali and Australian government encouraged their citizens not to travel to Bali.
Thus, tourism enterprise in Bali found own way to survive. The main target market was
removed from Australia, New Zealand, the USA and Europe to Asian market like
Japanese, Taiwanese and Korean. Especially, Bali tourism focused more on young and
retired Japanese ones (Bali plans to lure Japanese tourists). And the result is the
traditional long-haul North American and European market segment has been well
surpassed by domestic, Asian and budget Australian travelers with shorter visits and
reduced daily expenditures. The number of Japanese tourists visiting Bali ranked the
second after the Australians.
Product strategy
To recreate the image of a safe and peace destination, move beyond the images and
memories of Bali bombing, Bali authority improved the national and regional security.
Implementing active strategies like identifying and prosecuting the Bali Bombing
suspects; strengthening international intelligence sharing arrangements; introducing new
anti-terrorism laws; and increasing the highly visible police and security presence across
Bali, particularly at seaports and airports, they aimed to regain the customer confidence.
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For example, to ensure the safety of the first visitors - the first large Japanese group
to visit the island after the bombing tragedy, the local police guarded the harbor. The cruise
liner arrived on 9 a.m. on Feb. 10 (Senior Japanese tourists enjoy the beauty of Bali).
Then, after the Bali blasts, we contacted all embassies and travel institutions around
the world to convince them that Bali still safe. We also asked related governments to
revoke their travel advisories.
In addition, some types of products changed to catch up with the situation, these
changes were reflected in a decline in the numbers of FITs (Free Independent Travelers)
and a relative increase in package tourists (Terrorism and Poverty: Causes and Impacts).
Promotion strategy
Right after the crisis, there were several ceremonies inviting all religious
denominations and nationalities to purify and cleanse it of all residual chaotic
influences; and attract media attention from around the world to display the level of
grief and anxiety of Bali bombing. It was important to respect and remain the sensitive
to the victims of Bali tragedy. Moreover, warm smile and willing conversation of local
residents reduce the sadness and confusion of tourists (After the Bali).
They continued advertising and resilience like using media and public attention
drawn to other issues in various parts of the world. International marketing and public
relations firms were also employed by various organizations to assist in the promotion
and restoration of a positive destination image for the area. Initial campaigns and
slogans such as: “Bali for the world” and “Unified in Diversity: Unified we stand” were
designed to demonstrate the strength of both industry and community, while broadening
the Bali brand to encompass Bali culture and heritage (Bali overcoming crisis). Other
campaigns and slogans like Bali for the World and Kuta Karnival of Life active
strategies to emphasize and assure safety and security. Moreover, Congress Tourism
from the frequent international conferences held on the island, especially after the
terrorist bombings of 2002 and 2005; ostensibly to resurrect Bali's damaged tourism
industry as well as its tarnished image (The Bali Updated). They created familiarization
trips for foreign journalists to promote balanced media reporting. Other significant
investment has been committed to the development of dedicated websites, brochures
and promotional materials.
Additionally, sales promotion like large concession from airlines, hotels and tour
operators is an effective action to lure the tourists back to Bali.
People
To get over the tragedy, there is a special need of cooperation between all relevant
stakeholders of Bali. In fact, cooperation between businesses, the humanitarian
organizations, all levels of government and the local community contributed a greater
socio-economic resilience through the development of a comprehensive crisis
management plan and associated recovery marketing strategies. Every issue like
security, regional stability, contingency planning, available resources, emergency
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procedures, communication, rehabilitation and mitigation, need to be clearly addressed.
In an effort to support Bali tourism, PATA quickly deployed representatives to assist
with the management issues and conduct an objective of initial response strategies. And
to remain effective each element was regularly reviewed and updated ensure that
relevant destination image, marketing, and promotional initiatives.
Improve a community’s capacity to efficiently respond to a hazard—whether threat
or reality. Constructive crisis management should be integrated, holistic and sustainable,
rather than simply reactive. Through the open, multilateral sharing of information,
experience and knowledge it is possible to anticipate a diversity of problems, formulate
appropriate response techniques, and determine organizational responsibilities (After the
Bali). The restoration of destination should be full awareness and support of the local
community. However, the Bali community has yet completely empowered. Many
residents still remain ignorant the political decisions official actions.
2.3 The results
Bali becomes more affordable place. Many airlines have rerouted or scheduled new
flights to the island while hotels and businesses are experiencing renewed patronage.
Direct foreign arrivals have reached unprecedented highs while occupancy rates are
generally above 80% (BPS Statistics Indonesia 2004). Revitalization and continuing
growth in visitor numbers appears promising. (New record tourists to Bali in 2009: 2.2
million). Promotional efforts, security improvements and heavy discounting have helped
to attract tourism back to Bali yet such tactics have created their own social and
economic issues. However, spending and behavior patterns have yet to return to precrisis levels. Many of the social and victim support groups formed directly after the
terrorist attacks in 2002 have now disbanded or moved on to sponsor other causes.
Employment remains limited and wages low.
It is a sad reflection of today’s world that the island of Bali can never truly recover
its pre-crisis “innocence”, however in the aftermath of this tragedy lies the chance to
realize a safer, more alert and more resilient community—the ultimate emergency
management priority (Gurtner Y., 2004)
3. Disease – Hong Kong case
The Asian Development Bank (ADB) has indicated that the Asian economics
severely affected by the SARS (Severe acute respiratory syndrome) crisis include
People’s Republic of China (PRC) Singapore, Vietnam and Hong Kong. Appeared at
the end of February 2003) SARS widely spread to Hong Kong and causes serious
affects on tourism activities in this country. The tourism operations in hotel, restaurant,
tourist attractions and airline transportation are suddenly froze. There is a rapid
downturn in tourist arrivals followed the first outbreak of SARS in this country from
mid-March onwards. Comparison with the same period of 2002, arrival dropped from
19.1% positive growth in the first half of the month to 9.9 % negative growth in the last
half of 16 days. The lodging industry also suffers heavily from the SARS storm. Also
according to the ADB, hotel occupancy declined severely in the second quarter of the
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year. However, the tourism industry sustain the most serious influence is airline
industry. The Association of Asia Pacific Airlines (AAPA) indicated that the average
passenger in April 2003 just over 11,300 per day, downturn 65.6 % from the same
period last year. In the next month this airline just carried approximately 7,000
passengers a day. In the addition, the flight schedules have been cut about 45%. Along
with the decrease of airline transportation is the drop in tourist expenditure in exchange.
The retail sales dropped 50% in March 2003 (Hong Kong Retail Management
Association, 2003). From this above statistics, we can jump to the conclusion that Hong
Kong tourism is the greatest industry suffer from the SARS). It were 7 years after the
disease crisis, it is the right time to look back how successfully the tourism authorities
done to overcome the crisis. This research aims to evaluating the tourism marketing
recovery campaigns of this country and the effectiveness of its actions.
Due to the large impacts of SARS, it is necessary for the Hong Kong tourism
authorities conducting the various destination marketing campaigns in order to recover
the tourism industry after the crisis. One of the priority tasks is redefine the target
segmentation market. A number of possible areas for further explorations also turned
up. During the outbreak, for instance, when both inbound and outbound travel was
dropped a half, local tours organized by tour companies was a hit as few people had
been aware of the local attractions and countryside. Hong Kong is believed that
development in this area could stimulate more local spending, as well as provide more
appeal to tourists than just shopping so they would extend their stay in Hong Kong.
Therefore, the government should provide the infrastructure and create more tourist
destinations to satisfy the unfulfilled demand.
There is a fact that the international visitors quantity come to Hong Kong, especially
the America and European market drop dramatically. Even many large corporations in
American forbid their employee travel to Hong Kong as an incentive travel. Therefore,
the crisis has speed up Hong Kong tourism diversify and develop new potential target
market such as India, Russia and the UK (Hong Kong Association and travel Agents).
In the addition, with the aim of concentrating in one of the target segmentation market,
the Individual Visit Scheme that allowed travelers from Mainland China to visit Hong
Kong on the individual basis has been applied on July, 2003. In the short time of
applying, the number of visitors under the scheme increase constantly. As the results, it
created a 'positive by-product' to attract overseas travelers to visit Hong Kong when
scheme is attracting a large number of Mainlanders to Hong Kong," (Miss Kinnie
Wong, 2003). Based on that the overseas markets such as the United States and
Australia may feel safe visiting Hong Kong again in the big event of this country.
Pricing strategy
According to WTO, at the special “Recovery Committee’s” meeting in Berlin
(2002), lowing prices is the one of the five best methods that determines the demand
change in the market after crises. The reality shows that Hong Kong tourism has applied
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price reducing activities in the wide scope of tourism activities. Airline supplier Cathay
Pacific and Dragonair spent 3000 airlines ticket with low price. The travel agents offer
the reduced- price holiday package tour and value-added services to the all visitors.
Food and beverage industry also reattracts the tourist expenditure by reducing the
receipt price or dishes price such as Yung Kee or Maxim”s Caterers restaurant. This
strategy really brings the positive results in response.
Promotion – marketing strategy
"What we need now is a stunning and effective publicity strategy that draws the
attention of global consumers and the media and rebuilds their confidence”, said Selina
Chow, Chair person of the Hong Kong tourism Board. There is a fact that, SARS crisis
deeply changed the destination’s image on the customer’s perception. Hong Kong now
no longer is the safety and non- disease destination, a dangerous and deadly country
instead. There fore, promotion and communication plays an important role as changing
and raising awareness of products to prospective customers, consequently stimulating
demand and generating the incentives to travel. It is totally necessary to create a strong
relationship and cooperation between the destination and its prospective market, make it
more reliable and more sustainable in development as well. That requires Hong Kong
tourism authority conduct a comprehensive marketing campaign in all aspects, included
the communication message, marketing content and materials, promotional techniques
and distribution channels.
The government of Hong Kong spent $129 million on a global recovery campaign
aimed at revitalizing the city's battered tourism, commerce and exhibition businesses in
the wake of the SARS epidemic. It partly reveals the effort of Hong Kong in recover the
tourism industry after SARS. With the aims of changing visitor ‘s perception towards
Hong Kong, Hong Kong tourism Board spread out widely the message “ Seeing is
believing” by inviting nearly 500 international trade representatives and media,
including groups from Europe, Germany, Japan, Malaysia, Southeast Asia, Korea and
India. They also made sure that all these events are widely publicized in the
participants’ home market so that the reassurance message is well spread to consumer in
those countries. It can be said that Hong Kong not only target on the domestic market
but also the international market.
Public media is also an important promotion channel in the marketing after crisis
strategy of Hong Kong tourism. HKTB constantly produces three videos newsreels
which have been distributed to major TV stations and networks in more than 60
countries worldwide. These feature interview with visitors and expatriate business
people, stating their confidence in Hong Kong as well as showing the community out
enjoying themselves again at events like Dragon Boat Festival celebrations. During
SARS outbreak, the campaign "We Love Hong Kong" showed Cathay Pacific hand in
hand with the Hong Kong community can overcome adversities. The airline has
recently been accorded as the Airline of the Year 2009. Its tandem with Hong Kong
International Airport, international awardees in its own right, is indeed formidable. The
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Hong Kong and overseas offices have also been using press releases, media interviews
and articles to spread the message that life in Hong Kong is back to normal, working
closely with the Hong Kong Economic &Trade Offices and the Hong Kong Trade
Development council in relevant markets to deliver a strong and consistent message.
Under the banner “Hong Kong welcome you” the Hong Kong tourism board
conducting a serial of recovering program that include:
- “Welcome month” launched on 13 July of 2003 to coincide with the Boan /
WTO tourism forum and running until mid September/During period, early customer
will be lured back with some irresistible air and hotel offers, a list of special dining and
shopping privileges when they arrive and a Lucky Draw offering more than HK $10
million worth of prizes, which will also be opened to local residents to help stimulate
domestic spending. The promotional program will be carefully timed and tailored to
each different market, based on the assessments of consumer sentiment gathered from
HKTB research.
- A major welcome day in Mid August at the mid point of the two welcome
months, the leading trade and representatives from all over the world will be invited to
Hong Kong to enjoy a spectacular series of special, news-making event.
- A series of mega events and promotion running from mid August until the end
of March 2004. These events will ride on Hong Kong’s unique harbor and lighting,
showcasing the city’s energy and vibrancy, and creating new excite and experiences for
visitors worldwide. They also make full of use of popular and well-established, colorful
festival such as Mid Autumn Festival, Christmas and Chinese New Year. With a new
event being added each month, travel agent will have a sustained supply of “must see”
attractions that they can use to arouse customer’s desire to visit Hong Kong.
It is clearly to recognize, Hong Kong after SARS storm made the best effort in
recovery tourism with the aim of bringing visitors back as quickly as possible.
However, these recovery programs are looking at the long term (Mrs. Chow, 2004).
That is the reason why Hong Kong tourism focus on making the sustained and
memorable program not long right after crisis. Their plan is combining short tern
initiatives that will attract visitors back with specials offers and spectacular event that
can reinforce Hong Kong’s long term destination image and reputation. The priority of
Hong Kong tourism board is reviving the tourism business in key source market and
build on Hong Kong core strengths and values to reinforce its positioning as a
significant market in the international area.
Product Strategy
It is suggest that the tourism product in the recovery period of a destination
suffering crisis fall on the eliminate the negative influence on the tourism products and
offers (Glaesser 2003); various short-term product (WTO 1991 in Glaesser 2003) and
niche products (Mintel 2002, WTO 2001).
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The effort of Hong Kong and the city administration of Hong Kong in applying
product developing strategies reflected the above approach. In order to recover the
customer’s belief after SARS crisis, trends in sanitary services are also encouraging.
The increased demand for cleaning services alongside the heightened awareness of
hygiene should be another bright spot. The 2% rise in business since the SARS outbreak
means there is still long way to go, as both the public and private sectors now
understand the importance of hygiene. By spending more resources on cleaning up the
city, not only quality of life in the city is can be improved, but also the tourism industry
can be changed in term of destination’s image and brand name (Hong Kong tourism
development committee).
Except the affect of SARS outbreak, Hong Kong is an ideal Mice destination for the
various business travels with the advanced technology and facilities, warm hospitality
personalized services coupled with immense natural beauty and rich cultural heritage. It
brings to the Hong Kong tourism an opportunity to focus on enriching and boosting the
Mice product in the post-SARS period. According to the Hong Kong tourism Board
(2004), although a number of conventions and exhibitions in the second quarter of 2003
were postponed due to the SARS outbreak, many were simply rescheduled to later in
2003 or 2004. So far, more than 120 international conferences and exhibitions have
been scheduled between 2004 and 2010. In the addition, the priority tourism product
focuses on the product extension and diversification, such as Disneyland in order to
refresh and extent its product base (World Travel and Tourism Council, 2004).
Distribution strategy
Basically, there are two kind of distribution channel: direct and indirect. In the field
of domestic tourism distribution, direct sale take place directly between the service
providers and consumers (Glawsser, 2003) One of the most importance findings of a
research that after the crisis period, the consumer had highly demand of finding the
information and statistic about this destination as well as the expectation for the
recovery and insurance in term of safety and security for their traveling. Therefore,
direct sale is an effective channel to answer the enquiries from the customer and open
the opportunities for the services suppliers make customer satisfy throughout the
professional and differentiated product and services. Cost consideration is one of the
most important contributors of direct distribution channel that used as an indicator in
choosing the tourism product of the consumer. Hong Kong, due to this principle, has
applied many lowest possible prices with the best guarantee and reliability to customer.
Indirect sale, in contrast, is the indirect communication between customer and
service providers or “secondary distribution”. Internet and television is the popular
indirect channel. Although Hong Kong authorities has updated a lot of related
information and guideline for the best trip in the crisis period in the tourism websites
(www.gohongkong.about.com; www.info.gov.hk; www.news.gov.hk etc) or the
marketing strategy of famous star Jackie Chan with slogan “live it, love it” widely
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spread in the public media (2004), the internet still a long way from becoming a major
distribution channel in term of volume (WTO, 2002b).
It is recommended that the Hong Kong tourism authorities should conduct both two
distribution channels in order to change the customer’s perception as well as boosting
their traveling to Hong Kong.
Conclusion
After gradual recovery from the SARS crisis, the Hong Kong tourism destination
marketing campaign has proved the effectiveness in the way of recovery the tourism
industry by each step of each particular strategy: retargeting the market segmentation,
lowering the tourism service package price, applying the various the destination
marketing campaign, diversifying the product catalogue and broadening the distribution
channel. The inbound and outbound tourist market continues developing in the amount
of visitors. Based on the above analysis and findings, we con draw a conclusion that
Hong Kong tourism board was successful in way of recovery the country’s image and
tourism industry. To conclude, “The marketing instrument employed in crisis
management requires no change or innovation in themselves. The instruments and
fundamental decisions still remain the same. Only the different framework caused by
the negative event has to be taken into account.” (Glaesser 2003, p.146).
4. Natural crisis – Sichuan Earthquake, China (12 May 2008)
The word “Natural Disaster” has now become too familiar with the history of the
Earth during the past years. Any destination which has ever had to suffer from natural
disasters once was also left with extensive damage and heavy losses, especially
reputation in terms of tourism. Phuket, Thailand in tsunami (30 December 2004) is a
typical example. “Tsunami drowns Thailand's tourism industry” is the title of an article
on website http://www.cdnn.info/industry/i041230/i041230.html of CDNN (CYBER
DIVER News Network)1 that showed viewers clear information and evidence about the
huge negative impacts of that disaster on a country having been well known in tourism
for such a long time. Even the Prime Minister of Thailand, Thaksin Shinawatra while
touring the disaster area said "Even though we can quickly rebuild hotels, it will take
some time to draw back tourists to the affected areas". This indicates a fact that tourism
will have to suffer huge damage if a natural disaster happens in some region. In this
paper, our group would like to emphasize on the case of Wenchuan (Sichuan)
Earthquake in China (12 May 2008) in addition to the case of tsunami in Thailand as it
has recently occurred and received most attention from many parts of the world.
4.1 General impacts
This was not the first time that a natural disaster occurred in China. In the past,
China often had to experience some types of natural disaster like famine, flood,
typhoon. The earthquake on Monday, May 12, at 2.28 pm (Beijing time) that struck
China’s Southwestern, Sichuan province is said to be China’s most severe natural
disaster since 1976, when an earthquake destroyed the eastern city of Tangshan, killing
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upwards of 240,000 people. According to a comprehensive study (LingLing, Jiexiu and
Lianyou 2008)2, this 8.0 magnitude earthquake caused extensive damages and heavy
losses, mainly in Sichuan, Gansu and Shaanxi Provinces, and caused some damage in
another seven provinces. As of 25th September, the official death toll stood at 69,227
lives with 17,923 people missing, and 374,643 people injured (see Table 7). Totally
46.25 million people were affected by the earthquake. Besides, a great number of rural
and urban houses collapsed, infrastructure facilities were damaged on a large scale,
agriculture and industry suffered from heavy losses, and the ecology and environment
encountered severe destruction. Geological hazards induced by the earthquake, such as
landslides, rock falls, debris flow and barrier lakes, were experienced at an uncommonly
high level. The total amount of direct economic losses caused by the Wenchuan
earthquake is estimated at RMB 852,309 million, and losses in Sichuan, Shaanxi and
Gansu Provinces are estimated at RMB 845,136 million, making up 99.16% of the total,
among of which losses in Sichuan, Gansu, and Shaanxi Provinces were RMB771,770
million, RMB50,535 million, and RMB22,830 million, respectively, making up
91.32%, 5.98%, and 2.70% of the total losses in the three severely affected provinces.
5.98%
2.70%
Sichuan
Saanxi
Gansu
91.32%
5.61%
17.08%
Social
Infrastructure
55.05%
22.26%
Productive
Cross
Figure 6:
A. Percentages of Direct Economic Losses in Three Severely Affected Provinces
B. Percentages of Direct Economic Losses in Different Sectors
In general, the Wenchuan earthquake affected 10 provinces/cities (Sichuan, Gansu,
Shaanxi, Chongqing, Yunnan, Hubei, Guizhou, Henan, Shanxi and Hunan), 417
counties (cities, districts), 4,667 towns and 48,810 villages. The total disaster area
covered 500, 000 square kilometers, in which the worst affected 51 counties (cities,
districts) in Sichuan, Gansu, and Shanxi Provinces covered 130, 000 square kilometers.
Particularly, huge tremors from the first wave were felt throughout the country, rattling
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buildings in both Beijing and Shanghai, and smaller shocks were felt as far as Thailand
and Vietnam. The situation became more serious when three strong aftershocks
measuring 4.8, 5.5 and 5.8 respectively continued to occur in the quake areas and hit the
Sichuan-Gansu border region. As a request, many researches about the impacts of the
earthquake on the affected regions have been carried out to find for the overall planning
of the rehabilitation process.
Impacts on Sichuan tourism:
The earthquake has tremendously affected all industries in the quake-hit areas, with
no exception of the local tourism.
a) Pre-disaster situation
Tourism in Sichuan belongs to the service sector which contributed 34.9% of the
economic growth in Sichuan. The development of the service sector is particularly
important, as it provides jobs not only for new additions to the labor force, but also for
transferred farm laborers. Therefore, services play an irreplaceable role in developing
the economy and promoting social stability in the affected areas.
Located in the country's southwest mountainous areas, Sichuan is well-known by
its diversified scenic spots, including Jiuzhaigou, Emei Mountain and Wolong Giant
Panda Protection and Research Center. Tourism and travel accounted for more than 8
percent of the province's gross domestic product. Figures from the National Bureau of
Statistics show tourism revenue of Sichuan Province hit 121.7 billion yuan in 2007, up
24.3 percent year on year. Sichuan received 185.7 million domestic travelers and 1.71
million foreign travelers in 2007 (Xinhua News Agency 15 May 2008).3
b) After-disaster situation
Due to the earthquake, transportation was hardly moving, and service
establishments were closed for several weeks in the aftermath of the disaster. Most of
the tourist destinations, including cultural heritage sites in Sichuan Province, were
wrecked by the earthquake. Overall losses to the service sector are estimated to be RMB
41.13 billion. Also according to a comprehensive study (LingLing, Jiexiu and Lianyou
2008), many travel agencies have also had to suspend their activities because of the
non-availability of tourist destinations. The combined effects of the earthquake means
the situation regarding tourism-related employment is grave. Over 300,000 people have
lost their jobs and the average occupancy rate in hotels has been less than 25%.
Additionally, some of the unaffected tourist destinations have had no tourists because
the transportation infrastructure for bringing tourists to those areas was not able to
function and the government introduced a tourism prohibition to those regions.
Consequently, the gross income from tourism in May in Sichuan decreased by 64.7%. It
is hard to quantify the long term effect of the disaster on the development of tourism in
Sichuan, but it is clear that the effects will be severe and long-lasting. So far the
percentage of losses in tourism has been highest (53%) compared with commerce, real
estate and finance in service sector which were 13%, 30% and 4% respectively.
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13%
4%
Tourism
Real Estate
53%Finance
Commerce
30%
Figure 7:
The percentages of losses in Tourism, Real Estate, Finance and Commerce
The earthquake affected all resources necessary for developing tourism like natural
reserves, cultural heritage, natural ecosystem or biology diversity. On a website of
China, experts said that the earthquake will have little long-term impact on the
province's tourism industry but the short-term impact is severe because after the quake
hit on Monday the China National Tourism Administration (CNTA) ordered all local
travel agencies to halt its planned journeys destined to or passing through quake-hit
areas and the public is asked not to visit the areas in the near future. There were also
some other comments about the impact of the quake:
- Wu Jiaoli, an expert with Ctrip. com, a renowned national online traveling
service company, said that the quake had given a severe and abrupt shock to the tourism
and traveling industry in the areas. The company had canceled several planned tours out
of concern for safety.
- “The earthquake might cut the inflow of foreign tourists even more”, said a staff
member surnamed Huang in a travel agency that deals in arranging domestic travel for
overseas tourists.
However, responding to Xinhua News Agency, Dai Bin, the vice president of China
tourism institution with the CNTA, in the article “Tourism in quake-hit Sichuan
encounters severe but short-term problems”3, told that “the prospects for the tourism
industry this year may not be as bright as in the previous years, but it will not persist long”.
4.2 Plan of Recovery Marketing
After the earthquake, Sichuan has been working on the reconstruction plan of its
tourism sector. According to the plan, the province raised nearly 200 billion (nearly
US$29 billion) from both the governments and investors for the reconstruction of the
sector (Sichuan reopens to tourists, full recovery by 2010, 2008)4. Besides, Sichuan
reopened 12 cities and one prefecture to tourists in a move to revive its once-booming
tourism industry, which include Zigong, Panzhihua, Luzhou, Suining, Neijiang, Leshan,
Nanchong, Yibin, Guang'an, Dazhou, Meishan and Ziyang and the Liangshan Yi
autonomous prefecture and some visitors' attractions were reopened to visitors before
June 15, 2008.
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According to Zhang Gu, chief of the Sichuan provincial tourism administration on
chinadaily.com.cn, Sichuan would promote visits to its attractions by locals in the
province and ask provinces and cities which were helping Sichuan in its after-quake
reconstruction to organize tourists to Sichuan and the fact really proved the
effectiveness of this. It also means that the international market was just considered as a
second priority while the domestic market was focused as the main one.
Pricing strategy
• To promote tourism hard hit by the May 12 earthquake, many attractions in
Sichuan were open free of charge, which was in response to the Sichuan Provincial
Tourism Administration's decision to partially reopen the provincial tourism market on
June 15 (Cui Wei, 2008). The typical example for this is the Lidui Park (48 km
northwest of Chengdu) which was open free of charge for three months.
• Moreover, Sichuan province also launched preferential policies on tourism
named as "price lowland". For example, some scenic spots have provided tickets at half
price or for free, and 20 million "panda cards" have been issued. All of these measures
have obtained favorable social effect and economic benefits.
Product strategy: “Earthquake Tourism”
• In August 2008, local officials in the south-western Chinese province of Sichuan
announced plans to help restore tourism by turning the area devastated into a tourist
attraction6. It means that the province could incorporate a number of new sights along
the fault line that runs through Wenchuan, the epicentre of the 8.0-magnitude
earthquake. As a result there is a new sector, the “Earthquake Tourism” where travelers
come to Sichuan to visit the ruins from the quake7. These would include a memorial in
Yingxiu, a museum of quake ruins in Beichuan and a “quake lake” at Tangjiashan. “The
tourist route for the Wenchuan quake ruins will demonstrate the protection of such ruins
and the quake survivors’ spirit of perseverance,” Zhang Gu, chief of the Sichuan
Provincial Bureau of Tourism quoted as telling the local news agency, Xinhua. In May
2009, China officially endorsed ‘disaster tourism’ as a form of economic subsidy to
devastated areas as Wu Min, deputy director of the Sichuan provincial tourism
department said to the Xinhua News Agency that “There is a huge tourism market in the
ruins. We can not block the tourists out and we also hope the tourists watch their
behavior and not hurt the quake survivors’ feelings.”8
• In addition to earthquake-related sights, the planned tourist zone extended to
cover southern Gansu province and the Hanzhong region of Shaanxi province and
incorporated some of Sichuan’s more conventional attractions, such as a giant panda
habitat and villages of the ethnic Qiang people.6
• Besides, as reported on the article “Earthquake Memorial or Tourist
Attraction?”, soon after the quake, the central government spoke about building
earthquake museums to remind people of the disaster. Under the initiative, which had a
price tag of 2 billion yuan, museums were built in Wenchuan, Beichuan, Hanwang and
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Hongkou counties. Dujiangyan, Pengzhou, Mianzu, Maoxian, showed interest in
building their own memorial museums or markers, no matter whether funding would
come from the central government or from local residents. They had their eyes on the
same goal which is to attract tourists as well as to boost the local economy.9
• Taking the post-disaster recovery and reconstruction as an opportunity, Sichuan
province has integrated the tourism resource and, on the basis of reinforcing the strength
of invitation of investment and driving the construction of important projects, made up
an overall plan on travel routes, so as to develop the advantage of Sichuan tourism
products as a whole. In order to meet demands of self-help and self-drive tourists for the
trip, Sichuan Tourism Bureau has designedly launched about 1,000 self-help and selfdrive travel routes with measured strokes and integrated scenic spots, towns and roads
into route portfolios, which are featured with such tourism factors as "meal, dwelling,
trip, tourism, shopping and entertainment"5. Before June 1, 2009, total 1,000 routes
have been published on the internet successively with the coverage of 21 cities,
autonomous prefectures and main scenic spots. The total hit rate has been more than 4.5
million times on the internet.
4.3 Promotion strategy
• As stated on www.chinadaily.com.cn, the province will stress the promotion of
the Chengdu-Mount Emei-Leshan Giant Buddha route in the second half the year 2008
to show Sichuan is safe first. In addition, to encourage domestic travels to the ruin sites,
in a ceremony marking the Lidui Park’s reopening, the Dujiangyan municipal
government presented 100 "gold cards" to soldiers, policemen, medics, volunteers,
donors, journalists and representatives from international organizations to appreciate
their contribution to relief work in the city. With the cards, holders who have
contributed to relief work can visit the Dujiangyan Irrigation Project and Mount
Qingcheng, which is birthplace of Taoism, the only religious indigenous to China, free
of charge during their lifetime. Particularly, the issuance of the cards was not limited to
all those who have helped its relief work.4
• The boom in disaster tourism has received official endorsement not only from
local officials but from party leaders too. A report prepared by the communist party
school in Dujiangyan - one of the most ravaged cities in the earthquake zone - has called
on officials to "actively promote the earthquake tourism brand" in order to transform
destruction into a "valuable tourism resource." Some localities have even issued
vouchers, encouraging residents to travel to the earthquake area as tourists and help its
recovery by sightseeing and spending. The government of Macao Special
Administrative Region for instance, has subsidised Macau tourists to Sichuan with
vouchers of 1,500 RMB (220 US dollars) each.8
• In order to explore overseas market, since June 2008 to now, Sichuan province
has invited travel agents and media delegations with total 510 persons in 15 batches
from various countries and areas, such as South Korea, Japan, the U.S. and France, to
investigate in Sichuan, and has dispatched delegations totaling 11 batches to
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propagandize in some other countries and areas. In March 2009, leading Sichuan
tourism promoting delegation, Huang Yanrong, Vice-governor of Sichuan province,
attended a tourism exhibition held in Berlin, Germany. It was the first time for Sichuan
province to exhibit its tourism in the world after the earthquake, the practice which
evoked strong echo.5
4.4 The results
Currently, except for very few severest disaster areas, the tourism market in Sichuan
province has welcomed tourists comprehensively. Xue Yaping, Deputy Director of
Sichuan Tourism Bureau, told the reporter that from January to October of 2009,
Sichuan province had achieved the tourism revenue of RMB125.01 billion yuan, up
43.4 percent than the same period of 2008. Among the revenue, the foreign exchange
achieved US$180.85 million by welcoming 586,200 foreign tourists. "It can be said that
the tourism market of Sichuan province has recovered to and surpassed the level before
the earthquake." - Zhang Gu, Director of Sichuan Tourism Bureau, expressed.5
• On the website ipsnews.net, the state agency reported that ruins from the quake
had become a draw for visitors - attracting hundreds of thousands of tourists.
Donghekou village where only 300 of more than 1,400 villagers survived a landslide
triggered by the earthquake is now amongst the hottest tourist destinations in the
Sichuan province for the “Earthquake tourists” as more than 260,000 tourists had visited
the Donghekou Relics Park in 2009 since it opened in November 2008.7
• The numbers of tourists that have swarmed to the earthquake zone are
astonishing. According to the Sichuan Tourism Office, during the Chinese New Year
holiday more than 7 million people flocked to the mountainous region where the
earthquake wiped out whole towns, squashing schools, factories and homes.
May Day weekend saw another spike of tourists - with 2.9 million people arriving in
Chengdu and heading out on specially designed one-day package tours of the
earthquake zone. Such tours include visits to quake relics parks, public cemeteries
where the ashes of many dead are buried, and sightseeing platforms to observe
panoramic views of the destruction.8
• The plans of building earthquake museums, markers or parks also have had
some success. In Qingchuan, 2,000 visitors have been to the park to pay respect to the
earthquake victims, “which has stimulated the sale of owners, food and souvenirs, and
brought about the opening of 50 hotels in the area,” Shen Xingna, the county’s tourism
director, told reporters.9 The local government already recovered its initial investment
of 3 million yuan.
5. Vietnam under the global economic crisis 2007-2010
5.1. The global economic crisis’ effect on Vietnam’s economy in general and
tourism sector in particular
Financial crisis of the period 2007-2010 has resulted in the collapse of large
financial institutions, the bailout of banks by national governments and downturns in
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stock markets around the world. It is considered by many economists to be the worst
financial crisis since the Great Depression of the 1930s. (http://en.wikipedia.org).
Vietnam, one of fastest growing economy (Bản tin Tài chính Chứng khoán ngày 6/5,
2008), was not out of this global impasse. According to the Washington-based World
Bank (WB), the global financial crisis and economic recession slowed economic growth
in Vietnam. The impact was apparent in the first quarter of 2009, when GDP increased
only by 3.1 percent from a year earlier, or 4 percentage points below the average firstquarter growth for the last few years. However, positive signs of recovery have been
emerging as a result of the government efforts to support economic activity. (Vietnam
navigated global financial crisis relatively well, 2009).
The impact of the global economic crisis (GEC) on Vietnam economy was obvious.
However, since everything is connected, the industries interrelated directly and
indirectly; it brought about the impact on tourism industry (Borislav Hadzhiev, 2009).
According to Alieu Secka (Global Economic Crisis Affects Tourism, 2009), following
the global economic crisis, many people in the West were laid off by their employers
and as a result they did not have money to travel as tourists. He said many people in the
west did not have access to loan facilities following the global economic crisis and as a
result they did not have money to travel abroad. Whereas, international tourists have
been accounting for a significant sector to Vietnam tourism industry. In September
2009, the seminar “Capacity building for Vietnam’s tourism businesses against the
backdrop of the global financial crisis” was held in Ho Chi Minh city to discuss lessons
and recommendations for local tourism businesses to improve their capacity (Financial
crisis, swine flu blamed for tourist fall, 2009). Discussing Vietnam in particular, the
presentation reviewed a negative fluctuation in tourists’ arrival since its second quarter
in 2008. From 1.3 percent increase in the total arrivals in the second quarter, tourism
industry quickly saw a slump at negative 9.6 percent in the third quarter. The fluctuation
continued during the first seven months of 2009, with the bottom recorded a drop of
28.6 percent. In an effort to get its head above water, the industry managed to stem the
fall to 10.1 percent in June. But, in the next month, the collapse continued, with a 17.8
percent at loss. "The number of international arrivals has been down for months, but the
situation has seriously worsened since October," said Vu The Binh, a senior official at
VNAT (Vietnam tourist numbers plummet as crisis bites, December 2008).
Under those circumstances, all the sectors under the tourism industry were affected,
excluding hospitality, travel operators and airlines. Representatives of many travel
agencies showed the worries when the number of tourists canceling tours were
increasing. There were also a lot of hotels which held the reservation rate of only 30%
for the first quarter of 2009 (Du lịch lâm vào khủng hoảng: Cấp bách giảm giá,
December 2008). Mr Vu The Binh, the head of travel department, attached the
importance of this problem. Whereas, the general director of Vietnam Airlines, Pham
Ngoc Minh told that from September 2008, the number of passengers on international
flights was negative compare to the same period of 2007 and the situation could be the
same for domestic flights after the lunar New Year holiday. According to Mr Minh,
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2009 would be the year of tense competition in terms of destinations, service quality
among countries. (Du lịch lâm vào khủng hoảng: Cấp bách giảm giá, December 2008).
5.2. Vietnam tourism industry’s practices in overcoming the crisis
In front of this issue, the National Administration for Tourism (VNAT) drawn out
solutions and criteria for all the tourism sectors to follow. According to the VNAT
General Director Nguyen Van Tuan, the agency would focus in five areas to get ready
for the recovery of tourism: 1/ continue the ‘Impressive Vietnam’ discounted services
campaign; 2/ advertise Vietnam at home and abroad as a tourist destination; 3/ organize
professional training; 4/ continue upgrading facilities and 5/ improving the quality of the
tourism experience (Travel agencies and hotels preparing for post-crisis period, 2008).
Though the global economic crisis has cratered Vietnam’s tourist market, some
tourism sector heavyweights have concluded that it was the right time to restructure
themselves, improve service quality, and launch marketing campaigns. The practices of
Vietnam tourism sectors are put in more detail in the following respective sections.
Price strategy
The VNAT called for the enterprises to participate in the discount program to attract
tourists. At the very beginning, the program attracted 61 hotels and 34 travel agencies,
whereas, the hotels reduced the price up to 30-50% (Ảnh hưởng của khủng hoảng kinh
tế thế giới đến ngành du lich Việt Nam, 2009). At the same time, VNAT also launch a
website which provided information about the discounted services of all enterprises in
sectors of hospitality, restaurants, transportation, travel agencies, shopping centers, etc.
at http://www.promotours.gov.vn. In this program, the most mentioned solutions were
the discounts in tour packages, hotel rooms, visa fees, etc. According to the survey of
PATA, one third of tourists thought that the economic crisis did not affect much on their
traveling plans in which the choice for cheap and short packages were dominated (Giải
pháp du lịch thời khủng hoảng: Ngắn ngày, giá rẻ, 2009). Hence, the discount program
was at that time considered to be the foremost solution.
Besides, Vietnam tourism industry decided to target at local markets such as
Singapore, Japan, Hong Kong, China, Taiwan, etc. in order to maintain and develop
tourism market during the crisis period. These are also groups of tourists who are more
price-sensitive than Australian, English, French, American, Indian tourists whose travel
plans are less affected by economic crisis (Giải pháp du lịch thời khủng hoảng: Ngắn
ngày, giá rẻ, 2009).
Promotion strategy
Nevertheless, in such situation, only discounting was not enough. Some specialists
in tourism industry attached the importance of launching new programs about
advertising and promotional activities. Mr. Pham Ngoc Minh, general director of
Vietnam Airlines said that instability in some Asian countries (such as Thailand and
India) resulted in less safety and less competition in some traditional destinations. He
added that Vietnam could grasp the opportunity, takes the full advantage of stable
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politics, safe security and diversified tourism products… by promoting marketing
activities (Du lịch lâm vào khủng hoảng: Cấp bách giảm giá, December 2008).
Accordingly, travel agencies and tour operators were putting more effort in
launching marketing campaigns. Vo Anh Tai, Saigontourist Director, said that his firm
had been expanding Saigontourist’s system in Hanoi and was opening a branch in Can
Tho to access the Mekong Delta market (Travel agencies and hotels preparing for postcrisis period, 2008). Tai added that while waiting for the opportunities to come, the firm
is emphasizing training and pushing up marketing, particularly internet marketing, so
that Saigontourist could be primed to greet tourists as soon as the crisis ends. He
concluded that companies in the travel business need to detect changing tourist
preferences so as to draw up reasonable marketing and advertisement policies. This was
generally considered to be the way that the sector prepared and overcome the crisis.
One of the efforts of VNAT in promoting the image of Vietnam to tourists was
opening the campaign “Impressive Vietnam” since the beginning of 2009.
Comprehensively, the goal of the campaign was to promote Vietnam’s image abroad,
while focusing on some main international markets which were put on top by VNAT.
One of the traditional markets of Vietnam is China with the population of over 1 billion
people. A lot of promotional activities were held in order to introduce the image of our
country, people, culture, tourism’s potential to Chinese people. The campaign
“Impressive Vietnam” was intended to be promoted till early 2010 with the organization
of events, exhibitions, roadshows in Bei Jing and Shang Hai. Beside the main markets
such as China, Japan, France, Western Europe, Australia and New Zealand, Vietnam
also extended to new markets like Russian, Eastern Europe, North America, Korea and
Middle East. The head department of Vietnam tourism cooperated with agencies of the
Foreign Affair to hold “Vietnam week in USA” at the end of 2009. Besides, VNAT also
promoted Vietnam’s image and tourism via public media overseas. Together with
releasing images of Vietnam’s heritage on Heritage, the magazine of UNESCO,
Vietnam tourism was advertised on JETSTAR magazine which was followed by more
than 1 million readers worldwide. What is more, those images and detailed information
about Vietnam tourism can be found in “Tourism handbook 2010” published by PATA
(Pacific Asia Tourism Association) and the World Tourism market daily magazine with
over 60,000 publications to biggest international tourism trade fairs and exhibitions.
(Quảng bá hình ảnh Việt Nam ra nước ngoài, 2009). Specially, one clip about Vietnam
tourism was shown on BBC World starting in early April, 2009. Specifically, the clip
was broadcasted 320 times, each time 30 seconds. This campaign was divided into 3
programs, including 8 weeks in Asia-Pacific, 6 weeks in Europe and 6 weeks in
America. BBC is the channel broadcasted worldwide in 200 countries in different
regions. According to the statistic, the channel is watched daily by 276 million
households and it appears in 1.5 million hotel rooms all over the world. (Quảng bá hình
ảnh Việt Nam còn thiếu và yếu, 2009)
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Product Strategy
Regarding on tourism product development, the new strategy would be to focus on
potentials like natural landscapes, cultural heritage especially the World Heritage
sites,and unique cultural communities. One quite new product put more on development
was sea tourism which was considered as an important product for both local and
international tourists. (Consultants sought for long-term tourism development plan, 2010).
In the hospitality industry, Vietnam’s luxury hotels have been particularly hard hit
by sharply lower tourist arrivals. However, a Vietnamnet reporter found managers in the
elite hotel sector are looking to the future rather than moaning about the present. (Travel
agencies and hotels preparing for post-crisis period, 2008). Meaningfully, hoteliers
were putting more effort in renewing their products and services. As an example, the
five stars Movenpick Saigon was spending $25 million on an 18 month upgrade to its
rooms and services. There was the fact that guests were scarce at most of Hanoi’s five
star hotels (Phan Huy Tien, Travel agencies and hotels preparing for post-crisis period,
2008). On the other hand, hoteliers believe that today’s reduced travel budgets, canceled
meetings and ‘staycations’ (stay-at-home vacations) are tomorrow’s pent-up demand,
said Patricia Neo of Starwood Hotels & Resorts. Accordingly, Starwood planed to open
the Sheraton Nha Trang in November that year. The group had put into operation a
telephone number (free of charge) which clients could use to book hotel rooms at 950
hotels run by Starwood worldwide.
Place Strategy
The effort in recovery is not only the job of the head department of tourism but also
the concern to every tourism enterprise and local authority. VNAT has done its best in
trying to involve all sectors from provinces to individual business into the effort of
tourism recovery, fulfilling the strategies and goals of tourism development before,
during and after the crisis.
5.3 The result of the policies in recovery effort of Vietnam tourism
The work of promoting the image of Vietnam tourism to the big and key market has
been more and more effective. Specially, Vietnam was chosen to be the venue for
international events such as the East Asia-Pacific committee meeting, Miss Universe,
Asian Indoor Games, etc. This is the driving force for Vietnam tourism to increase
drastically in 2010. In January 2010, UNWTO signed the tourism corporation between
the Ministry of Sport, Culture and Tourism (MOSCT) and UNWTO. Accordingly,
UNWTO would continue to help Vietnam check and adjust tourism planning policies;
give technical assistance in promotional activities; improve the human resource quality
for Vietnam tourism via short training cources. (Động lực cho Du lịch Việt Nam tăng
trưởng trong năm 2010, 2010).
In the first quarter of 2010, Vietnam tourism industry received over 1.3 million
international tourists, increased more than 30.6% compare with the same period of
2009. Nguyen Van Tuan, the general director of MOSCT, said Vietnam tourism
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developed spectacularly despite of objective factors including the economic crisis.
(Động lực cho Du lịch Việt Nam tăng trưởng trong năm 2010, 2010).
The above statistic showed that Vietnam tourism went on the right direction in the
recent period of crisis recovery, which is a positive sign of Vietnam in the year 2010.
This result can be gained thanks to the effort of the whole industry, the provinces in the
whole country to achieve the target and the plans of the year with big events such as
Hanoi 1000 year anniversary, 50 year anniversary of tourism industry, Hue Festival
2010, etc. This is the opportunity for the development of Vietnam tourism.
Even though the figure of 2010 looks good compare with 2009, it is still far from
what was expected. The tourism administration once expected that Vietnam would
receive around six million foreign visitors in 2010. However, this may not be realized
because the country just received nearly 2.2 million international travelers in the first seven
months of this year (Consultants sought for long-term tourism development plan, 2010).
Considering some shortcomings in the implementation of the proposed plans,
Saigontourist Director Vo Anh Tai commented that other countries seemed to have had
a more rapid economic recovery and have better dealt with the crisis than Vietnam
(Travel agencies and hotels preparing for post-crisis period, 2008). Tourism
administrations in many countries had very quick response to their crisis. Thailand
launched the campaign “Thailand apologizes” to attract tourists, decreased the room
price up to 70% in Phuket, 50% in Bangkok. Other countries such as Indonesia,
Malaysia, etc. besides reducing the price, they invested hundred of million USD in
promotion for the last months of 2008. However, in Vietnam, until December 10, 2008,
there was one meeting to discuss about the urgent solutions to attract tourists to be held.
(Du lịch lâm vào khủng hoảng: Cấp bách giảm giá, December 2008). Under 10 days
that Thailand ended its political crisis, tourists were surprised of their campaign to
encourage tourists to come back. Whereas, the tourism administration, the tourism
enterprises continued discussing and it was untill January 2009 that cheap tourism
packages were launched. (Ảnh hưởng của khủng hoảng kinh tế thế giới đến ngành du
lich Việt Nam, 2009). Expressing the same viewpoint, a Mexico Tourism Board official
noted at a workshop that Vietnam tended to be very slow to draw up new tourism
policies when conditions changed (Travel agencies and hotels preparing for post-crisis
period, 2008). Baron Ah Moo of the Vietnam Business Forum’s tourism consultative
group, says he was been told that the initial budget for promoting Vietnam’s tourism in
2009 was $2 million. Meanwhile, Thailand announced it would provide $140 million to
revive tourism after the Bangkok airport was shut down for several weeks by political
upheavals, additional to its ‘regular budget’ of $80 million designed for 2009. Malaysia
reportedly has reserved $180 million for ‘Truly Asia’ campaign (Travel agencies and
hotels preparing for post-crisis period, 2008). Additionally, according to The HCM
City Tourism Association, the discounts of 10 to 30 per cent did not make a "strong
impression" on tourists when many countries in the region were offering up to 80 per
cent rate cuts. (Hotels spoil plan on low-cost tourism, 2009). Hence, this is not only the
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problem of being slow in drawing out the strategies but also in putting sufficient amount
of investment in recovery tourism.
For the second issue, the strategies for tourism recovery seemed not to be
widespread to and accepted by all the private enterprises and local region of Vietnam. In
fact, many hotels did not participate in the program of reducing room rates. Some said
they did not honor their commitment because they were still waiting for the
Government’s incentives for those involved in the campaign which mainly related to
taxes, electricity and water prices. Some hotels did not want to reduce their prices
because it could affect their prestige, while others were afraid that if they cut tariffs
now, they would be unable to raise them in the future. Nguyen Duc Quynh, deputy
executive director of the Furama Resort Da Nang, said Furama had not participated in
the campaign because its room prices were already reasonable. (Hotels spoil plan on
low-cost tourism, 2009).
III. Assessment of findings
1. Good practices
Considering all recovery plans for marketing the destination in some countries after
crisis or disaster, it is easy to see some common good practices between them, one of
which is the promptitude and sensibility of local officials in renewing their products and
services to fit each of their situations. Sichuan in China proved that it was really
successful in this point when the local authority turned the area devastated into a tourist
attraction called “disaster tourism” or “Earthquake tourism”. In general, this can help to
create a valuable tourism resource from the disaster as well as catch the interest of a
numerous people/tourists who are attracted to sites of catastrophes. In addition, these
new tourism products also raised a strong campaign like “Stay another Day” in
Cambodia, in correcting the image of the destination that had to suffer from heavy
losses and damage. As a result, they become a form of economic subsidy to devastated
areas in terms of contribution to the country economy in general and to the tourism
industry in particular.
In order to response to unexpected crisis, all of the destinations focused on the
domestic market as the main priority. The reason for this is simply because domestic
tourists have a more convenient access to the sites in terms of distance than international
ones. In addition, more important, they are more willing to spend their trips and
attention in subsidizing their national tourism industry itself. As a result, that practice
increased the number of shorter visits with lower expenditure, which took part in
improving the economy situation as well.
Besides, most of destinations experiencing crisis used strategy of reducing price,
even reopening attractions for free of charge. This is not a new point but seems to be
effective in most situations as for tourists with not very high income, money is still the
first concern. For example, in Bali, the large concession from airlines, hotels and tour
operators lured the tourists back to Bali, making it become a more affordable place. By
this way, the destination can encourage a wider market to visit the ruins or the regions
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and have an opportunity to show them that it is still safe for people, which leads to a
positive image about the destination in their mind.
The success of renewing products, resegmentation and low price strategy cannot
exclude the good collaboration between the stakeholders to recreate the image of the
destinations. The promotion campaign was conducted widely in both national and
international scope to ensure the safety and security as well as the remaining attractiveness
of devastated sites. Thanks to the prompt response from the local authorities, right after the
crisis, every effort was made to advertise the local tourism in tourism conferences, tourism
exhibitions, especially media. This not only achieved the opportunity to explore overseas
market but also recovered the belief and preference of customers.
2. Bad practices
2.1 Low and reactive response
The first thing to rise is low and reactive responses when the crisis happened.
Despite admirable response efforts and altruistic intentions it is apparent that prior to the
tragic events of October 12, 2002 Bali had no operational crisis management plan or
integrated recovery strategies. While subsequent programs and activities have attempted
to address issues of social and economic development, crisis management and
promotion, experience has revealed some of the disparities between theoretical ideals
and practical realities (After the Bali).
Furthermore, after planning the strategy, there is a slow in drawing out strategies
long after crisis. In Vietnam, the strategies are implemented less promptly compared
with other countries like Thailand.
The reactive action also reflects in tourism product: In Hong Kong, the tourism
product is short term with the aim of attracting customer come back. Thus, Hong Kong
need to create the sustainable long term product that not be affected by crisis or develop
the unique product.
2.2 The cooperation of relevant stakeholders
There is a need of the unity between the relevant bodies (Du lịch thời khủng hoảng:
Phải tìm được tiếng nói chung). In a conference of VNAT (“Discussion about the way
to increase the number of international tourists to Vietnam”) in Dec 2008, all members
agreed about the problem of Vietnam Tourism is the collaboration, the links between
tourism suppliers in promotional campaign. Moreover, the promotional campaign did
not involve all relevant bodies. Tourists can be confused and suspicious about the
destination with the instability in price and quality of service.
The case of Bali shows that within the cooperation there still exists problem. When
the lack of communication and regularly updated information among the participations,
this lead to the corruption and misuse of public funds. A seemingly valid proposal to
establish a jointly funded co-ordination centre to operate as a centralized data collection
and dissemination point was dismissed by the majority without further discussion or
clarification. While unanimous decisions are rarely a political reality, the Bali Recovery
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Group seemed to lack the consensus for effective, efficient collaboration. In a country
renowned for its corruption and misuse of public funds many organizations remained
reluctant to offer full accountability and transparency (Karyadi 2003).
2.3 Others
The business ethic is big issue tourism enterprise must take careful consideration.
Actually, human resource is not exploited thoroughly in the crisis period. Many of them
were unemployed or had to take unpaid job. In the following period, the lack of human
resource will be a big problem.
Following that, the sensitivity is concentrated to the memorization place of crisis. In
the earthquake crisis, this also created a question whether it is moral to capitalize on
other people’s suffering and received oppose from some people who worried that China
lacked the courage to reflect on and preserve the painful memories of calamities
(Antoaneta Bezlova, Cashing In on Earthquake tourism). They saw the craze of
‘earthquake tourism’ as a perturbing sign.
IV. Recommendations for Vietnam in tourism recovery after crisis
In order to effectively recover tourism, regarding any type of crisis, Vietnam has to
do more and learn more from practices of other countries.
Firstly, Vietnam still lacks experiences in tourism recovery after crisis. That is the
reason why there was a slow in finalizing the strategies from the head government,
resulting in slow implementation of policies. To deal with this shortcoming, Vietnam
should have proactive plans and policies for any crisis to occur. Waiting until the crisis
to come that policies are discussed is not a wised strategy. Lessons from Thailand showed
the success and advantages of quick actions that the country of crisis has applied.
Low pricing of tourism products and packages was one of effective strategies that
the head department of tourism has directed all tourism sectors to follow. Yet, the result
did not show a full satisfaction from managing people. This is due to the lack of
assertive discount decision-making from the head department in general and individual
tourism enterprises in particular. While the discount packages ranged from 30-50%,
they did not affect strongly to buyers’ mind that had to suffer from decreased salary and
increased inflation rate. Especially, it is hard to touch international tourists since they
face up with numerous choices of cheaper packages from other countries. Thailand for
instance offered packages of flights, accommodation, attractions, etc. with the discount
of up to 80%, which strongly affected tourists’ choice of destination.
Regarding product strategy, Vietnam seemed not to make the most of its tourism
resources in creating tourism products. Even though mentioning about creating more
new and diversified tourism products, there was almost no outstanding or different
packages in the period of recovery compare with the previous period. Apart from
promoting campaigns of general image “Impressive Vietnam” or “Vietnam, the hidden
charm”, it is the job of all individual enterprises to create their own special and creative
packages to show a different image of Vietnam tourism other than using the old ones.
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Recently, Vietnam has identified its new product of MICE tourism. However, sufficient
care and added values for this product are out of notice from tourism people in order to
make Vietnam an outstanding destination for MICE to international tourists. Hence, this
tourism market needs being paid more attention and even made to be the typical product
of Vietnam. Besides, the high quality of tourism products needs special attention to
show the effort of Vietnam in tourism recovery and its care for its customers.
In term of promotional strategy, it was good practice of Vietnam to target at specific
international markets such as China, Japan, etc. However, it is a should to firstly pay
attention to the domestic market as this accounts for a big market of Vietnam tourism.
Domestic tourists are quite picky in buying decision, yet they are easier to persuade if
the benefits are shown. What is more, Vietnam has been successful in a lot of
international event biddings. Nevertheless, the promotional activities during these
events have shown to be ineffective. What to recommend for Vietnam is to establish
more activities to promote Vietnam tourism in events which are held in Vietnam and
events which are held in other countries. Specifically, tourism fairs can be held a long
with other activities such as invitation of celebrities, journalists of prestigious
magazines or gifts to the delegates which shows the image of Vietnam tourism.
Apart from those above suggestions, it is a must for the head department to attach
the importance of coordination among stakeholders in implementing the proposed
trategies. There was a fact that the lack of coordination among stakeholders affected
partly to the success of recovery plans. So, the head department should put more effort
in encouraging all tourism enterprises, all national, provincial and local authorities in
implementing the policies. One way to encourage tourism sectors in gaining the general
objectives is to offer them incentives. That may be some benefits such as having the
right to advertise in some specific media.
Ensuring the appropriate implementation of these strategies, Vietnam can take the
advantage of the country of safety and peace in the eyes of tourists and effectively
recover its tourism industry. To any kind of crisis, these practices and recommendations
are critical in order to gain the most successful result.
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COUNTRY RISK ANALYSIS IN VIETNAM
Written by: Dang Thu Trang, Nguyen Thi My Hanh (3K-07)
Tran Thi Quynh Trang (3K-07), Phung Thi Anh (2K-07)
ABSTRACT
We conducted this research in order to help the foreign investors have an overall
view about the level of risk they may face when investing in Vietnam. There are two
main risks which would be taken into consideration, the current political and financial
issues. In terms of political risk, the attitude of Vietnamese consumers toward foreign
goods and services, the tax condition and other actions of host government to local firm
or the copyright law, the bureaucracy and corruption recently were those aspects we
wanted to analyze. About the financial risk, we considered the fluctuation of some main
economic indicators like the GDP growth rate, GDP per capital, inflation rate, the
exchange rate and real interest rate. After evaluating each criteria of risk, we give some
recommendations for the investors with the hope that they can overcome all the
difficulties to successfully get into Vietnam.
PART 1: INTRODUCTION
1. INTRODUCTION
As a result of war, Vietnam's economic development suffered compared with other
neighboring countries. However it is catching up fast. Despite the 1997 Asian economic
crisis, Vietnam's economy has expanded rapidly since the Communist Party of Vietnam
turned away from the communist economic policies in the 1980s. A sustained growth
rate of around 8% for over 19 years shows great progression and is one of many reasons
for the increasing number of foreign investors. Vietnam received over US$20 billion of
foreign direct investment in 2007, a record amount with an increase of 70% on 2006
figures, and saw almost 1,500 new projects licensed in the same year. Although the
economy is developing at a rapid rate, entry costs for investors are still low.
Furthermore, with 50% of population of 84 million under 30, Vietnam has a strong
human resource and consuming force. The very cheap labor costs coupled with a young,
literate workforce make business investment a very attractive and lucrative prospect.
The Vietnamese government has shown their commitment to economic liberalization
and international integration. Structural reforms needed to modernize the economy have
been implemented, helping to produce more competitive, export-driven industries.
Vietnam joined the WTO in January 2007. This should give a major boost to Vietnam's
export led economy and should spur on the country's economic liberalizing reforms.
However, problems remain. Reform of state enterprises is proceeding slowly, while
another big issue is the under-development and poverty level in remote ethnic-minority
areas. Although recent statistics show Vietnam in a favorable investment light, it is
crucial to also take note of the country's current economic and political situation. In this
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research, on the perspective of foreign investors, we will focus on analyzing factors of
political and economic risks that they may encounter when investing in Vietnam. And
then we also give out recommendations for foreign investors to overcome and reduce
the risks so that they still can make investments and earn huge profits in Vietnam.
2. METHODOLOGY
Our research methodology requires gathering relevant data from the specified
documents and compiling databases in order to analyze the materials and arrive at more
complete understandings about the level of overall risks in Vietnam in recent years. Our
research specialize in the type of secondary research which involves examining all the
various types of research that are available to the public, collecting data, and forming
some type of opinions about it.
When analyzing aspects of both political and financial risk in Vietnam, we start
with raising the real situation of each with the facts and figures to prove our judgments,
then explain why this issue happens in Vietnam, how the matter creates risks to foreign
investors, compared with another regional countries in Asia. After all, we can assess the
overall level of risk in Vietnam
PART 2: LITERATURE REVIEW
There is a long tradition of research on country risk in the international business
area. In the world, there have had a lot of projects which have been carried out to
analyze the overall situations worldwide in general and in Vietnam in particular. The
challenges posed by the intersection of politics and markets continue to be a topic of
interest to both academic scholars and practicing managers. In forums, official websites
and newspapers, the authors have tried to determine the causes, the facts and figures,
results of economic and political opportunities and threats so that the readers could have
deeper understading of his own country as well as of surroundingsSeveral scholars
(Fatehi - Sedeh and Safizadeh, 1989; Formica, 1996; Kobrin, 1979; Robock, 1971;
Sethi and Luther, 1986) did describe the difficulties involved in developing a precise
definition of political risk and suggest ways to improve the clarity of the domain of the
construct. In general, it is most commonly conceived in terms of (usually host)
government interference with business operation (Carbon, 1979). Schmidt (1986)
defines political risk as "the application of host government policies that constrain the
business operations of a given foreign investment".
Jeff Madura(2006) believed country risk represents the the potentially adverse
impact of a country’s environment on the MNC’s cash flows. Country risk can be used
to monitor the countries where the multinational company is presently doing business. It
can be considered to improve the analysis used in making long-term investment or
financing decisions. The Euromoney indices of country risk note that country risk on the
other hand includes not just political risk but also other factors such as economic
performance (current and future), credit ratings, and a host of other indicators. Cosset
and Roy (1991) suggested that country risk ratings provided by publicly available
economic statistics represent reasonably valid and reliable measurements of country
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risk. Jeff Madura(2006) in his “International Financial Management” book rated
political risk based on attitudes of consumers in the host country, actions of host
Government, Blockage of Fund transfers, Currency inconvertibility, War, Bureaucracy
and corruption. According to him, economic Risk factors include Interest Rates,
Exchange Rate and Inflation(Madura,2006).
Actually, there are 4 types of country risk assessment: Macro-political risk, Macrofinancial risk, Micro- political risk, Micro-financial risk. And the opinions of different
risk assessors often due to subjectivities. There are some techniques of assessing
country risk like checklist approach, delphi technique, quantittative analysis and
inspection visits. In this research, because of limitations, we focus on analyzing the risk
of macro environment, not the micro ones by using the descriptive method.
Many projects have proved that the economy and the stability of a country are the
extremely crucial factors that investors take into consideration before choosing to invest
into any country. Chakrabarti (2001) finds that higher levels of political risk are
generally associated with lower levels of FDI inflow. Click (2005) finds that when firms
invest in higher risk countries, the country risk is compensated by higher returns,
suggesting that foreign investors seek higher returns to compensate for the higher risk of
their investments.
In this research, instead of covering all the issues of overall risk of every country,
we focus on analyzing specific points of political and financial risks of Vietnam only in
comparison with those of regional countries. Our completion of this research is the
result of colleting information from various sources, especially the book“International
Financial Management” of Jeff Madura(Florida Atlantic University), the research of
PERC and a report of Yoshiharu Tsuboi (Waseda University).
This topic creates an endless inspiration for economists to exploit, therefore, we do
this research with the hope that it can be helpful not only for foreign investors but aslo
for further surveys or researches in the future.
PART 3: COUNTRY RISK ANALYSIS IN VIETNAM
As stated above, we are going to identify gradually all the risks that foreign
investors may have to face when investing in Vietnam. There are two sources of risks
forcing earnings generated in Vietnam to reduce out of foreign investors’ expectation.
I. POLITICAL RISK
Regarding political risk first, all the factors determined political risk of Vietnam to
be low or high in comparison with other countries will be pointed out one by one.
1. ATTITUDE OF VIETNAMESE CONSUMERS
Attitude of consumers are considered as one factor in political risk because the
preference of Vietnamese customers toward foreign goods will affect the demand and
then sales volume of foreign made goods. Luckily, according to study result of “Eye on
Asia” program conducted by Grey Group, statistics shows that 77% of Vietnamese
prefer foreign brands. However, average number of foreign brand preference across
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Asian countries is just about 40% (http://www.thesaigontimes.vn). The question raised
is that why Vietnamese people prefer foreign brand. The answer is Vietnamese
consumers have not trusted domestic producers for a long time. In centrally planned
economy, Vietnam lacked of materials, high technological machines, outdated industrial
knowledge; thus; finished products which were low and unstable quality were used to
meet minimum requirements of Vietnamese people. Until Vietnamese government had
“DOI MOI” campaign, Vietnam has changed to market economy. Vietnamese
producers have had more opportunities to develop but they also have to face the fierce
competitions from foreign producers. Foreign firm have sold globally branded products
at a price that Vietnamese people can afford. Apart from high quality, good post
purchase service, products made abroad have been advertised popularly and
professionally. Therefore, foreign goods are trusted and preferred by Vietnamese people
for years and the trend is still maintaining.
In the face of this issue, Vietnamese government has some actions to reduce this
percentage by raising a campaign “let’s buy domestic products”. This campaign has
been carried out in many ways. One of them is having government restrictions on
foreign made products by increasing import tax rate. From 20/6/2008, new import tax
applied for some unfavorable foreign products has been implemented. Import tax rate
on cosmetics product increased by 6% from 30%, tax levied on importing mobile phone
or wireless used items went up from 5% to 8%. Those who imported high engine’s item
had to bear the tax up to 29%. This policy would support “let’s buy domestic”
campaign. Moreover, in December 2009, Prime Minister Mr. Nguyen Tan Dung did
sign the documents which required export to be promoted and import of unnecessary
products to be limited for the purpose of balancing Vietnam trade deficit. (See appendix
1). From the action of preventing foreign products from flowing into Vietnam, the
campaign “let’s buy domestic product” was promised to be successful in the near future.
Moreover, there are some separate websites only used for the purpose of running this
campaign, for example, http://www.dunghangviet.vn, www.daisuhangviet.vn and
http://hangviet.vtv.vn/.
In addition, many newspapers and other means of media had a lot of activities in
order to raising awareness of Vietnamese people toward domestic products. For
example, at 9 a.m 19th of June, 2009, there was an online round discussion amongst
various economists and experts considering the issue of Vietnamese people‘s preference
toward foreign brands (http://www.tienphong.vn). Apart from indoctrinating this
campaign to Vietnamese people, along with government supporting actions for
domestic firms, Vietnamese firms themselves need to improve their good quality, to
have more frequent advertisement over multi-media so that Vietnamese people can have
more information about products and put their trust in domestic producers. From then,
Vietnamese will gradually have the habit of and get acquainted to using home made
products. It is believed that in the near future, Vietnamese products will be replaced
with foreign made ones which were once preferred by Vietnamese consumers.
Therefore, concerning the political risk factor of Vietnamese consumer attitude toward
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foreign products, the risk is predicted to increase for foreign investors to sell foreign
made products in Vietnam when Vietnamese government does try best to promote
Vietnamese products as well as protect domestic producers under the threat of fierce
competitions with foreign firms.
In comparison with China, Chinese people are famous for their strong culture and
strong national identity preservation. They want to consume more domestic goods rather
than foreign goods. Now all the evidences supporting this idea will be listed out one by
one. Regarding the proof of the fact that Chinese people prefer domestic brands, in
2009, CLSA (Credit Lyonnais Securities Asia) (see appendix 2) conducted a
comprehensive survey of more than 1500 urban, trend-setting consumers from 15
leading Chinese cities, who named 1230 brands in nine core sectors ranging from food
to financial services to produce the Index, plus a list of the Top-100 most preferred
consumer brands and a comprehensive assessment of brand value.
On 17th September 2009, this group reveals domestic Chinese brands make up more
than 50% of the Top-100 brands preferred by its respondents, with seven of the top ten
being Chinese.(https://www.clsa.com)
According to CLSA research, Chinese people are also very loyal to currently used brand.
More than 70% of respondents say they would stick to their current brands. (See appendix 3)
As a result, in comparison with Vietnam, foreign investors will face more risks
when they intend to invest in China. Investing in Vietnam is also challenging only if the
campaign of “let‘s buy domestic” come into effect and it will let Vietnamese people
prefer Vietnamese brands to foreign brands. But it takes time to achieve this vision.
Therefore, with 77% of Vietnamese population likes foreign products, foreign investors
will be less risky when investing in Vietnam rather than investing in China. However, it
is forecasted that Vietnamese people are gradually aware of good domestic brands and
buy more domestic products. Thus, accordingly, the risk that foreign investor may face
in Vietnam is increasing over time.
2. ATTITUDE OF VIETNAMESE GOVERNMENT
2.1 Discouraging policies toward foreign investment
During the time of globalization and free market economies, Vietnamese
government has had many supporting policies and conditions to encourage foreign
investment in Vietnam. For example, Vietnamese government has the policy to
guarantees foreign investment. Foreign properties will never be nationalized in any
conditions and situations. And if Vietnam changes policies which may damage foreign
investors ‘properties, they will be compensated in appropriate ways. It will also be
illustrated further and more clearly in foreign investment Law of Vietnam (Appendix 4).
Following the foreign investment law of Vietnam, foreign investor will enjoy a quite
comfortable business environment. However, apart from many encouraging fields for
foreign investment, Vietnamese government also had some important fields in which
foreign firms are restricted or banned to make investment in because of some sensitive
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reasons like sovereignty protection (see Appendix 5). Foreign investors do not have the
right to invest in all investment fields that they like, therefore, it will be one of some
difficulties for foreigners investing in Vietnam. In addition, administrative procedures in
Vietnam are so complicated and may hinder business activities. From then, corruption
will destroy foreign investors’ return. Foreign firms have to bear this kind of risk when
making investment in Vietnam.
2.2 Tax (Corporate Income Tax and Withholding tax)
Foreign investors who want to make investment in Vietnam put tax rate as the first
consideration and concern because tax will affect very seriously earnings generated in
Vietnam. Foreign investors all have to pay corporate income tax of 15% to 25% (See
appendix 4, Clause No.38) out of total earnings in comparison with China with tax rate
of 33%. Despite the fact that Vietnamese government does not have policy to limit
maximum amount of fund transferring, foreign investors have to pay 5 to 10% as cost of
transferring fund (See appendix 4, Clause No.43). Besides, Vietnam has not restricted
currency convertibility. It means that all money earned in Vietnam can be converted
into any other foreign currency. But Vietnam government has attracted foreign investors
to reinvest in Vietnam by offering many favorable conditions. With the project of
reinvesting for more than 3 years, foreign investors will receive all tax payment paid
earlier to the government.(See appendix 4, Clause No.42).Comparing with China,
project’s length is required to be at least 2 years longer and they just receive back 40%
of tax paid if reinvested in China (http://socongthuong.tayninh.gov.vn). Moreover, for
different areas in Vietnam, foreign investors also receive different favorable condition
for their investment. For example, in Can Tho city, foreign production firms have to pay
10% as corporate income tax and tax will also be favorably reduced in at least 8
following profitable years. Service firms are charged only 15% income tax and tax will
be exempted in 2 following profitable years and be discounted in 4 following years.
And many other favorable tax conditions are applied for foreign investors investing in
Can Tho (see Appendix 6). If foreigner invests in Dong Nai province, high tech foreign
firms will be exempted from income tax payment for 8 years. Production firms will be
charged no income tax in 4 years and tax will be paid 50% less in 4 following years.
Especially in Dong Nai, firms in industrial zones have to pay only 3% for fund
transferring to home country. Firms out of industrial zones have to pay 3% applied to
firms which have initial investment of more than 10 million USD, less than 10 million
USD and greater than 5 million USD. If initial cash outlay is less than 5 million USD,
foreign firm has to pay 7% as tax on fund transfer (see Appendix 7). Along with this,
China also has different favorable policies in tax on using land, which is applied in
different areas. For example, at Tham Quyen province, foreign high tech firms have the
right to use land without paying any tax for the first 5 years. At Hai Nam province, tax
will be reduced if foreign investors rent upland or fallow, invest in project of building
up transport traffic infrastructures. At Chu Hai, low profit foreign firms are exempted
from land using tax payment and at Ha Mon foreign investors have to pay this tax 50%
less. Vietnam and China both have favorable tax policies to encourage foreign
investment, that’s why two countries have attracted a lot of FDI over years. It can be
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said that foreign investors face less risk in terms of obligations to pay income tax or
land using tax.
2.3 Pollution control standards:
In 2009 the government did introduce a decree No.117/2009/ND-CP on having an
increasing fine in environment-damaged issues with the highest punishment up to 500
million Dong. It will be much higher than current punishment on the same issue. This
decree has officially been implemented from March 1st 2010. Thus, in this case any
foreign investors have to consider this new policy if they have intention to damage the
environment in Vietnam in order to gain unethical profit. To avoid polluting the
environment more, Vietnamese government now concerns more about environmental
issues because Vietnam is so polluted with industrial waste and smoke especially in big
cities. Therefore, in near future, government is going to impose pollution control
standards in order for foreign investors doing business in Vietnam to protect the
environment and then reduce global warming effects, which may threat foreign
investors’ future earnings generated in Vietnam. (http://www.baodongnai.com.vn)
2.4 Subsidy to local firm
Vietnamese government did have many policies for subsidizing local firm. In terms
of loan subsidy, following resolution 131/QĐ-TTg, all firms which borrowed money for
investment in some industries namely agro-forestry industry, maritime products
industry, Mining industry, Processing industry, Producing and distributing electricity,
water industry, Construction industry, Information Technology industry would receive
4% interest subsidy with medium and long term loan. The timeline used for loan
subsidy was from the beginning of February to December 2009 with the purpose to
provide incentives for Vietnamese firms to invest in new fields. In 2010, this policy is
still remained for new investment encouragement, interest rate subsidy is reduced to 2%
for medium and long term loan denominated in Vietnam Dong. Interest rate loan
subsidy will help firms to reduce large amount of capital financing cost and then push
down product prices. (http://www.chinhphu.vn)
Concerning small and medium sized enterprises (SMEs), Vietnamese government
also has supporting policies which create favorable conditions for them to grow.
Investment encouraging policy said that government will help through financial support.
Government encourages many different areas and provinces to set up credit grantees
institutions. SMEs also have been given land for appropriate operating activities
(Decree 90/2001/ND-CP) and government aims to build up enough industrial zones for
all SMEs to do business. SMEs also have favored tax in land renting and land using.
Government creates opportunities for SMEs to approach information about market,
prices, supports them to expand consumer market as well as product displaying, product
launching, product advertising activities. Moreover, government will support SMEs by
ordering their products for government purchase. SMEs will have chances to cooperate
with stated own companies for exchanging high technology and learning expertise as
well as experiences so that SMEs will improve their competitive competencies.
Vietnamese government encourages SMEs to stimulate exporting activities by creating
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opportunities for them to cooperate with foreign companies, to expand products and
services exporting market. (http://www.hotrodoanhnghiep.gov.vn)
With government’s support, domestic firms are now growing steadily and gradually
can compete with foreign companies in the future; therefore, foreign investors now face
more risk when they consider investing in Vietnam. Despite the fact that SMEs have a
lot of supporting policies enacted by government, they are still weak and feel hard to
compete with foreign companies. The risk now is proved to be little but in the future it
will be very likely to increase.
2.4 Failure to enforce copyright law
As seen in the following picture, Vietnam in 2009 was categorized in group of
countries which had highest piracy rates over the world. In 2003 and 2004, statistics
showed that privacy rate in software industry was 92% (followed SBA- software
business alliances). Until November 2005 Vietnamese government enacted copyright
law, the data about privacy rates collected in 2006 was 88%. The percentage equaled to
96 million USD lost to Vietnam software industry due to copyright privacy. This
statistics explained that copyright law in Vietnam did not come to effect. As soon as
Vietnam integrated into World Trade Organization, this copyright law has just been
seriously implemented. Now the latest news about Vietnam privacy rate in software
industry was 85% (2009) (http://vietbao.vn).
Comparing with China copyright law was set up in 1990 but it is believed that this
Chinese law is very loosely implemented. As a result, despite the fact that China
enacted copyright law long before Vietnam, the privacy rate was still 80% (2009).
Concerning this issue, when investing either China or Vietnam, foreign investors may
face equal risk in failure of enacting copyright law of both countries.
Source: BSA (Business software alliances)
Figure 1: Top 30 highest and lowest piracy rates in 2009
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3. BUREAUCRACY
Rank
Ease of Doing Business 93
Starting a Business
Dealing with Construction Permits
Employing Workers
Registering Property
Getting Credit
Protecting Investors
Paying Taxes
Trading Across Borders
Enforcing Contracts
Closing a Business
Doing Business 2010
93
116
69
103
40
30
172
147
74
32
127
Figure 2: Some measuring factors of doing business in Vietnam in 2010
3.1 Facts and figures
Although Vietnam has some improvement in reducing administrative procedures,
administrative regulations are still rated unnecessarily prolix as the assessment of Rand
and Tarp organization. In 2007, the average time which firms had to spend to solve
administrative papers was 29.1 %, especially, 38.7 % in Hanoi and Ho Chi Minh City.
According to a research of World Bank, in 2008, Vietnam was included in the group
which spent most time to meet tax requirements due to complicated papers and procedures.
Also in this research, it was found that a firm had to hand in 32 times, to spend 1,050
working hours per year, on average, to complete all formalities about tax. The number of
document for export/import was 6/9, the number of signatures for export/import was 12/15,
and the average day for export/import was 35/36. A new survey about young business
association in Vietnam in 2009 found out that 39% of firms rated the tax procedure
“complicated”, 16% rated “easy” and 40% assessed it not transparent and stable enough. In
2009, Vietnam stood 140/182 of the most complicated tax administrative procedures.
http://www.thuvienphapluat.vn)
Figure 3: Ease of starting a business
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Vietnam is ranked 116 overall for Starting a Business, even ranks after Lao PDR.
As it can be seen, it is not easy at all for foreign investors to quickly open a business in
Vietnam. Due to the complexity in solving problems related to procedures and papers,
foreign investors will learn that it takes too much effort to expand their business in
Vietnam. To start a Business in Vietnam, a firm has to consider a lot of procedures and
they have to wait for a really long time for their papers to be solved.
The table which demonstrates the procedure time to complete and the Cost to
complete when a business is opened in Vietnam (see appendix 9)
Also, this country ranked poorly in the length of time it takes to close a business.
Vietnam is ranked 127 overall. Vietnam takes 5 years to close a business, compared to
an average of 3.4 years in East Asia and Pacific, and 1.5 year in OECD States.
Figure 4: Ease of closing a business
Countries
Number of years
Ireland
0.4
Indonesia
5.5
Lao PDR
no practice
Malaysia
2.3
Philippines
5.7
Thailand
2.7
Figure 5: Length of time it takes to close a business
When entrepreneurs draw up a business plan, the first hurdles they face are the
procedures required to incorporate and register the new firm before they can legally
operate. Economies differ greatly in how they regulate the entry of new businesses. In
some the process is straightforward and affordable. In others the procedures are so
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burdensome that entrepreneurs may have to bribe officials to speed up the process or
may decide to run their business informally.
Analysis shows that burdensome entry regulations do not increase the quality of
products, make work safer or reduce pollution. Instead, they constrain private
investment; push more people into the informal economy; increase consumer prices and
fuel corruption. Vietnam is famous for complicated procedures with high corruption
level. Although this country has many significant policies to encourage foreign
investment, in a rate of Ease of Doing Business 2010, Vietnam ranked 93 out of 183
countries. In this survey, Singapore is the top ranked economy.
Figure 6: Ease of doing business
It can be inferred that Vietnam is at the middle rank among South East Asia
countries. The Government of Singapore, Thailand and Malaysia as well have positive
policies to motivate the foreign investors. Their policies are not just in words on papers
but also seriously practiced in daily life. Therefore, in South East Asia area, these three
countries are the most attractive places for investors.
The table illustrates the number of days and procedures a firm has to deal with when
starting business in Vietnam and other countries can be found in Appendix 10. From
this table, we can have some useful comparison to know which country should be
invested in the most.
3.2 Causes of bureaucracy
The bureaucracy appeared and then arises from many different causes, some of
which appearing and existing attached to the appearance and existence of the State
while the rest come up due to objective situations and conditions.
Firstly, the appearance of bureaucracy and the existence of State
are often associated. As the society has evolved, many economic, political and
social activities have been more diverse and complicated; the State tends to extend its
organizational structure and personnel. New organizations under control of the State are
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established to manage the activities of the whole society. A cumbersome system with a
lot of personel, plus the limitations of management ability leads to the failure in
managing and controlling the whole organization. This creates an advantage for
bureaucracy to develop.
Secondly, the political institutions are still limited and our institution also contains
many problems. Legal system is not synchronized, forecasting ability is not updated, so
a great many of areas, activities, social relations have not been adjusted on time. The
principles, mechanisms and policies in management are not close and clear enough,
therefore, when the negative activities are found out, individuals can avoid their
responsibility and there is no one to be blamed for. Thus, taking advantage of laws and
“loop hole” occur which can be considered the source of bureaucracy disease.
Furthermore, the society in which we live is a society of information. And this
convenience in information transmission also shapes the psychology to be afraid of
“travelling incognito” to investigate the real life of residents, so officers cannot grasp
the essence of the issues, cannot understand the hopes and the wishes of residents. There
are high level of people just catch the information through reports without caring about
the accuracy of given information. A great many of officers use fake figures or make up
stories to please his supervisors so that they can be promoted or can lower their colleagues.
4. CORRUPTION
Despite the fact that progress on corruption will remain a key determinant of
investment attractiveness and the authorities had announced aggressive plans to fight
corruption by encouraging the media to act as a watchdog, but these efforts have not
made a significant progress because corruption has become endemic in Vietnam at all
levels of Government.
4.1 The difference about corruption concept understanding
Actually, the foreign governments including international institutions and the
Vietnamese government have different understanding of the definition of “corruption”.
For the international institutions and foreign governments, corruption is any acts of
demanding money outside of fixed charge or taking commissions for favors on the part
of the civil servants. However, from Vietnamese government’s point of view, because
no civil servants can make a living solely depending on their salaries, it is
conventionally understood that they take a certain margin, or “commission”, on the
fixed charge for whatever they do in their job. It will be just taken into serious
consideration when the “commission” is an outrageously huge quantity, or an individual
keeps all the “commission” to himself instead of distributing it fairly among the
members of his team or department, in proportion to their respective positions. In
Vietnamese understanding, what matters is not whether there was an exchange of
money outside of the rules with regards to administrative work, but how much
commission that they received was and whether they fairly delivered it among
themselves.
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4.2 Level of corruption
Corruption covers all aspects of social life, at all levels of every sector. It is not so
difficult to see corruption in almost everywhere nowadays. Failure in giving a certain
quantity of money beforehand means that you have to wait in a long queue and for a long
time to make your problem to be solved even when you have enough necessary legal
conditions and procedures. Therefore, giving the authorities an agreed sum to make your
procedures done more quickly has become a habit, and even a “custom” in our society.
The corruption happens at 3 levels: individual, business and political. In Vietnam, it
is a fortune that political corruption has not taken place. Therefore, in this report, we
just mention the first two levels.
Individual corruption is corruption that takes place primarily in relations between
individual citizens and public officials and authorities. This type of corruption is the
most popular in our society. It happens from slightest activities to highest level ones. It
is not difficult for the corruption to be seen in almost anywhere which has the
appearances of civil authorities. For example, in order to append committee’s seal to a
birth certificate or other kinds of paper certification, a resident must either have a
extremely close relationship with high-level people or give an appropriate rewards to
the person who will take in charge, or he will have to wait for many days without
having any idea of when his problem will be solved. In another situation, if you go
straight when the traffic light is red, you will be fined a large amount of money and your
car will be taken away for a short period of time according to the traffic regulations.
However, if you give the traffic policeman an agreed sum of money, you could continue
going and your car will not be taken away. And certainly, this money will flow into that
policeman’s pocket, instead of into the treasury organization.
The next level is business corruption which takes place primarily in relations
between enterprises/companies and public officials and authorities. The public feel it is
not easy at all to forget PMU 18 crime, or other typical crimes related to land
conflicts.... However, not only domestic companies but also international companies
bribe the officials to make a quick procedure and to ensure that their company could
take over the projects. This can be evidenced by the corruption of Nexus Technologies
Inc, an export company whose headquarter is in Philadelphia. In this case, Mr. Nam
Nguyen, Kim Nguyen and An Nguyen pled guilty of corrupting Vietnamese officials to
exchange for huge contracts which broke the Foreign Corrupt Practices Act of America.
These brothers admitted having given a total number of $250,000 USD to Government
Officials in the period of 1999 to 2008. (http://www.bbc.co.uk).
It was Pacific Consultants International (PCI), a Japanese company which used this
technique when doing business in Vietnam. According to a Japanese public prosecutor,
the former President of this company, Masayoshi Taga and other 3 officials Kunio
Takasu, Haruo Sakashita and Tsuneo Sakano, were accused of corrupting behavior.
According to Kyodo Media, these people bribed a high level official of Vietnam to be
taken part in a development project originated from Japanese Government. They did
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give a sum of $ 820,000 USD (90 million yen) to an official in Hochiminh City, which
violated the laws of anti illegal competition. (http://www.bbc.co.uk)
Political Corruption is the corruption that takes place in the higher echelons of
public administration and on a political level. In Vietnam, this has not happened as Iraq
or Thailand. A political corruption in both Iraq and Thailand has made these two
countries in to a political crisis, which increases the worry of foreign investors.
4.3 Fact and Figures
Figure 7: Corruption perception index
From this table, it can be inferred that the corruption in Vietnam is really higher,
and this problem is much more serious than other countries like Singapore, Denmark
and New Zealand. Although the index of Vietnam is higher than Indochina countries, in
comparison with China, Vietnam ranked 41 steps less, according to the table. It is
critically a significant point to have interest in when the investors are confused whether
to choose China or Vietnam.
The corruption perception Index last year said that the U.S. leader in particular and
of the world in general is not doing enough to combat corruption worldwide. Made after
one year was much the economy crisis, the report asserts that "corruption is the
environmental risk to economic recovery and a major challenge for countries which are
in conflict." Vietnamese government always claim anti-corruption as one of priority, but
also recognizes this war is difficult.
According to the Political and Economic Risk Consultancy (PERC), based in Hong
Kong, Viet Nam ranked 3rd in the list of the highest corrupt countries in Asia-Pacific in
a new economic report. In the highest position for corrupt countries is Indonesia, one of
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the economies which are highly developing in the continent. The second, ahead of
Vietnam, is Cambodia and after Vietnam is the Philippines.
PERC have reviewed the 16 nations of Asia Pacific areas from the foreign
investors’ points of view. This organization has consulted 2,174 high end and middle
class investors operating in Asia Pacific area. In this survey, Indonesia was scored 9.07
points over 10, while the score of last year was 7.69. Countries such as Thailand, India,
China and Malaysia also marked with high levels of corruption. Meanwhile, Japan, U.S,
Hong Kong, Australia and Singapore were considered the least corrupt
nations.(http://www.bbc.co.uk)
Nevertheless, the estimated cost of corruption worldwide is more than 5% of global
GDP (US$ 2.6 trillion) each year. In Vietnam, corruption cost 3-4% of total GDP per
year, according to Mr. Tran Dinh Thien. However, with the calculation from
economists, in the period of 2001 and 2005, approximately 4 trillion USD flowed into
greedy mandarins; therefore, this percent of corruption can be higher with 6-7% GDP.
One estimate puts the cost of corruption in China at more than $100 billion a year or
around 5 per cent of gross domestic product. Corruption is stealing from the State. The
amounts of money now being stolen in China are astronomical. In the 1990s it was rare
for a corruption scandal to involve a million Yuan. China’s National Audit chamber
tried to calculate the cost of corruption between 1996 and 2005. It came up with a figure
of 1.29 trillion Yuan ($170 billion). This was about 8 per cent of budget spending for
these years.
In Vietnam, according to C37, in the period of 6 months in 2009, the policemen in
the South discovered 1,415 cases related to economy, which were 114 cases more than
2008. http://www.tin247.com). In China, the authorities deal with huge numbers of
cases every year. On average, since the 1980s, over 150,000 cases come before the
courts. About a third of those sentenced are found guilty of ‘harming the social order’
and one of six is engaging in ‘economically corrupt’ behavior. According to the anticorruption organization in China, there were 106,000 mandarins arrested for
embezzlement in 2009, which is 19% as high as previous years. Corruption in China
and Vietnam has some similarities. For example, the corruption is concentrated on those
sectors in which the government is most involved. These include infrastructural
projects, government procurement, financial services, and sale of land licenses and
closely regulated state industries. These can be demonstrated by the figures. In 2007,
inspectors found the derogation with 2,870 trillion VND, 1.24 million USD and 880 ha
of land. Inspectors suggested taking back 1,200 trillion VND and 880 ha of land, 1,464
officials were addressed. In 2009, after 3,000 investigations, the inspectors worked out
202 derogations with the total loss of 16.5 trillion VND and 187 public servants were
addressed. In provinces, through a thorough investigation of 7,000, 379 derogations
were detected with the damage of 50 trillion VND and in this inspection, 442 officials
were judged. (http://thanhtra.mt.gov.vn)
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The lack of a competitive political system and a free press renders these sectors
especially vulnerable to corruption. In China, a 2006 survey of over 3,000 corruption
cases revealed that over half were involved in infrastructural projects and land deals.
Transport and urban planning are other areas where officials succumb to bribery and
other crimes. Astonishingly, over half of provincial officials responsible for transport
have been found guilty of corruption over the years. Some have even been executed. In
Indonesia, corruption has cost this country billions of dollars for the last 5 years. The
latest report of Human Rights Watch estimated that corruption in forestry has taken two
billion dollars each year away of Government budget. Although Indonesia ranks the
third about high tropical forest areas, millions of trees are cut down illegally each year.
Land is very valuable and, consequently, is the source of much crime. Local
officials use violent means to acquire land at low prices and then sell it on to developers
at high prices. In one survey in sixteen cities in 2005 found that half the development
land had been acquired by extra-legal means. The authorities uncovered over a million
cases of illegal land acquisition in the six years up to 2005.
4.4 The reasons of corruption in Vietnam
4.4.1 The leadership of one party system
The absolute and comprehensive leadership of the Vietnam Communist Party is the
root of all the tragic situation of the country today, including corruption problem. Viet
Nam Communist Party would want to gain people’s trust through efficient
administration and civil servants clean of corruption, however, administrative reform in
Vietnam involves a vast structural problem. Unless there are certain forms of benefits
during the reform to the party members working for existing administrative institutions,
it would be difficult to push the process forward. Therefore, they have to tolerate a
certain degree of embezzlement or misappropriation as a necessary evil.
4.4.2 Poorly-paid salary in State-owned organization
Vietnamese civil servants are extremely poorly paid, whether they work for the
central government or local. Although there is a fact that the salary level has been
improved over the certain periods, these levels of increase have not ensured the
employees to be able to live on their “hard salary”. Therefore, sharing commissions
from work becomes the easiest way to “earn cash.” Thus, as long as it is reasonably
acceptable sum and shared equally among everybody involved, they do not think they
are doing something wrong, not to mention “corruption”, and do not understand why
such deeds should be condemned.
4.4.3 The inconvenience and unclearness in administrative procedures.
The legal system is not synchronized and still overlapping. Therefore, many public
servants take use of this inconvenience, plus with their high position to receive illegal
amount of money. Not only domestic companies but also the international companies
has made use of this to guarantee that their companies could have a quicker procedures
and could have the projects they want from the help of public servants(as said above).
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To sum up, high level of corruption in Vietnam is actually an obstacle for foreign
investors. Maybe in the future, with the serious interest in addressing corruption of
Government, corruption will be reduced over time and thereby, investors could have a
fair competition in which they can position themselves without doing unethical actions.
II. FINANCIAL RISK
1. Exchange Rate
From 2008 until now, exchange risk has tended to grow. Dong was subject to
downward pressures. Government authorities thus increased the dong fluctuation band
several times (plus or minus 5% as of March 2009) and lower the official value of the
dong, which is pegged to the US dollar, four times: in June 2008 (by 2.4%), in
December 2008 (by 3%), in November 2009 (by 5%) and in February 2010 (by 3.4%).
Moreover, the authorities decided in November 2009 to reduce the dong fluctuation
band to 3% in order to anchor exchange-rate anticipations. On the black-market,
however, the dong is still traded far below official parity. Government authorities could
thus devalue the dong again in 2010. (http://www.coface.jp) Bui Kien Thanh, a former
government adviser, said: “The State Bank foreign exchange reserves will shrink further
and the State Bank will be forced to take further action to defend dong parity".
(http://uk.reuters.com) If the SBV allow the dong to depreciate further against the US
currency, it would increase the dong value of firms’ US dollar-denominated debt, which
raises the risk of default for the many firms that rely on trade financing in US dollars.
Figure 8: Exchange rate of USD/VND from 2008 to 2010
In the process of finding out the reasons for that issue, we can enumerate some
factors below.
Firstly, inflation is on the rise once again. After trending lower during most of 2009
to a low of 2 percent in August, it rebounded to 7.6 percent by January to stand above a
2010 government target of 7 percent. HSBC currency strategist Daniel Hui says
inflation will reach double digits in the second quarter of the year
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(http://uk.reuters.com). Obviously, the rise in inflation rate makes a decrease in the
export and an increase in the import of Vietnam, which affects the balance of trade in
this country. Actually, after increasing sharply in 2009 as a result of the economic
slowdown and the stimulus plan, the trade deficit will likely remain substantial in 2010.
In fact, the trade deficit has ballooned in recent years from $5 billion (3 billion pounds)
in 2006 to $18 billion in 2008. The global downturn saw it narrow to $12 billion in
2009 but the deficit in January 2010 was already well over $1 billion.
(http://uk.reuters.com) In order to improve the trade deficit, SBV make a decision to
devaluate the VND.
The public debt will likely grow and half of it is denominated in foreign currency,
which makes it vulnerable to exchange rate risk. The current account deficit is moreover
expected to remain high in 2010 with only 50% covered by FDI. Vietnam will thus
remain very dependent on financial markets. (http://www.coface.jp)
2007
2008
2009
2010(f)
Current account balance (%GDP)
Foreign debt (%GDP)
-9.8
33.3
-11.9
29.7
-9.7
31.9
-9.4
32.0
Foreign exchange reserves (in months of imports)
3.6
3.2
3.5
3.1
(f): forecast
Figure 9: Some macro-economic indicators
Secondly, despite the SBV’s effort to stabilize the foreign exchange market, its
status remains uncertain because of the high dollarization rate of Vietnam. Concerned
about fluctuations in the exchange rate, many businesses were unwilling to sell US
dollars earned from their export activities. In order to preserve their accumulations of
US dollars, companies access loans in US dollars to fund their immediate needs, leading
to a US dollar deficit in bank transactions. The gold fever appeared during the end of
2009, with prices escalating as people rushed to buy gold. In addition, the ongoing
foreign currency tension combined with the increase in exchange rates caused people to
worry over the decline in their savings. Additional inflation pressures created by the
recent stimulus package have led many people to move their assets into gold and
dollars. With the high demand for US dollar in Vietnam, it is obvious that US dollar
appreciate against the VND.
The issue that recently VND has weakened against the US dollars makes more risk
for the foreign investors in case they invest in Vietnam. Exchange rate volatility can
work against an international company if a payment in a foreign currency has to be
made at a future date. There is no way to guarantee that the price in the currency market
will be the same in the future-it is possible that the price will move against the
company, making the payment cost more. On the other hand, the market can also move
in a business' favor, making the payment cost less in terms of their home currency. In
the near future, “Vietnam may weaken its currency to rein in the nation’s trade deficit”,
said Nguyen Duy Hung, chairman of Saigon Securities Joint-Stock Co., referring to a
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March research note. The company’s Sector Watch report predicted 3 percent to 4
percent depreciation for the rest of 2010. (http://www.businessweek.com) Therefore, the
trend of exchange rate in Vietnam in next few months seems predictable and the risk
level seems less serious.
Consider the exchange rate in Singapore from 2008 to 2010, as seen in the figure
below, this rate has fluctuated more than the one in Vietnam. Moreover, according to
the forecast of Financial forecast centre, the Singapore dollar are going to depreciate
against US dollar in next few months, so it is more risky. Consequently, in the aspect of
currency risk, from the perspective of international investor, Vietnam is regarded as
more attractive for investing than Singapore.
Figure 10: Exchange rate of USD/SGD
2. Interest Rate
Real interest rate of Vietnam during the period from 2008 up to now has fluctuated
continuously as it can be seen in the table below
Time
01/01/2008
01/02/2008
19/05/2008
11/06/2008
21/10/2008
05/11/2008
21/11/2008
05/12/2008
22/12/2008
01/02/2009
11/2009
04/2010
Nominal interest rate (per year)
8.25%
8.75%
12%
14%
13%
12%
11%
10%
8.5%
7%
8%
8%
Inflation
Real interest rate (per year)
14%
16%
25%
25%
27%
22%
22%
24%
24%
17%
4%
9%
Figure 11: Real Interest rate in Vietnam
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-5.5%
-7.25%
-13%
-11%
-14%
-10%
-11%
-14%
-15.5%
-10%
4%
-1%
Th¸ng 5 - 2010
Why have we had the incessant fluctuations of real interest rate? It’s because of the
change in base interest rate and also the variability of inflation rate from 2008 up to now.
Apparently, it has related to the monetary policy of Vietnamese government.
• In the first half of 2008, Vietnam was combating a potential macroeconomic
instability such as high inflation, a fragile financial system and surging twin deficits.
Therefore, on April 17, 2008, the Government released Resolution No.10/2008/NQ-CP
detailing measures to restrain inflation, stabilize macro economy and ensure social
security and sustainable growth. In one side of the Resolution, the government took
decisive and consistent measures on monetary tightening. The State Bank of Vietnam
(SBV) increased benchmark interest rate on VND three times in the first half of 2008,
boosting benchmark rate from 8.25% to 14% per annum on June 11, 2008.
(http://www.eai.nus.edu.sg/BB447.pdf). The government’s policies to stabilize the
macro economy have generated visible results. In particular, the monetary policy has
reduced inflation and trade deficit. However, the level of overall macroeconomic
instability is still quite severe.
• In the second half of 2008, before the country could fully address its first set of
problems, the economy was dealt another blow by the global financial crisis, including
surging trade deficit since September 2008, rising unemployment, weakening domestic
demand and slow economic growth. Consequently, in December 11, 2008, the
Vietnamese government released Resolution 30/2008/NQ-CP on urgent measures to
deal with the economic recession. In detail, on monetary policy, since July 2008,
Vietnam has gradually eased its monetary policy. From October 21, 2008 to January 23,
2009, SBV cut its benchmark interest rate six times from 14% to 7% per annum.
(http://www.eai.nus.edu.sg/BB447.pdf).
• In 2009, the government has continued to apply the loosened monetary policy.
SBV try to adjust and maintain the interest rate at rational level since February 2009 in
order to reduce the lending interest rate level and to strengthen the mobilization sources
to meet the credit expansion of the economy, thereby, the prime interest rate in VND
was still remain at 7% per annum. Since November 2009, all the aforementioned
interest rates have readjusted 1% additional to response the new conditions of the
economy. Moreover, on January 23, 2009, the Vietnamese Government decided to use
US$1 billion (VND 17 trillion) to subsidize loans’ interest rates to boost the economy.
Decision No. 131/QD-TTg, (dated January 23, 2009) was issued by the Prime Minister
to provide interest-rate subsidies. Under the Decision, short-term loan contracts with
maximum duration of 8 months and signed and disbursed from February 1, 2009 to
December 31, 2009 will get interest rate assistance of 4% per annum. Since April 2009,
this package has been expanded to medium and long-term contracts and simultaneously
supported for loans to purchase machineries, equipments, materials for agricultural
productions and for constructing houses in rural areas.
To sum up, 2008 is the year that the degree of interest rate varied constantly while
in 2009 and the first quarter of 2010, that rate seem to stabilize. Refer to the degree of
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country risk, the more fluctuant the interest rate is, the more threatening the foreign
investors have to confront under the control of government. So, recently, the risk of
interest rate is not very high.
3. Real GDP Growth Rate
Real GDP
Growth rate (%)
Vietnam
China
Cambodia
2009
2008
2007
4.3
8.7
-2.9
6.23
9
6.5
8,5
13
10.2
Figure 12: Real GDP growth rate
In 2008 the financial crisis affected many developed economies and some other
developing economies. From the above table, all the growth rates of three countries had
downward trend. This is a risk for investors when they invested in because low growth
rate means low return rate. However, downward is the same trend for the world
economy due to the world financial crisis. Furthermore, in comparison with China and
Cambodia, Vietnam has moderate risk, Cambodia is the most risky country and China is
the least one. China is one of the biggest and fastest-growing economies, so it has lower
risk than Vietnam and Cambodia; developing countries. But comparing with developing
countries like Cambodia, Vietnamese economy is less risky, it still grow in spite of the
world financial crisis.
GDP Per Capital
GDP
per capital($)
Vietnam
China
Cambodia
2009
2008
2007
1074
3677
740
1024
3160
818
825
2459
723
Figure 13: GDP per capital
It can be seen that Vietnam has low GDP per capital, only about $1000 in two
recent years. However, it has increased continuously; this is a good signal for economic
development. In comparison with other countries in region, Vietnam’s GDP per capital
is at average level, it is higher than Cambodia, but lower than China. GDP per capital of
China has high growth rate and is more than 3 times as much as Vietnam’s one. In
general, Vietnam’s GDP per capital is still very low; it stands at 137 in the world, China
is at 114(according to the GDP per capital country rank by the CIA World 2009). The
low GDP per capital show the poor and less developed economy. It is known that low
income country has low consumption power, they are usually sensitive to the price, if
the foreign companies offer product with unreasonable price or there is uncertainty they
will face the potential of losing sale and so reduction in their revenue. Therefore, it is
risky for investors to invest in low income countries.
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Analyzing both GDP per capital and GDP real growth rate, it can be seen that
despite the financial crisis, Vietnamese economy still grows with slow and rather stable
rate. At the present, Vietnam is in the recovery stage, with stable growth, so the risk of
investment in Vietnam is not very high as the others like Cambodia.
4. Inflation Rate
Inflation (%)
Vietnam
China
Cambodia
2009
6.518
0.7
5.325
2008
23
4.8
19.87
2007
12.6
1.5
5.9
Figure 14: Inflation rate in Vietnam, China, and Cambodia from 2007 to 2009
Vietnam still has very high inflation rate, in three countries; Vietnam has the highest
level, which increased rapidly from 2007 to 2008, nearly double. This put high pressure
on government to control inflation and high risk for investors who invest in Vietnam.
Commonly, it is very risk to invest in high inflation country due to the increase in cost
of production and reduction of sale. It is simple that high inflation leads to the increase
in price, when the price increases, the cost of production will rise because of the rise of
material’s price. In addition, high price will reduce demand for the product and reduce
sale as well as the revenue of the firm. However, in a positive note inflation has reduced
dramatically from more than 20 percent in 2008 to less than 10 percent in 2009. This
reduction is due to the economic slowdown, but the relative inflation of Vietnam with
others is still high. Furthermore, the table below of the inflation condition of inflation of
Asian country from 2002 to 2008 also showed that Vietnam was one of the highest
inflation countries.
Country
Cambodia
China
Hong Kong
India
Indonesia
Korea
Laos
Malaysia
Philippines
Singapore
Thailand
Vietnam
2002
3.3
-0.8
-3.0
3.4
11.9
2.8
10.7
1.8
3.0
-0.4
0.6
3.8
2003
1.2
1.2
-2.6
5.4
6.8
3.4
15.5
1.1
3.5
0.5
1.8
3.1
2004
3.9
3.9
-0.4
6.4
6.1
3.6
10.5
1.4
6.0
1.7
2.8
7.8
2005
5.8
1.8
1.0
4.4
10.5
2.8
7.2
3.0
7.6
0.5
4.5
8.3
2006
4.7
1.5
2.0
5.5
13.1
2.2
6.8
3.6
6.2
1.0
4.6
7.5
2007*
4.2
1.8
1.6
5.0
6.2
2.4
5.0
2.7
4.8
1.6
2.5
6.8
2008*
3.5
2.2
2.3
5.0
6.1
2.6
5.2
2.7
5.0
1.0
2.5
6.3
*Forecasted for 2007-2008
Resource: Asian Outlook 2007-Comparison Table: by Runckel & Associates
Figure 15: Forecasted inflation in some Asian countries
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Overall, Vietnam’s economy expanded rapidly with GDP growth at 8.5 percent in
2007. It continued to grow at 6.23 percent in 2008 and 4.3 percent in 2009. However,
the economic is slow in 2008 and 2009, and GDP per capital remains low by regional
standards and high inflation. Consequently, Vietnam is considered to be highly risky for
investment.
PART 4: CONCLUSION AND RECOMMENDATION
1. Conclusion
From all above, investing in Vietnam face two main risks; political risk and
financial risk. Stable political condition, good attitude of Vietnamese consumers toward
foreign goods and services and favorable tax condition make Vietnam less risky for
investors to make investment in. Inversely, there are a lot of burdens when investing in
Vietnam; including strict pollution control standards, local firm’s subsidy, failure to
enforce copyright law, massive and complicated procedures. These factors make
Vietnam highly risky to foreign investors, especially failure to copyright law,
bureaucracy, and corruption which are serious problems in Vietnam. Overall, Vietnam
has moderate or a little bit high political risk by considering all the factors listed above.
Besides that, economic improvement, open market policies encourage Vietnamese
economy to develop a lot. In addition, emerging economy helps Vietnam be less
affected by the world financial crisis. However, Vietnam still remains low GDP per
capital only around USD 1,000, and belongs to one of highest inflation countries in
Asia. Furthermore, downward pressure on VND, unstable interest rate also creates risk
for investors. As a result, the financial risk of Vietnam is high. And then the whole
country risk is high.
Some evaluation or rate of country risk for Vietnam by some international
organizations can be used as references to understand more about Vietnam Country risk.
Country risk service by the Economic Intelligence Unit (EIU) for 2008, rated Vietnam
as CCC for economic or financial risk, B for political risk and overall country. They
rates countries according to scores from 0 to 100 and range in to 10 categories as the
table below.
Score
New model band
0-12 9-22 19-32 29-42 39-52 49-62 59-72 69-82 79-82 89-100
AAA AA
A
BBB BB
B
CCC CC
C
D
Source: Rating band characteristics detail at: http://www.eiu.com/site_info.asp?
info_name=eiu_CRS&rf=0
The higher score is, the higher risk is, so AAA is the least risky and D is the most
risky, as EIU’s evaluation Vietnam has moderate political risk and high economic risk
and overall country is moderate risk, too.
Another example is ranking from Euler Hermes UK by analyst David Atkinson
2009 which rated Vietnam at grade D according to Country Risk Grades on a scale of
AA, A, BB, B, C, D where AA is the lowest and D the highest risk; the highest risk
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level, with P3 for political risk (P1: the best, P4 the highest risk) and E6, the highest risk
grade for economic risk. The final one recommended is the country risk report of A.M.
Best company, Inc (AMB) in 2009; they evaluated Vietnam to be high in political and
economic risk and very high for financial risk. It is showed in the chart in Appendix 8.
As analyzed above, the results that researchers have found are equivalent to those
our group has studied and come up with. Finally, it can be concluded that Vietnam is
seen as a highly risky place for foreign investors to invest in. However, it is likely that
high risk brings high return; therefore, Vietnam is still one of potential places for
investments in foreign investors’ eyes all over the world.
2. Recommendation
Due to limited scope of our research, we did release only several recommendations
for foreign investors who invest in Vietnam.
Investing in Vietnam now brings to foreign investors a lot of benefits because
Vietnam is one of the most attractive countries to make investment in Southeast Asia
with GDP growth rate just behind China. Therefore, expanding business into Vietnam
market is one of many foreign investors’ targets. Despite the fact that foreign investors
who want to do business in Vietnam may face high risks, they can still gain a lot of
earnings only if they understand thoroughly opportunities and threats of doing business
here. Regarding political risk in Vietnam that investors may encounter, as stated above
77% of Vietnamese customers prefer foreign brand. It will create very big opportunities
for foreign producers because they can compete very easily with domestic producers.
Taking advantage of Vietnamese consumer’s preference, understanding this chances,
foreign investors should keep their quality and also their service in order to satisfy and
retain loyal Vietnamese customers. From then, they can keep their strong position in
Vietnam market and also stand outstandingly in Vietnamese consumers’ mind.
However, this situation might be changed in the future sooner or later because now
Vietnamese government is having a campaign of “let’s buy domestic products”; it will
threaten foreign investors’ future earnings. Therefore, foreign producing firms need to
take it into consideration so that they will have appropriate and quick response in the
changing demand of Vietnamese people.
Vietnamese government now has visions and expectations of foreign direct
investment in 2010. With the aims of speeding economic growths, government
continues to attract foreign investors to make investment in Vietnam. In order to achieve
objective of FDI in 2010 of 22 - 25 billion USD which is increased by 10% comparing
with 2009, the government must have detailed policies to provide foreigners incentives
for foreign direct investment in Vietnam. Thus, making use of favorable conditions that
Vietnamese government give, foreign investors need to expand their business and also
make more investments in different Vietnamese industry. If so, they will receive highest
level of benefits and advantages which are brought from government. Moreover,
understanding the importance of FDI in economic development of Vietnam, foreign
investors will have the advantages over tax reduction and land renting expenses. From
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then, they may reduce cost of production and give out products at lower prices
comparing with recently in order to compete with small and medium sized firms which
receive a lot of Vietnamese government subsidy. Vietnam now strengthens the
enforcement of copyright law which guarantees foreign investors’ intellectual property
and ensures fairness for all businesses.
Regarding bureaucracy and corruption, they have existed in Vietnam for a long time
so that they cannot be eliminated in a short run. Efforts to be clean of corruption in
Vietnam will take a long time to complete despite the fact that the country has positive
policies to wash out bribery and bureaucracy. Therefore, the foreign investors have to
take into account their risks and opportunities carefully when deciding to invest in
Vietnam. Actually, bribery to Government official is not a wise idea because nowadays,
Vietnamese Government has taken part in an anti-corruption. Doing business in an
unethical way does not only can cost investors a huge sum of money but also can put
them into prison. Therefore, do not keep the belief that bribery and bureaucracy can
help you to have a sustainable position here.
How can a business protect itself against currency and interest rate volatility? One
risk management tool that can help a business protect its profits from unforeseeable
changes in the currency market is hedging. The primary goal when hedging is to protect
company's profits from exchange rate and interest rate uncertainty at the lowest possible
cost. Therefore, the foreign investors who want to invest in Vietnam can choose some
hedging tools like the forward contracts, the swaps, and the option contracts to reduce
the possibility of financial risk. Refer to the forward contract; foreign companies may be
required to make payments or to receive payments in a local currency, in that case, these
companies can enter into the forward exchange contract which is a binding obligation to
buy or sell a certain amount of foreign currency at a pre-agreed rate of exchange, on a
certain future date with a bank. HSBC and many other banks in Vietnam even have a
team of specialists available to advice and support for these companies if they need
more information. About the swap, many banks offer the interest rate swap which is a
derivative in which one party exchanges a stream of interest payments for another
party’s stream of cash flows. Interest rate swaps can be used by hedgers to manage their
fixed or floating assets and liabilities. It can help changing from the floating to fixed
interest rate (without changing others conditions) to reduce interest rate risk of rising (in
case the company are borrowing fixed rates) and vice versa.
The research shows not only the foreign investors the risks they may face in
Vietnam but also some suggestions to help them invest in Vietnam more effective. This
is a really interesting topic, hope that there will be more deep researches to help
investors understand more about Vietnam and also help Vietnam see itself and have
appropriate policies to attract more DFI to develop the home economy.
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sách
ưu
đãi
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at URL http://www.tradingeconomics.com/Economics/Inflation-CPI.aspx?Symbol=CN
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Countries”, Available at URL:http://socyberty.com/issues/corruption-and-accountability-inthe-developing-and-the-developed-countries (Accessed May 12 2010)
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26. Anonymous,2010, “Chong tham nhung o Vietnam khong mang tinh he thong”, Available at
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http://www.bbc.co.uk/vietnamese/world/2010/04/100401_china_corruption.shtml
30. Anonymous,2009,
“Tham
nhung
o
Indonesia”,
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at
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http://www.bbc.co.uk/vietnamese/vietnam/2010/03/100317_viet_us.shtml (Accessed May 12 2010)
32. Anonymous 8. 2008, “ Bat nguoi Nhat vi hoi lo quan chuc Viet Nam”, Available at URL:
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34. Alex Frangos and Patrick Barta, 2010, “Vietnam face further currency risks”Available at
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http://www.theaustralian.com.au/business/news/vietnam-faces-further-currencyrisks/story-e6frg90x-1225829575430. (Accessed May 10 2010)
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36. Ngo Thi Ngoc Chau, 2010, “Dong devaluation barely cures Vietnam’s woes”Available at
URL: http://uk.reuters.com/article/idUKLNE61B01H20100212. (Accessed May 11 2010)
37. Anonymous, 2010, “Singapore dollar currency exchange forecast”Available at URL:
http://forecasts.org/singd.htm. (Accessed May 10 2010)
38. Le Thi Thuy Van, 2009, “Vietnam’s policy respond to the financial crisis”Available at
URL: http://www.eai.nus.edu.sg/BB447.pdf. (Accessed May 12 2010)
39. Anonymous,
2009,
“Climate
file:
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Available
at
URL:
http://www.coface.jp/CofacePortal/JP/jp_JP/pages/home/onlineaccess/risks_home/business
_climate/climate_file//Viet%20Nam?nodeUid=572232(Accessed May 12 2010)
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GAP BETWEEN ORDINANCE AND SMALL-SCALE RETAILERS’
MANAGEMENT ON FOOD HYGIENE AND SAFETY
Written by: Nguyen Thi Thanh Huong (3K-08)
Hoang Thu Ha (CN2-08), Nguyen Thi Thuy (2KT-07)
Supervisor: Nguyen Thi Cuc
I. INTRODUCTION
Food is one of the most necessary things for human’s life. It also affects directly and
significantly the people’s health. Therefore, the food quality is concerned at not only
individual, national but also international level. In Vietnam, recently, it is the fact that
the quality of food, especially fresh and raw foodstuffs, has been under serious threats
of being unhygienically or unsafely grown, produced and handled. Although the
Vietnamese government has already launched the Ordinance on Hygiene and Safety of
Foodstuffs in 2003 in responding to a number of requests from different related parties,
every year it still witnesses thousands of cases of food poisoning. This can be partially
explained by the loosen management on food hygiene and safety during stage of microscale retailing. This research paper will bring a deep view about the variances between
the regulation and its implementation, and also suggest some recommendations which
help to minimize the gap.
II. Literature review
1 Major international standards on Food Hygiene and Safety:
As mentioned before, food quality is a globally concerned issue. Therefore, there
are a lot of international standards which are set before. However, in this research we
based on some basic ones such as Hazard Analysis Critical Control Point (HACCP),
Good Manufacturing Practices (GMP), Good Agricultural Practices (GAP) and Good
Hygiene Practices (GHP).
Hazard Analysis Critical Control Point (HACCP) is a systematic preventive
approach to food safety and pharmaceutical safety that addresses physical, chemical,
and biological hazards as a means of prevention rather than finished product inspection.
HACCP is used in the food industry to identify potential food safety hazards, so that
key actions, known as Critical Control Points (CCPs) can be taken to reduce or
eliminate the risk of the hazards being realized. The system is used at all stages of food
production and preparation processes including packaging, distribution, etc. HACCP
itself was conceived in the 1960s by Pillsbury with the aim of providing a basis to
design and manufacture the first foods for space flights for the US NASA (National
Aeronautics and Space Administration). Since then, HACCP has been recognized
internationally as a logical tool for adapting traditional inspection methods to a modern,
science-based, food safety system.
HACCP was initially set on three principles but now on seven principles (Please see
appendix 2).
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Good manufacturing practice (GMP) is part of a quality system covering the
manufacture and testing of active pharmaceutical ingredients, diagnostics, foods,
pharmaceutical products, and medical devices.GMPs are guidelines, and in some
countries such as the USA regulations, that outline the aspects of production and testing
that can impact the quality of a product. Many countries have legislated that
pharmaceutical and medical device companies must follow GMP procedures, and have
created their own GMP guidelines that correspond with their legislation. (Please see
appendix 2 for the principles)
Good Agricultural Practices (GAP) are "practices that address environmental,
economic and social sustainability for on-farm processes, and result in safe and quality
food and non-food agricultural products". GAP has been developed in recent years by
the food industry and producers organizations, aiming to codify agricultural practices at
farm level for a range of commodities. Their purpose varies from fulfillment of trade
and government regulatory requirements (in particular with regard to food safety and
quality), to more specific requirements of specialty or niche markets. The objective of
these GAP codes, standards and regulations include: ensuring safety and quality of
produce in the food chain, capturing new market advantages by modifying supply chain
governance, improving natural resources use, workers health and working conditions,
and/or creating new market opportunities for farmers and exporters in developing
countries. GAP focus on 4 criteria: manufacturing technique, food safety and hygiene,
working environment and origin trace.
Good Hygiene Practices or GHP: All practices regarding the conditions and
measures necessary to ensure the safety and suitability of food (GHP) at all stages of the
food chain. (Please see appendix 3 for the principles and scopes of examination)
2. Concepts in food hygiene and safety.
2.1 Food hygiene and food safety
- Food hygiene has been defined as “all conditions and measures necessary to
ensure the safety and suitability of food at all stages of the food change” (Codex
Alimentarius). It encompasses a wide range of measures that can be applied from the
growth of food products and the raising of food animals, through harvesting and
slaughter, processing, delivery, storage and final sale. However, in case of refresh or
raw foodstuffs, food hygiene will be equated with cleanliness; the cleanliness of food
premises and food handlers.
- Food safety refers to the discipline that involves describing, handling, preparing
and storing food in ways that prevent food borne illnesses. These include a number of
standard operating procedures that should be followed to avoid potentially severe health
hazards. Some of these standards include cleaning of areas, preparing the tools needed
to clean the areas, disassembling areas and/or equipments and method of cleaning and
sanitizing in general. The reason behind this is that food transmits disease from person to
person as well as serves as the breeding ground for bacteria that can cause food poisoning.
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2.2 Retailing and micro-scale food retailers
- Retailing consists of the sale of goods or merchandise from a very fixed location,
such as department stores, boutiques or kiosks in small or individual lots for direct
consumption by the purchaser. Retailing may include subordinates services, such as
delivery. In commerce, a “retailer” buys goods or products in large quantity from
manufacturers or importers, either directly through wholesaler, sand then sells smaller
quantities to the end-user. Retail establishment are often called shops or stores. Retailers
are at the end of the supply chain. Manufacturing marketers see the process of retailing
as a necessary part of their overall distribution strategy.
- Micro- scale food retailers are simply defined as which shops and stores which sell
food and foodstuffs (both dried and fresh food ranging from vegetables, fruits,
slaughtered flesh like chicken, pork, beef or fish to ready-to-eat materials) to
consumers.
3. Ordinance on food hygiene and safety in terms of fresh and raw foodstuffs
(extracted where relevant).
Article 8: The following conduct shall be prohibited:
1. Planting crops, raising animals, collecting and gathering, catching and trapping;
or partially or fully processing, packing, preserving, transporting or selling foodstuffs in
contravention of the law.
2. Manufacturing and trading:
(a) Foodstuffs which are stale, rotten, deteriorated or contaminated and dirty and
which may cause harm to people's health and lives;
(b) Foodstuffs which are toxic or poisonous;
(c) Foodstuffs which contain parasites causing disease or which contain microorganisms causing disease or micro-organisms beyond the prescribed levels;
(d) Meat foodstuffs or foodstuffs manufactured from meat not subject to veterinary
examination or which was examined but failed to satisfy requirements;
(d) Domestic animals, poultry or marine creatures which died from disease, poison
or uncertain causes; products manufactured or processed from domestic animals,
poultry or marine creatures which died from disease, poison or uncertain causes;
(e) Foodstuffs which are contaminated or dirty because their packaging or container
became dirty, broken or torn during transportation;
(g) Foodstuffs which are beyond their use expiry date.
3. Manufacturing and trading animals or plants which contain germs which are able
to be transmitted to people, animals or plants.
4. Manufacturing and trading foodstuffs from raw materials other than food or from
chemicals which are not on the list of substances permitted to be used.
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5. Manufacturing and trading food additives, substances assisting food processing,
nutritious micro-substances, functional food, high risk food, food preserved by
irradiation methods or genetically modified food which has not yet been permitted by
the competent State administrative body.
6. Using polluted transportation facilities or transportation facilities which have
transported toxic substances in order to transport food.
7. Providing false information, advertising or labeling, or other dishonest conduct
regarding hygiene and safety of foodstuffs.
Article 9. Organizations, households and individuals that produce and/or trade in
fresh and raw food must ensure that the places where the food are reared, cultivated or
traded in shall not be polluted by surrounding environments and must be isolated from
areas where environmental pollution and/or food contamination may occur.
fresh and raw food must apply measures to treat wastes according to the law provisions
on environmental protection.
fresh and raw food shall have the responsibility:
1. To ensure that the food they have produced and/or traded in are not polluted, are
preserved at clean places, isolated from places where chemicals, chiefly toxic
chemicals, are preserved and other pathogenic sources;
2. To be accountable for the origins of food they have produced and/or traded in.
Article 13.
1. Food-processing sites of organizations, households or individuals must be located
at places which meet the food hygiene and safety conditions.
2. The food- processing sites must be designed, constructed, installed and operated
to satisfy the food hygiene and safety requirements.
Article 14.
1. Raw materials used for food processing must ensure hygiene and safety according
to law provisions.
2. The food-processing establishments must apply all measures to keep food from
being contaminated or infected with pathogens which may spread to humans, animals
and/or plants.
3. The food-processing establishments must ensure that the processing process is
conformable with the law provisions on food hygiene and safety.
Article 29
1. Persons who are directly involved in the manufacture and trading of foodstuffs
must satisfy fully health standards, must not have any contagious disease, and must be
knowledgeable about hygiene and safety of foodstuffs.
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2. The Ministry of Health shall provide regulations on health standards and on
requirements on knowledge about hygiene and safety of foodstuffs applicable to persons
who are directly involved in the manufacture and trading of foodstuffs, as appropriate
for each manufacturing or trading branch and trade.
Article 30
1. Organizations, family households and individuals manufacturing and trading
foodstuffs shall be responsible to ensure the health standards of persons who are directly
involved in manufacturing and trading at their establishments in accordance with law.
2. The Ministry of Health shall provide regulations on health checks applicable to
workers at establishments which manufacture and trade foodstuffs.
III. RESEARCH QUESTION
Of all the controversial issues taken most concerns recently, food hygiene and safety
is considered the most debated one. The ordinance on food hygiene and safety has been
come into force since 2003; however, its effects are still relatively small up to
expectation. In order to give more information on this concern and some figures to
clearly prove the weakness of this ordinance implementation, a research paper named
“Gap between ordinance and small-scale retailers’ management on Food Hygiene and
Safety” was conducted. The purpose of our study has been to work out the gap between
Ordinance and its implementation by micro-scale food retailers. The reason why the
ordinance stills remains new to micro-scale food retailers and some recommendations to
narrow the gap is another objective of our study. Specifically, we try to answer two
following questions:
1. What is the gap between the Ordinance and its implementation by Microscale Food retailers?
2. What should be done to narrow the gap?
IV. AIMS AND OBJECTIVES
The purpose of our research is to work out the gap between the ordinance and the
current implementation situation carried by small-scale retailers. By analyzing the
results and findings of our survey and then some discussions, the causes of this lag will
be pointed out and then some related recommendations will be discussed in order to
curb the real problems in retailing industry sector, which brings customers more value
concerning to the food hygiene and safety issues. More specifically, the main objectives
of our study are to:
1. work out the problems in management practices of micro-scale food retailers in
terms of maintaining food hygiene and safety;
2. figure out the main reasons for the problems;
3. and suggest short term and long term solutions to deal with the problems which
is believed to enhance the performance of the micro-scale food retailers.
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V. METHODOLOGY
In order to work out the gap between the ordinance and the current situation of
implementation on the Food Hygiene and Safety issues of small-scale retailers’
management, we use quantitative method to have numbers and figures supporting the gap
with some evidences. To collect the data, a set of 11 questionnaires was designed. Using
many types of questions such as yes/no questions, multiple choice questions; and having a
clear guide, the questionnaire was easy and convenient for the respondents to answer.
On May 11, 2010, thirty (30) copies of questionnaires were delivered to small-scale
food retailers located in Phung Khoang market during their business time with 100%
returned. Because we asked them when they were doing their business, therefore, some
could not write directly the answers to the survey paper. We helped them read the
question and marked their choices instead, just like face-to-face interview technique but
the main difference is the aid of ready-made questionnaire. This method of doing
research is relatively reasonable and straight-forward to harvest accurate outcomes.
The surveys, was conducted in Vietnamese since majority of salespersons in small-scale
retailers had little proficiency in English. After collecting the data, we translate the survey into
English, and both the Vietnamese and English version can be found at Appendix.
Basing on the reasons of population size, the result accuracy, time and the number
of group members, a sample size of 30 small-scale retailers out of the population of all
participating in the retailing sector located at Phung Khoang market was considered
suitable for us to conduct the survey. Furthermore, the sample size of 30 was believed
rational and large enough to present the characteristics of the population. Last but not
least, due to the lack of time and human resource, conducting a survey with such small
sample size was reasonable and effective. Besides, some secondary data were exploited to
provide this paper with a great deep and comprehensive view. Both primary and secondary
data were analyzed and made full use to create completion for this research paper.
VI. DATA ANALYSIS AND DISCUSION.
1. Data analysis
With the large size of retailing industry in Viet Nam, it tends to widen & widen by
the profits through this channel increases 45 %(2009) compared to those of 2008.
Although more people are familiar to modern channel- supper market, the traditional
markets still play an important role in retailing industry- they account for 68% market
share. So we only focus on the subject- traditional market, our samples are 30 microscale retailers in Phung Khoang market(Nguyen Trai street, Thanh Xuan, Ha Noi). With
the cooperation of the sales in this market, we did collect & gather the information and
the results are illustrated in the following table:
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Question
1
2
3
4
5
6
7
8
9
10
11
10years
9
Never
14
Ever
2
Yes
4
Always
7
TV
9
5-10years
30%
46.7%
6.7%
13.3%
23.33
%
37.5%
food caregiver
14
Very often
0
Salesperson’s
personal
hygiene
2
Through
wholesale
market
12
Import from
prestige
supplier
18
12
ever
16
never
28
no
20
Sometimes
13
Newspaper
4
1-5years
40%
53.3%
0
6.7%
40%
60%
11
Often
4
salesperson’s
health
condition
0
Through
prestige
supplier
6
Import from
relatives/
friends
12
6
Fully aware
0
<1year
20%
3
30
10%
30
0%
30
93.3%
66.7%
43.33
%
16.67
%
Salesperson
46.7%
Th¸ng 5 - 2010
Not sure
6
Seldom
4
Medical staff
11
30
20%
13.34
%
45.83
%
Never
6
20%
30
Others
0
0%
24
consumer
36.6%
13.3%
0%
20%
40%
30
5
Occasionally
26
Stall’s
clearances
16.7%
10
Through
relatives/
friends
12
Never know
33.3%
0
0%
never
30
Stall
section’s
clearances
18
30
86.7%
60%
30
40%
30
After collecting the survey from Phung Khoang market, we can realize that the
biggest percentage of our sample (40%) is person who worked 5-10 years in retailing
industry. 30% of retailers asked seem to have more experience with more than 10 years
working in this field. Only 10% of our sample has just entering this industry, may be the
new one. Another part, retailers with 1-5 years doing this job account for 20%
With the large proportion of the sample, 70%, working in retailing industry in long
time (>5years), whether or not they pay enough attention on food hygiene and safety?
Not surprisingly, no one makes sure he/she can fully aware about the Decree on Food
Hygiene and Safety (signed 2003), almost of them do not have time to study it or this
decree has not popularized to them. 50% has ever heard about that, and the rest 50% do
not know what the decree is, may be the first time they hear about it. Intensive course
on Food hygiene and safety seem to be stranger to them, only 2 out of 30 admitted to be
trained in this kind of courses. The rest has never been trained, some ones have never
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heard about that before. Surprisingly, almost of them might not recognize the important
of the course, they though it not necessary, because they believe in their experiences and
they always do something out of habits.
Finger1: Have you been given the information about the conditions to run a food business?
When asking” Have you been given the information about the conditions to run a
food business?”
“Sometimes” is the answer which be chosen by nearly half of the sample. 23.33%
of responders can get the information frequently while the same amount 20% conceded
not be given the relative information.
As can be seen clearly from the following bar chart, TV and medical staff seem to
be the most effective media to small-scale retailers. Especially, face-to-face method
between medical staffs and small-scale retailers’ makes up to approximately 50% of all
kinds of method, by this way retailers may pay more attention, be improved in
awareness faster although this method is costly in terms of time & finance. After a lot of
epidemic diseases, TV spends more time on Food hygiene and safety, by the relative
information about the situations & figures that may attract and affect the retailers
positively& deeply.
Finger3: How did you get the information?
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Th¸ng 5 - 2010
Guarantee food hygiene and safety, however, they did not focus on simple things
like Salesperson’s personal hygiene (courtesy clothes, hair, clean hands, etc.);
salesperson’s health;condition Stall’s clearances….which affect directly to the food.
As for the origin of food, small-scale retailers often place confidence through
wholesale market or through relatives/ friends. The reasons may come from the
competitive price in comparison to prestige suppliers.
2. Discussion:
From the response for the question about the knowledge on the Ordinance, it can be
seen that the majority of our sample-70% respondents work in retailing industry at least
5 years, however Ordinance on food hygiene and safety in terms of fresh and raw
foodstuff is still not familiar with them. On conducting the business, the traders still
heavily rely on their experiences as well as their habit. It also can be shown that they are
lack of appropriate awareness about food hygiene and safety but they seem not to be
interested in updating information on it.
The brief summary of these responses can be compared with the Decrees given by
the Ordinance in the following table:
Compared
Criteria
Food protection
Environmental
protection
The Ordinance
The factual situation
The gap
Retailers
must
ensure that the
places where the
food are reared,
cultivated or traded
in shall not be
polluted
by
surrounding
environments
We can see some simply
ways to protect their
foods such as: protective
curtain, dish-cover, showcase….that will not make
sense in the case they do
not pay enough attention
to the surrounding areas
where the bacterium are
likely to come from.
Many shops are near
polluted areas (waste,
dirty water…) or the
fresh food is next to dried
foodstuff…
The waste is not gathered
& fixed immediately but
left until the end of the
day or the next day
outside or inside the
shop/store
premises.
Cleaning the premises
was not considered very
crucial factor to traders.
These facts show that
the food could surely
have serious influences
or been contaminated
by the trading settings.
Retailers
must
apply measures to
treat
wastes
according to the
law provisions on
environmental
protection.
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Gutters can be the
resources which every
kind of waste may put
into. That causes the
polluted surrounding
environment of not
only the shops/stores
but also the nearby
settings.
Origins of food
Retailers
are
accountable for the
origins of food they
have
produced
and/or traded in.
Salesman’s
health condition
People who directly
sale the raw and
fresh foods, have to
reach the standards
about
health
condition, do not
get communicable
diseases.
Only
20%
of
the
materials
sold
are
wholesalepurchased
from prestige suppliers,
the rest places their
confidences on wholesale
markets or anonymous
sole traders.
Negatively, over 90%
correspondents do not
pay much attention on the
health condition. They
may think salesman’s
health condition does not
match with the safety of
food.
Th¸ng 5 - 2010
This fact suggests the
origins of food cannot
be guaranteed. Legal
requirements cannot be
imposed
on
any
anonymous sources.
This reflects high risks
for
foods
being
infected
by
the
infectious diseases of
the traders if any.
Viewed all together, it is seen that despite being launched 7years ago, the Ordinance
is still not popularized widely for retailers in traditional markets even very limitedly known.
According to Nguyen Thi Cuc (2010), the possible causes leading to the failure of
ordinance application can be both subjective and objective.
Subjectively, it is due to the limited knowledge of both managers and workers about
the standards. It is the fact that the managers of these businesses are often the owners of
the shops. They are often not highly literate to be well aware of the hygiene and food
safety themselves. In some cases, even if they may be aware of these as well as the
hazards of food borne illnesses, they are too busy running the business daily or they are
unable to practice the standards professionally. Next, it is due to ethical problems of
both managers and workers. Almost of owners of the micro-businesses mentioned run
the businesses to meet their and their family demand. They face with the financial
pressures of their daily expenses rather than the pressures of a strategic or long-term
development for the business. Therefore, they can be considered profit-oriented and
often show little concern over the hazards that maybe caused from the food they sell.
Additionally, the workers of these businesses are often poorly-qualified who are often
the family members or relatives without formal training generally or ethic training
particularly. Therefore, it is likely that they often perform poor practices in handling the
food generally. The regulations in the standards would surely be too detailed or too
strict compared with their traditional way of dealing with food.
Objectively, it is due to the weak legal requirements from the related authorities.
The legal requirements tend to reach larger scale businesses and those that apply to
micro-scale businesses often minimized to only undocumented requirements. The
requirements of the Ordinance seem to overlapped and too general to define clearly
what to be done, how to be done, when to be done… The obligation of each authority
agencies is still not transparent, leading to the interwoven between the duty of one to
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another and the avoidance of accountability once problems occur. Particularly, the
responsibility of food hygiene and safety’s implementation and supervisor belongs to
the Ministry of Health, the Ministry of Agriculture and Rural Development, the
Ministry of Commercial and Food Administration Office to small market management
board. Furthermore, no clearly-defined or stated punishments announced officially
therefore these businesses do not find it compulsory or necessary to apply the standards.
Additionally, it is the high cost for applying the standards ranging from consulting
services, improving facilities and training employees. Last but not least, it is due to the
limited knowledge of consumers on their own food intakes’ hygiene and safety due to
poor living conditions or the unselected purchasing habit.
VII. CONCLUSION AND RECOMMENDATIONS
It can be concluded from the above analysis that, there is a big gap between the
Ordinance regulations and the factual situations in managing Food Safety and Hygiene
in the micro-scale food retailers in general and in the correspondents of the research in
particular due to a number of subjective and objective reasons.
Therefore in order to well manage the activity of retailing sector, we suggest some
recommendations. Firstly, at the governmental level, in the proposal for Law on Food
Safety and Hygiene which will be ractified in the next National Assembly meeting and
Ordinance on Goods Quality must go inline with international regulations and support
each other in guaranteeing the act of relevant party in order to provide a comprehensive
legal framework for Food Safety and Hygiene implementations. Specially, the
responsibility of authorities must be seperated and transparent assigned in order not to
avoid their task when problems occur. As mentioned in Proposal, the Ministry of Health
would be the agency to implement the technical standard and other requirements on
Food Safety and Hygiene, including the activities from manufacturing process to food
retailing business; receive the register for food retailing from businesses; examine and
supervise Food Hygiene and Safety law implementation and enforce the law to give
strict discipline for regulation violators. The Ministry of Agriculture and Rural
Development would take the responsibility to manage the quality of import food and
foodstuff, the processed goods and other domestic agriculture, fishery products. The
Ministry of Commerce will have accountability to manage the manufacturing process
domestically and import/exported goods (Anonymous, 2009). The responsibility for
process chain is for the Ministry of Agriculture and Rural Development and the market
place products’ quality guarantee belongs to Food Administrator Office, a branch of
Ministry of Commerce. A tight relationship amongst the Ministry of Health, the
Ministry of Agriculture and Rural Development and Food Administrator Office, small
market management boards is needed to well manage the act of food and raw foodstuff
retailing from the quality of input material, delivery to distributions to small-scale
retailer through supplier intermediaries (Anonymous, 2009).
Furthermore, it is the task of the government to deliver the compatile instruction
document paraleled with the articles in the Food Safety and Hygiene Ordinance to give
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comprehensive and clearly overview to retailers on their tasks and responsibility for the
health of other people. The 134 instruction documents provided by cities and provinces
must be written off as soon as the common instruction ractified by government take
effect. Information should be publicized from news agencies to each retailers and
customers by any means from mass media to words of mouth. Also, the local radio
channels need to be improved and broast-casted during their business activity conducted
to attain most widely attention from small-scale food retailers.
Besides, it is inefficient for Food Administration Office to do examine the safety
and hygiene implementation of retailers (include small-scale retailers) strongly and
actively just in prevention periods. These preventions take place only in peak seasons
such as Tet holidays, summer holidays and other vacations like or other prevention
programmes carried out by government once high risk phenomena happens. It is
recommended that instead of supervising the Food Hygiene and Safety implementation
of small-scale retailers in peak occasions, the Food Administration Office do take their
supervising daily in market business time. A meeting held weekly is necessary to
conclude some problems each week of their caring areas and then analysis, summarize
the possible solutions to form a timely action to promptly tackle the problem.
Secondly, at the business level, it is necessary for almost the small-scale retailers
form an Association of Retailers, taking as a channel for them to receive directly the
Ordinance of Food Safety and Hygiene and other food retailing business related
documents from the Food Administration Office. It is expected that the salesmen
participate actively into the Association’s activities such as weekly meeting to discuss
the problems they face when applying the ordinances; the Association will be the agent
to collect feedback and submit them to the Food Administration Office for their
consideration. In the short term, the Association will guide its members to put the
requirements of Food Hygiene and Safety into their practice under the Ordinance. The
practical training course for salesmen needs to be held by the Association of Retailers
with the assistance of the Ministry of Health. The Association should be given more
preference on accessing the high risk food and foodstuff from the list of Food
Administration Office directly to stipulate all information needed for the small-scale
retailers promptly. This practical training course should give salesmen aware about
hygiene and safety requirements market knowledge needed and their role in retailing
industry as well as helping them retain positive attitude towards managerial staff. Better
quality products following the hygiene and safety criteria would gain more customers
through words of mouth.
Besides, a training course to differentiate the real and fake goods, the goods with
quality and hygiene and safety should be delivered to consumers, which is held by the
Association of Consumers’ protection. The customers will have to learn how to say
“no” or boyscot the unsafe products to protect themselves. “Being a smart consumer” is
a slogan of programme held by the Association of Consumers’ protection has earned a
great attention from the public. Based on this success, the Association of Consumers’
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protection should cooperate with the Association of Retailers to inform its members
about the benefit of using and selling safety and hygiene products and the retailers meet
all the safety food requirements will gain their customers through the advertising
activities supported by the association of consumers’ protection (Thien Chi, 2009).
Due to limited time given doing the research, we hope that further research will be
conducted by us on the field to extend the scope of research or sharpen the research outcomes.
REFERENCES
1. Vietnam Government, 2003. The Ordinance on Food Hygiene and Safety. [online] Available at:
http://vbqppl.moj.gov.vn/vbpq/Lists/Vn%20bn%20php%20lut/View_Detail.aspx?ItemID=21036
[accessed15 May 2010].
2. Nguyễn Thị Cúc, Áp dụng chuẩn quốc tế về vệ sinh an toàn thực phẩm: Khó khăn từ các cửa
hàng nhỏ bán lẻ thực phẩm, Báo Kinh tế Việt Nam, Bộ Công Thương, Số 2, Tháng 1/2010.
3. Anonymous, 2009. An Ninh Thu Do – Proposal for Law on Food Hygiene and Safety,
Cooperation among ministries is needed. [internet] Available at: http://www.baomoi.com/Info/
Du-thao-Luat-ATTP-Cac-Bo-can-tiep-suc-cho-nhau/45/3199894.epi [accessed 17 May 2010].
4. Thien Chi, 2009. Build a food hygiene and safety model from farm to eating table. [online]
Available at: http://www.baomoi.com/Info/Xay-dung-mo-hinh-an-toan-thuc-pham-tu-trangtrai-den-ban-an/45/2867782.epi [accessed 16 May 2010].
5.
Hong Son, 2009. Proposal for Law on Hygiene and Safety Food – Improve the
effectiveness
of
People’s
Health
Protection.
[internet]
Available
at:
http://giadinh.net.vn/20090824041251920p0c1000/nang-cao-hieu-qua-bao-ve-suc-khoenhan-dan.htm [ accessed 17 May 2010].
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The development of Standby Credit and its application
in Vietnam
Written by: Le Thi Thu Huong, Nguyen Thi Thanh Nga
Nguyen Thi Ha Nhung, Nguyen Phuong Van
Abstract
In recent times globalization trend has played such a crucial role in enabling not only the
incorporation of Vietnam- an emerging economy towards outside world but also the
development of Money and Banking Market along with Market for Guarantee. As a matter of
fact, the considerably increasing demand for international contract in the field of commerce,
construction investment, service results in the growing need for domestic assurance and the
variability of guarantee forms. Furthermore, the expansion of such a preeminent instrument as
Standby Credit in the United States and other countries all over the world has a great
contribution in introducing this advanced means of guarantee into Vietnamese market for the
past few years and promisingly bringing it about a prospective popularity. It is the truth that
Standby Credit has its part in reducing unexpected risks in many fields of transactions,
diversifying and improving the guarantee market in particular and market for money in general
so as to keep up with the pace of world modern banks. Thus, based on several researches
together with online references this secondary research is conducted on the purpose of studying
and exploring the nature, procedure and the real life popularity of this modern American
guaranteeing product-“Standby Credit” as a fairly new instrument in Vietnam. As such, it is
our belief that this report can serve as prototype as well as potential stimulus for larger and
further studies in the future
I.INTRODUCTION
It is true that nowadays many businesses still choose to obtain a loan from banks to
fill a gap in their cash flow, finance an profitable investment project, sign a post-paid
sales contract with their suppliers or for any other favorable business purposes. But few
know a “bank’s letter of standby credit” is also a useful and excellent tool in various
business circumstances. Indeed, standby credit is useful when one party wants
additional evidence and proof of another’s financial capability and creditworthiness.
This particular application of standby credit as a secondary payment mechanism, therefore,
explains the reason why many trade dealers find this tool extremely helpful in facilitating
them to develop relationship and open line of credit with more and more suppliers.
Apart from this, using standby credit can even bring cost advantages to the applicant
in comparison with the choice of getting a bank direct loan. To take a quick
mathematical example, assume business A chooses to borrow $15,000 from his local
bank for 30-day period at interest rate of 10 % per annum. This financing option will
pose the business to a repayment of $125 apart from the principal at the end of the
borrowing period. However, the amount will become much less if the standby letter of
credit method is applied, which accounts for just $18.75 in addition to principal for a
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typical bank charge of 1.5% per annum on the face value of the standby LC. And for
any business, reducing financing charges definitely goes hand in hand with improving
its producing efficiency.
Thus, based on these fundamental benefits of standby credit, there is no doubt about
the fact that SBLC should be widely applicable in various business sectors as a
profitable device to enhance a firm’s operating efficiency and empower trading activity.
Nonetheless, not so many companies all around the world as well as in our nation put a
deep consideration into the use of this wonderful credit method. Furthermore, there are
still not so many available academic researches on domestic scale focusing on the
detailed explanations of standby credit in an picture of various corners.
Bearing this in mind, this academic research conducted by a group of students from
Hanoi University has aimed to attack the very details of standby credit. The research is
clearly categorized into separate parts under different crucial headlines for the purpose
of readers’ easy understanding and taking notes.
The very first part comes with Nature of Study, where a thorough presentation with
regard to Rationale for study, Literature review and Research methodology is
mentioned. Following this part, a deeply analyzed discussion covering almost every
aspect of standby credit becomes the main proportion of our research. This part includes
from a very basic description of a backward history of standby origins in association
with a most general definition of itself, a detailed illustration of operating process and a
clear picture about standby LC’s natures together with its categories. Additionally, a
section with full comparison of standby credit with normal commercial credit that has
been non-popularly described ever is a worth noting point of our research. And
discussion part is finally made more complete by the incorporation of Application
section where the most updated facts and figures about the popularity of this special
credit device on both national and international scale is provided.
Closing up, the research comes to a Conclusion and Recommendation part with
several crucial suggestions for the greater domestic development of standby LC as a
result of all information collected above.
II. DISCUSSION
A. NATURE OF STUDY
1. Rationale for study
During nearly twenty years of Doi Moi period, especially, after joining WTO in
2007, Vietnam’s economy has been growing significantly. More and more foreign
investors come to Vietnam thanks to efficient monetary polices and incentives from the
Government. Factually, commercial exchanges among nations are indispensable for the
world development, which lead to the increasingly importance of International Payment.
On the other hand, making business transactions across borders contain so many
risks for the investors. As a result, they require a document to guarantee their profits and
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limit losses. From that demand, standby L/C is brought into the economic world as a
mean of assurance for financier in exchange transactions.
As stated in the introduction, standby credit, which serves as secondary payment
mechanism, is very similar to a guarantee of transactions among parties involved.
According to the definition, the beneficiary can show standby credits along with the
evidences needed to get money in case of failure to perform the obligations of the
applicant. Therefore, it becomes more and more popular in helping reduce the overall
risks in commercial operation. Besides, it can be used to support the payment of
financial obligations or contractual agreements maintain capital for other personal or
business needs, and ease the establishment of new business relationships.
However, in Vietnam, standby credit seems to be inexperienced and strange. Not
many individuals know how to make full uses of this kind of L/C to strengthen the
assurances and increase the profits. Hence, we do this research to help the readers
understand deeply the approaches and the process of utilizing standby credits.
2. Literature Review
From judgments above, standbys, as they are called, get more and more well-liked
in the modern life. As a result, there are loads of investigations about this attractive
field. In one research of Buddy Baker, an analyst of ABNAMRO- a Dutch bank in
March 7, 2005 (link address: http://www.docstoc.com/docs/29073887/STANDBYLETTERS-OF-CREDIT/), he explained the differences between commercial letters of
credit, standby letters of credit, and demand guarantees through procedures and usages
in order to show the importance of standby L/C among other types of L/C. He also
mentioned some cases in which standbys might not work out. For example, when they
are expired L/C or issued during political or economic events in the country of the
issuing bank happen, bankruptcy preference period, etc. Thanks to this study, standbys
can be used more effectively and suitably.
Another amazing comment of Victoria Duff, the reporter of eHow magazines,
showed clearly the way standby L/C can be considered as beneficial collateral in
business transactions (link address: http://www.ehow.com/how_5703255_use-lettercredit-collateral.html). Not only did she prove that advantage of standbys in
guaranteeing contracts, but she also provided some tips for Issuing Bank to secure the
guarantee of payment by requiring offsetting deposits or physical collateral adding to
the original standby L/C. Thanks to her, our group found out more pros of L/C which
are very useful for our research.
The last reference we want to point out is some judgments of Vietnamese analysts.
As known, although standbys are very preeminent and easy to use, they have not been
widespread in our country yet. Therefore, not many studies have been made about this
topic so far, which is a main reason that we collect remarks merely upon standbys from
several economic websites. Most of them focus a lot on the importance of standby
credits in the modern life when financial boundaries are reduced and people make
business more freely. In addition, there has also been a research by Dang Lan Anh, a
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student of A7-K35C, Foreign Trade University, that systemized all risks associated with
standbys transactions as well as recommendations to put up the popularization of
standby L/C in Vietnam. In another discussions, economists also mentioned the most
suitable and effective ways to use standbys applying ISP 98 or UCP 600.
3. Research Methodology
In this research, we do take advantages of various data collection methods such as
reports from journals, books, magazines, internet, etc. Especially, our group catches the
valuable consultancy from banking experts. They give us practical experiences and
guidance in lieu of theories, from which we can acquire information of real situations of
using L/C in Vietnam. Moreover, in order to catch readers’ interest as well as ensure for
their deep comprehension of standby credits, some statistical tools are also added like
diagrams, flow charts showing the process of applying standby L/C or demonstrating
particular types of L/C in general accompanied with comparison and contrast analysis.
B. HISTORY AND DEFINITION OF STANDBY CREDIT
Well-known as a superior means of international payment,Letter of Credit is
considered one of the oldest forms of transporting money developed by European bankers just
before and during the Renaissance (http://library.law.columbia.edu/CircularLetterOfCredit/).
Throughout world history, Letter of Credit, whose primary function is aim to serve
as the highest level of security in international commerce, has still evolved to various
types of credit in order to fulfill a wide range of newly arising business context,
scenarios, objectives. While Documentary Letter of Credit was early used around 1840
and especially witnessed the exceptional growth after the First World War (1914-1918),
the period during World War II(1939-1945) was the occasion of the increased use of
Commercial Letter of Credit. It was not until after the Second World War that Standby
Credit emerged a new preeminent means of securing performance under the type letter
of credit because of the fast change such as monetary regulations, currency fluctuations
and import restriction.
In spite of the fact that Letter of credit originated in Europe, its variant-Standby
Credit was derived from the history of the United States. The book “The law of letters
of credit and bank guarantees” by Agasha Mugasha reveals that back to the middle of
19th century, as a consequence of the released legislation from the Federal Reserve, no
federally chartered banks were allowed to undertake the issuance of guarantee on behalf
of the third parties. That regulation, also recognized as “No guaranty”, was taken into
enforce due to several factors. First and foremost, there was a judge-made rule that
chartered banks must engage directly to business of banking within its scope. This
principle from the judge then permitted that this guaranteed should be responsible by
only surety company which later developed. Second, the nonappearance of domestic
surety companies at that time, undeniably, was the incentive for customers to ask
bankers act as their sureties. Like a coin has two sides, the surety action also had to face
up with the severe problem which stemmed from customers’ default-the inability to
make payment. If so, banks always repudiated their liability since that banker’s act of
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surety apparently were ultra vires banks’ power and banks could not take action of
guarantee on behalf of clients due to shortage of legal capital. Last of all, it was the ultra
vires doctrine that the courts readily applied to treat banks as other corporations17.
Reversely, the end result of the Second World War had essential function in
expansion of such credit. As in a position of becoming not only victory and almost
unaffected country thanks to the separate geographic location, the United States, which
has been famous for both developed economy and rich natural resource, took the chance
to boost the major economy more by entering a large amount of international contract.
However, the another issue regarding to international trade became apparent as a result
of incapability of American surety companies that at that point of time had tendency to
operate within the domestic market, which means that there would be no means of
guaranteeing the performance outside the USA-a potential risk for counter partners of
American business people. Having realized the necessary importance of guaranteeing
instrument, several major banks began to issue “guaranty letters of credit” which
nowadays is legally known as Standby Letter of Credit. Moreover, it can not be denied
the help of some other crucial factors that also made great contribution the rapid growth
of SBLC. First, it is evident that Standby credit was a must to fill the gap in
international trade. Next, the rising previous problem concerning to ultra vires doctrine
seemed to be increasingly dubious; together with this banks were permitted to have
freedom in operating banking business. Last but not least, as a preferred superior toolSBLC protects the interests of each party involved. Obviously, much cheaper costs
would be paid by the applicants; more income flowed to banks along with the certain
protection for the beneficiaries.
Consequently, it it appears that the expanding of United States economy led to the
increased use of Standby Credit, whose role are both financing transactions and
securing performance. Standby Letter of Credit (Standby L/C) is an irrevocable
undertaking from Issuing Bank to support payment, when due or after default, of
obligations based on money loaned or advance, or upon the occurrence or nonoccurrence of another contingency. Standby LC, therefore, can be functioned as a
Guarantee or an LC where the Beneficiary can receive payment from the bank on
presentation of compliance documents.
C. OPERATION PROCESS:
Honestly, it can not be ignored that there are many parties engage in procedure of
operating the standby letter of credits. Each participant has its own role and
responsibilities. Rather than a three-party agreement, standby L/C is an independent
agreement issued by Issuing Banks (bank of the Applicant) to pay specified amount to
the Beneficiary upon the presentation of required documents in case of nonperformance
of the Applicant. Another party involved is Advising Bank, representative of the
beneficiary.
17
“The Law of Letter of Credit and Bank Guarantee” – Agasha Mugasha
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With an aim to provide readers with detail procedures, a flow chart is thoroughly
vital for translating all the complex explanations into clear steps:
As indicated by this chart, after a contract is made between Applicant and
Beneficiary, an applied standby will be sent to the Issuing Bank to get the acceptance of
opening a LC in favor of the beneficiary.
As indicated by this chart, after a contract is made between Applicant and
Beneficiary, an applied standby will be sent to the Issuing Bank to get the acceptance of
opening a LC in favor of the beneficiary.
Secondly, the Issuing bank will approve the credit worthiness of the Applicant and
then, forward a standby L/C to an Advising Bank or Confirming Bank that are usually
located in the same geographical region as the Beneficiary.
Following of this, the Advising Bank will check all terms and clauses of the
documents to assure that the Beneficiary can have a guarantee in dispatching the goods
and services.
After the Beneficiary make the performance done, he/she has to bring the required
documents to the Advising Bank to get payment. If all the documents are accepted,
Advising Bank will claim the fund by asking for the Issuing Bank accompanied with
sending those documents to that bank.
In the last step, Issuing Bank has to check the documents again for compliance, send
it back to the Applicant and debit his/her account.
D. NATURE
The standby documentary credit is considered as the obligation on the part of the
issuing bank to pay the beneficiary in case of non performance of the applicant.
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Therefore sometimes Standby letter credit is also called “non performing letter credit”.
It is also because they are only used as the back up payment method if the collection on
the primary payment method is pass due.
Standby LC in some ways is different from the traditional commercial LC. In nature,
when issued it is an irrevocable, independent, documentary and binding undertaking.
In the first place, standby LC is deemed to be irrevocable because it can’t be
revocable. It means that once LC is stated irrevocable, there is no amendment or
cancellation to the issuer’s obligation except it is provided in the standby or it is
consented by all the parties involved that the amendment or cancellation is asserted.
Secondly, standby LC is independent which means that the enforceability of the
issuer’s obligation under the standby LC does not depend on the issuer’s right or ability
to obtain reimbursement from the applicant; the beneficiary’s right to obtain payment
from applicant; it is also separated from the reference in the standby to any
reimbursement agreement, underlying transaction. Also, the issuer’s knowledge of
performance or breach of any reimbursement agreement is independent from standby LC.
Next, documentary is the third characteristic of standby LC. Because standby LC is
documentary, obligation of issuer depends on the presentation of documents and
examination required documents on their face. All the documents must be carefully
examined to ascertain whether or not, they appear on their face, to be in compliance
with the terms and condition ò the credit. Compliance of the document shall be
determined by the international standard practice.
Last but not least, binding is also an important feature of standby LC. When issued,
it is considered as binding, so it is enforceable against an issuer whether or not the
applicant authorized its issuance, the issuer receive a fee or the beneficiary received or
relied on the standby or the amendment.
E. CLASSIFICATION
When referring to Standby LC there are many kinds used in each specific
conditions. In reality, it is flexibly used.
The most commonly used is the commercial standby credit that supports the
obligations of an applicant to pay for goods or services in the event of non-payment by
business debtor. This kind of credit is to protect the seller from non performance of the
buyer. Under this kind of document the bank proceeds to reimburse the exporter when
the importer defaults the payments. A standby letter of credit will then be presented
along with the needed information to show that the buyer has not paid for the
merchandise.
Another popular type of Standby LC is performance Standby.
This instrument expresses an obligation to perform other than to
including the purpose of covering losses arising from a default of the
completion of the underlying transactions. Performance Standby is used
some sort of performance of a contractual obligation. For example, a
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applicant in
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company building a highway bridge might be required by the highway department to
put up a performance standby letter of credit ensuring that they will complete the project
contracted or to warranty the work. Under normal circumstances the standby would not
be drawn upon, however if the contractor abandoned the project midway through
completion or if the bridge were unsafe, the standby letter of credit could be drawn upon
for its specified dollar amount.
In contrast with performance standby, financial standby LC is to support obligation
to pay money, including instruments evidencing obligation to repay money or
outstanding loan. Financial standbys are frequently used between buyers and sellers
who have frequent, ongoing trade shipments for an extended period of time. The
standby acts as a blanket guarantee for the overall obligations of the buyer to pay and
does not contains specifics related to any one particular shipment.
Moreover, advance payment standby is the one which is used in advance payment
method. This instrument supports an obligation to account for an advance payment
made by the beneficiary to the applicant. To ensure the benefit for importer in case the
exporter has received LC, advance payment, deposit…, but hasn’t fulfilled his
obligation to delivery goods as stipulated in LC, importer can require the issuing bank to
issue standby LC to repay advancement and all the cost related to opening LC for them.
The last one used in construction is bid bond or tender standby LC. This standby
supports an obligation of the applicant to execute a contract if the applicant is awarded a
bid18. In this case, contractor will be the person who opens standby LC according to the
requirements of the project’ s owner to ensure the project execution19.
As can be seen from above, there exists many types of standby LC and each has its
own function so used in different case.
F. COMPARISON OF STANDBY CREDIT WITH COMMERCIAL CREDIT
As both documentary and standby credit are undertakings to pay against the
presentations of one or more documents (as reflected by their mutual features of being
independent and documentary), the distinction between them is almost nowhere
precisely stated. The UCP states that it applies to both without specifically defining
them. Similarly, the UCC that also takes care the application for both gives no room to
distinguish them at all. Nevertheless, the distinctions between the two are significantly
worth being discussed as they are subject to fundamental differences in terms of role,
nature, conditions as well as governing rules. Therefore, a thorough understanding about
their discrepancies undoubtedly can help improve the appropriate use and application of
each type under necessary cases to maximize benefits and minimize risks for all
involved parties.
On one hand, the outstanding nature of each seems to have contrasting feature. The
Documentary Credit is conditioned on the performance of the Beneficiary, meaning that
18
19
International course on trade service – Edward G. Hinlkeman
See Appendix 1 for a Sample SBLC
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the Beneficiary is entitled to get payment strictly based on the obligation completion of
himself. In contrast, the Standby credit is conditioned on non-performance or default by
the applicant party, who asks for the opening of Standby credit. In other words, the beneficiary
in Standby credit is entitled to get payment in case of applicant’s failure to perform20.
In pursuant to this big difference, there is no doubt about another dissimilar
characteristic in associated with the role of two credit types. If the Documentary credit
is universally implemented in the trade world as a mechanism of payment, the Standby
credit is generally accepted as a mechanism of guarantee rather than a means of
payment. Frequently, a standby credit is given to support an obligation of the applicant
in a variety contract types applied in numerous industries, as a means to add assurance
as well as higher level of trust to the beneficiary. It is used to support an obligation by
the applicant to make advance payment; it is used as bid bonds to assist the bidder’s
duty to execute a contract; it is also referred to as an excellent tool in loan transaction to
ensure repayment of the borrower. As a consequence of application under likely
expectations about the unexpected, it is rational to understand why Standby credit is
often issued with an expectation that it will not be drawn on by the beneficiary.
However, the opposite site holds for the case of normal credit.
On the other hand, the requirement for documents to be presented under two types
also stands out as a point of distinction. In a traditional letter of credit, the beneficiary
obtains payment against documents evidencing performance. In fact, the set of
documents required under L/C that follows the rule of UCP600 is both numerous and
complicated. As the presentation of documents under documentary credit is a sign that
the transaction is generally proceeding as according to schedule, documents required
may include important ones such as B/L, commercial invoice. insurance
certificate…Any lack of the required documents or inconsistency in information
between these and L/C content will become absolute obstacles to the right of receiving
payment for the beneficiary. On the contrary, the set of documents under Standby credit
is neither numerous nor complicated. As an indication that something has gone wrong in
the underlying transaction, the required documents are quite simple with all the proof,
clarifications and statements that applicant has defaulted or failed to complete his task.
Last but not least, it is worth taking into account the different set of governing rules.
UCP600 (for the latest) is the reference source of Commercial letter of credit while for
Standby letter of credit, ISP98 is an important reference source besides the general
application of UCP600. ISP98 (short for “international standby practice”) that was
prepared by Institute of International Banking Law & Practice, Inc in the US “reflects
generally accepted custom, practice and usage of standby credit in a comprehensively
detailed way”21. Unlike UCP600 that covers generalized terms and conditions of all
types of credit, ISP98 is devoted specifically to Standby credit and therefore has become
the most widely applicable reference source for parties involved in standby transactions.
20
21
The Complete guide to Documentary Credit/Chapter 3/Use of Standby Credit
“A guide to the use of ISP 98”, published by Institute of International Banking Law and Practice,Inc
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III. Application
A. International use of Standby letter of credit (SBLC)
As mentioned above, it was from the period of post World War II the U.S economy
witnessed the birth of Standby Credit - a newly strong means of guarantee. At first, this
newborn form was applied within the domestic banking system, yet, it just took a short
time to spread out in other parts of the world, which was unquestionably based on the
significant power of this North American country. As having advantage in not only the
field of economy but military also, the United States has widened out its global business
relationship with a variety of countries, in facts made use of economic strength to force
many countries both developing as well as developed partly or even wholly rely on it.
Such considerable condition was the main factor bringing a prospective future for SBLC
outside its motherland. To clearly illustrate, the case of Japan should be taken as a clearcut example where there used to be the existence of legislative prohibition of issuing
guarantee. Japanese banks also issue standby letters of credit for similar reasons.
Moreover, the use of SBLC is actively encouraged in many developing countries.
Consequently, this upward trend in the use of SBLC in banks, the major participants in
international trade, actively raised the demand for legal framework. It is surprising
enough that it was until 1983 that there was the first reference of SBLC in UCP
(Uniform Custom and Practice for Documentary Credits), specifically in Article 1
“These articles apply to all documentary credits, including to the extent to which
they may be applicable, standby letters of credit, and are binding on all parties thereto
unless otherwise expressly agreed. They shall be incorporated into each documentary
credit by wording in the credit indicating that such credit is issued subject to Uniform
Customs and Practice credits, 1983 revision; ICC Publication No. 400”
Nevertheless, the limited adequacy of UCP to Standby Credit became more acute
with the increasing growth of standby credit. Apparently, UCP 500 and UCP 600 have a
handful of articles pertaining directly to standby and there are several articles, if applied
for the case of standby cause confusion in both interpretation and application. In
recognition of the need, the Institute of International Banking Law and Practice has
obtained the approval of the international banking community for the introduction of
separate rules for standby letters of credit, known as the International Standby PracticesISP98. The International Standby Practices 1998 (ISP98) is a carefully written set of 89
rules designed to facilitate the domestic and international use of standby letters of credit
as well as reflects generally accepted practice, custom, and usage of standby letters of
credit. This standardized text is intended to be the typical reference for the use of
standbys worldwide and offers a precise and detailed framework for practitioners
dealing with standby letters of credit. It provides separate rules for standby letters of
credit that are more specialized than those outlined in the Uniform Customs and
Practice
for
Documentary
Credits
(UCP500)
(http://www.encyclopediaofcredit.com/WebHelp/international_credit/financing_internat
ional_sales/isp98_rules.htm).
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Throughout nearly half of the 20th century, it can not be denied the extremely vital
contribution of these uniform rules in reducing the cost and time of drafting, limiting
problems in handling and avoiding countless disputes and unnecessary litigation that
have resulted from the absence of internationally agreed rules on standby.
(http://www.iccbooks.com/Product/ProductInfo.aspx?id=201)
Standby Credit Facility by international financial institutions
As can be seen from above, SCF has been used for a long period of time. Especially
many International financial corporations have used it as an effective tool to make more
flexible and better tailored financial support to meet diverse needs of the low income
countries(LICs).
Among all of the International Finance Corporations using SCF, International
Monetary Market is the one mostly use SCF because it plays the very important role in
helping IMF supporting poor countries. In IMF, standby credit facility was created under a
newly established Poverty Reduction and Growth Trust (PRGT-the program established by
IMF with the objective of poverty reduction and growth by lending operation to its poorest
countries). It is formed to replace the High-Access Component of the Exogenous Shocks
Facility. The support of SCF can be under a wider range of circumstances, allows for
higher access, carries a lower interest rate, and can be used on a precautionary basis which
means that the countries that no longer face protracted payment of balance problem but
may need help and can be used on precautionary basis to provide insurance.And in particular,
it places greater emphasis on the country’s poverty reduction and growth objectives.
"http://en.wikiversity.org/wiki/Letters_of_Credit/Types_of_Letters_of_Credit
The SCF is available to PRGT-eligible member countries facing an immediate or
potential balance of payments need, where the country’s financing and adjustment needs
are normally expected to be resolved within two years, thus establishing a sustainable
macroeconomic position.
About duration, an SCF arrangement can range from 12–24 months. As the SCF is
intended to address episodic short-term needs, its use is normally limited to two and a
half out of any five years. Subject to these limits, an SCF arrangement can be extended
or cancelled, and consecutive arrangements can be approved.
The specific examples for using SCF of IMF is the recent IMF’s supply for 15month standby credit of SRD 22.8 billion(about USD 30.4 billion) to support the
Brazil’s economic and financial program through December 2003. Of the standby
credit, the equivalent of SRD 7.6 billion(about USD 10.1 billion) would be made
available under the Supplementary Reserve Facility. Furthermore, SFC is also used by
other corporation such as World Bank Group, which has signed an agreement to provide
a medium-term standby revolving credit facility of $30 million to LanChile S.A (one of
the leading airline in Latin America with wide network). This is IFC's first project in this
sector in Latin America. The facility will help strengthen the airline’s long term working capital
position. http://www.imf.org/external/np/sec/pr/2002/pr0240.htm. From all mentioned above,
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we can find that the contribution of SCF is not negligible and it’s likely that in future
SCF will be much more widely used.
B. Domestic use of Standby letter of Credit:
1. Current situation of standby products in Vietnam
As a result of a significant development in the domestic financial market that often
goes hand in hand with the domestic economic progress, standby credit in Vietnam
has also been steadily applied though not yet rapidly. However, the popular term in
domestic banking industry normally comes with “bank guarantee” rather than
“standby credit”. Basically, bank guarantee can be understood as an undertaking by a
bank to pay the beneficiary a certain sum to cover the action or default of a third
party22. Therefore, from a legal point of view, standby credit is equal to demand
guarantee in terms of producing the same results to parties involved. The most
outstanding feature that separates the two lies in the range of application. The SBLC
has evolved into a complex instrument that encompasses a much wider range of uses
than that covered by bank guarantee. It has developed into an all-purpose financial
support instrument while demand guarantee has not become so powerful widespread.
Indeed, it is commented in the ICC publication number 511 that “ it was unanimously
agreed that the Standby credit is not to be merged with Bank guarantee regulated
under URDG (Uniform Rule for Demand Guarantee)”.
In Vietnam, it is financial organizations that operate under the national Law for
financial institutions and commercial banks are allowed to provide bank guarantee
services. In fact, besides a variety of services that are offered by urban joint-stock
commercial banks such as mobilizing funds, credit operation, discounting and
rediscounting commercial and valuable papers, bank guarantee has occupied an
increasing important position in a diversification strategy of local banks nowadays.
Most of our local financial healthy banks such as Vietinbank, Vietcombank, BIDV,
EXIM bank, ACB, Maritime bank, Military bank have been able to satisfy customers
with various forms of bank guarantee like loans, advance payment, contract
performance, bidding and other forms for individual, credit institutions. Also, in
accordance with regulation of State bank of Vietnam under Decision No 26-QD-NHNN,
“banks that are permitted to provide international services may issue guarantee for loan,
advance payment and other forms of bank guarantee when Beneficiary is a foreign
individual or organization”.
As a result of an unofficial release of several local banking experts’ research in the
field of bank guarantee, bid bond and performance bond guarantee have been ranked as
the most popular type of guarantee services being offered by Vietnamese banking sector.
In reality, it is true that the nature of construction projects is such that significant
money must be spent and liabilities incurred prior to the completion and delivery of a
final product. Because of huge uncertainties involved in the process, prudent developers
22
“Finance of International trade” - Ẻric Bishop, published by Elsevier 2004
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often require the tender to submit an acceptable bid bond as an assurance that the tender
cannot walk away from a contract once it has been awarded to him. In addition with
that, the construction sector of Vietnam has been flourishing for the past few years with
the goal of completing the process of industrialization and modernization. Hundreds of
investment projects financed with both domestic and foreign capital have been in
progress with an aim to upgrade our infrastructure system has reinforced the need of bid
and performance bond.
Hence, local banks have been competing with each other in terms of bank guarantee
service fee in association with other accompanied services like free consultancy on the
issues related, quick and convenient procedures23, experienced and skilled staff with
professional knowledge and polite conduct to help improve applicant’s prestige with
their partners and strengthening the possibility of successful transactions.
A quick comparison at the type of guarantee products and fee schedule of two local
banks that are quite successful at implementing this service is incorporated for further
reference (next page).
VCB
EXIM Bank
PRODUCTS - Commercial Guarantee.
- Performance Guarantee
- Advance Payment Guarantee
- Bid Bond Guarantee
FEE
SCHEDULE
• Issuance fee:
9 100% margin 0.05-0.06%/m
9 Below 100% margin: 0.15 %/m
•
Advising fee: USD 20
•
Amendment fee: same as Issuing
fee /USD 20
-Bid bond Guarantee
- Performance guarantee
- Guarantee for product quality
- Loan guarantee
- Payment guarantee
- Advance reimbursement Guarantee
- Tax submission guarantee
•
Issuance fee:
9 100% margin: 0.06%/m
9 Below 100% margin: 0.1-0.2%/m
•
Advising fee: USD 20
•
Amendment fee: same as Issuing
fee / VND 200,000
2. Reasons for underdevelopment of demand for SBLC in Vietnam
Thanks to the examinations above, it can be stated that standby L/C is extremely
important in business transactions. In common sense, it has been applied effectively and
extensively all over the world, particularly, in developed countries such as United
States, German, etc. to limit the risks and assure profits for the beneficiary. In other
word, standby credits are often used as a bank guarantee in the international trade.
However, next to obvious advantages, standby credits have some drawbacks that
restrain Vietnamese entrepreneurs from utilizing and making full use of this kind of
23
See Appendix 2 “What should be in a Bank guarantee”
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letter of credit. This problem can put the economic growth of our country at the
considerable disadvantages in trading domestically and internationally. As a result, in
this research, our group tried to analyze the reasons why standbys are not popular in
Vietnam, from which we would give out useful recommendations to improve that issue
in the later part.
First and foremost, factually, standby L/C is quite new in Vietnam. There are not
numerous specific instructions as well as detailed laws for applying standbys. Until
now, ISP (short for International Standby Practices) 98 and UCP (short for Uniform
Customs and Practice for Documentary Credits) 600 are the most familiar sets of
regulations that stipulate and reflect generally accepted practices, customs and the
usages of standby credit. However, it is the fact that not many Vietnamese people can
understand these two documents deeply and accurately. Hence, businessmen have been
facing with many difficulties whenever they want to use standby credit as an assurance
in business undertakings.
The second reason is that standby L/C serves as a secondary payment mechanism,
which indicates that standby credit is just used as a backup payment method, not a main
means of payment. Consequently, in most normal operations with the main purpose of
making profits basing on the amount of money received, individuals do not really prefer
and raise awareness of standbys. Of course, it can not denied the nice effects of standby
L/C, but in case of business that focus merely on receiving money, it is not a significant
requirement of using that type of letter of credit.
In addition, it is known from the part of comparison between normal L/C and
standby letter of credit that the normal L/C supports equal gains as well as securities for
both parties of applicant and beneficiary engaged in international trade. Moreover,
normal letter of credit can be used as a stipulated document of making payments in
business world. Meanwhile, standbys just protect the beneficiary through promising to
pay him/her in case of nonperformance of the applicant. Hence, it is easily understood
that people use letter of credit more widely than standby credit in common judgments.
More detailed, standby credit is more effective and useful in complicated infrastructure
projects or contracture obligations.
Last but not least, there are some other causes for the limited distribution of
standbys in our country. For example, Vietnam lacks of talented people who work on
the major of international payment in general, and standby letter of credit in detail.
Furthermore, the Vietnam’s economy does not develop strongly enough to run huge
projects; therefore, standbys are not remarkably needed. Lastly, Vietnam’s economic
management system is quite complicated and overloaded which makes entrepreneurs
meet many obstacles in operating their business.
3. Recommendations
Standbys are definitely subject to a seemingly bewildering array of rules and laws.
Even the banks that promulgate many of these rules have not settled definitely on
whether to use the ISP 98 or the UCP for the simplest standbys. The precision and detail
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of the UCP and more especially of the ISP 98, however, are intended to maintain
confidence in the continued use and acceptance of standby letters of credit for a wide
range of assurance across diverse industries and through the world. The most
fundamental issue facing the SBLC users is whether to choose to be governed by UCP
500 or ISP 9824, in whole or in part.
Thus, in order to help parties involved (especially banks) have the right selection to
apply the most appropriate one for each specific case, the final part of our research is
aimed at providing readers with a deeper look at the main discrepancies in terms and
conditions of the two governing rules for SBLC. Unlike popular recommendation part
that aims to provide too macro suggestions or solutions to solve a particular problem, it
is our intention to clarify the representative characteristics of two basic governing rules
of SBLC as a way to resolve the confusion between them, hence assisting users to make
wise and suitable decision when incorporating either in a standby contract.
In terms of transference
Under both ISP 98 and UCP 600, SBLC is not transferable unless it is stated to be
so. However, transference can be conducted more than once while it is restricted to be
once only under UCP.
In terms of condition for complying presentation
Documents presented under ISP needn’t be examined for consistency and therefore,
each presented document needs to be complied only with requirements provided in the
LC. This is certainly an advantage for Beneficiary when there is a dispute between
beneficiary and applicant. However, under UCP600, drawing documents that appear on their
face to be inconsistent with one another will be considered as not in compliance with the LC.
Force Majeure
Under ISP 98, beneficiary doesn’t have to suffer from risk when applicant is subject
to force majeure. Following Article 3.14(a) of ISP 98, if the place for presentation is
closed on the last business day for presentation, then the last day for presentation is
automatically extended to the day occurring thirty calendar days after the place for
presentation reopens for business. Unlike that, under UCP 600, banks don’t have to bear
any responsibility for the interruption of their business due to causes beyond their
control and it is the beneficiary who may suffer from risk.
To summarize, ISP addresses several topics that are not addressed by UCP at all or
addressed only generally. Moreover, ISP contains several rules crafted for SBLC that
differ from their UCP 600 counterparts. Consequently, it is well advised that banks
should consider carefully before making the decision to choose which one to include in
the standby contract.
REFERENCE
“A guide to the use of ISP 98”, published by Institute of International Banking Law and
Practice, Inc. (Assessed on 7th, May 2010)
24
See Appendix 3 for a complete guide to ISP 98
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Agasha Mugasha, “The law of letters of credit and bank guarantees. http://books.google.com.vn/
books?id=7SO3WUrTN-IC&pg=PA14&lpg=PA14&dq=characteristics+standby+letter+of+credit&
source=bl&ots=THtb5FGv4d&sig=nXAp0SKlPo7A-CsOREs_kVb-Vvo&hl=vi&ei=88qsS-7Mijk
ssgOtm9WFDA&sa=X&oi=book_result&ct=result&resnum=6&ved=0CCMQ6AEwBTgK#v=onepage
&q=characteristics%20standby%20letter%20of%20credit&f=false. (Assessed on 5th May, 2010)
International course on trade service – Edward G. Hinlkeman. (Assessed on 7th May, 2010)
IMF
Approves
US$30.4
Billion
Stand-By
Credit
for
Brazil.
th
http://www.imf.org/external/np/sec/pr/2002/pr0240.htm. (Assessed on 10 , May, 2010)
ISP 98. (Assessed on 8th, May, 2010)
Letters of Credit/Types of Letters of Credit. http://en.wikiversity.org/wiki/ Letters_of_Credit/Types_of_Letters_of_Credit. (Assessed on 9th, May, 2010)
STANDBY LETTERS OF CREDIT. http://www.docstoc.com/docs/29073887/STANDBYLETTERS-OF-CREDIT. (Assessed on 3rd, May, 2010)
The Circular Letter of Credit. http://library.law.columbia.edu/CircularLetterOfCredit.
(Assessed on 4th, may 2010)
The Complete guide to Documentary Credit/Chapter 3/Use of Standby Credit. (Assessed on
4 , may 2010)
th
Letters of Credit/Types of Letters of Credit. http://www.encyclopediaofcredit.com/
WebHelp/international_credit/financing_international_sales/isp98_rules.htm. (Assessed on 8th, May, 2010)
Victoria Duff, eHow Contributing Writer –“How to Use a Letter of Credit As Collateral”.
http://www.ehow.com/how_5703255_use-letter-credit-collateral.html. (Assessed on 11th, May 2010)
UCP 500. (Assessed on 6th, May 2010)
UCP 600. (Assessed on 6th, May 2010)
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BILL OF LADING AND ENDORSEMENT PROCESS
Written by: Nguyen Van Anh (FB-07)
Kieu Thi Thu Hang, Nguyen Le Quyen (FB-07)
Abstract
Among a variety of paper instruments utilized in international payment, it is undeniable
that Bill of Lading (B/L) is one of documents which deserve ultimate attention from the traders
throughout the world. Under the legal terms related to Bill of Lading, endorsement and
endorsement process are peculiarly taken into account by entrepreneurs and parties involved in
Bill of lading’s usage for the reason that it links up to the matter of goods’ ownership. The
purpose of this research is to investigate the issue of Bill of Lading in a fairly broad scope,
which is derived from usage of B/L, B/L endorsement importance to practical cases for B/L
usage in reality. Besides, this research paper introduces detailed guidelines to apply B/L
properly and in standard procedure for B/L users. The materials and information used are
incorporated with both external sources and internal sources to conduct this research. After all,
this empirical research is under a great effort of researching group, in the hope that the
students and the learners could exploit this as a helpful reference for further study in this area.
1. Introduction
Among the four international payment methods; open account, documentary
collection, advance payment and letter of credit (abbreviated as L/C), the use of L/C is
the most favorable choice for many corporations, companies and organizations for the
reason that L/C can assure the interests of both parties – exporter and importer. In
addition, applying L/C as method of payment would benefit exporters and importers in
the way that it reduces the risks that may appear in transaction through a credit-worthy
intermediary – the bank.
As for the nature of international commerce, the transactions from nations to nations
are operated mainly through paperwork, for instances, sales contracts, insurance
documents, Bill of Exchange (B/E), commercial documents and the very essential one –
transport documents. Exceptionally, it is the ocean bill of lading (B/L) which is
considered as the heart of transport documents.
First and foremost, it is noticeable that ocean B/L is account for 80% of trading
volume globally (vietship.com). For that reason, ocean B/L is specifically prevalent and
gets a great concern from the traders. In the process of presenting the full set of
document to advising bank, the exporters always take B/L into cautious consideration
since the accuracy and coherency in handling B/L have strong impact on the success of
payment process.
The importance of B/L in L/C transaction arises from the sheer nature of B/L, the
evidence of possession of goods exported for the legally – accepted bearer. Another
issue arising from this feature of B/L involves the matter of endorsement in B/L.
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Similarly to other types of documents as bill of exchange or Letters of Credit, the
ownership of B/L can be transferred from one person to another one or another
organization by endorsing, which means the ex-owner of the goods transfers the
possession of goods to another person by endorsing. However, the legal procedures
associated with B/L endorsement are a fairly thorny problem requiring the involving
parties to study in detail. In this result, the usage of B/L and B/L endorsement can be
conducted in proper manner.
Loosely speaking, the purpose of this research paper is to help the readers by
bringing them a comprehension to the B/L issue and related information about B/L
definition and its functions in international payment. A predominant part of this
research gives out more details about B/L endorsement process as well as noticeable
matters of it. What is more, the empirical information about B/L would open up the a
closer view about how B/L endorsement is performed in actual fact and how far the
distance of B/L endorsement application is between practice and theory.
2. Literature review
Prior to entering a great volume of information about Bill of Lading, it is vital to
comprehend precisely the term “Bill of Lading”. “Bill “can be understood with many
different meanings, however, in the scenario of international payment, “bill “is
translated as any written paper containing a statement of particulars. With regard to the
interpretation of “Bill of Lading”, it means the act of constituting a load / freight /
burden on a ship. With general understanding of bill of lading (sometimes referred to as
a BOL, or B/L) is a document issued to acknowledge that specified goods have been
received on board as cargo for conveyance to a named place for delivery.
An interesting section of this part is to provide the readers with information about
the brief usage of Bill of Lading in the old time along with the legal source to control
and manage the use of B/L internationally.
The earliest and most fundamental application of B/L dated back from the thirteenth
century. At this time trades among the ports of the Mediterranean began to grow
significantly. Some record of the goods shipped was required, and the most natural way
of meeting this need was by means of a document so called “ship's register”, compiled
by the ship's mate. And this is a document of evidence that the goods had been shipped
on board and delivered at the port. Originally, the purpose of this document was
considered as a bill of the carrier to confirm the receipt of goods to deliver. The aim of
ship's register was compared to the bicycle ticket at the present, in which a person will
receive a ticket when he stored his bike in the parking lot, and then he gives back the
ticket to the conductor when he takes out his bike. Similarly to the case of the ship's
register, this document is a proof that shipment of goods had been happened and the
goods was delivered to the receiver. As time elapses, this primary document of
shipment is accepted by the law makers, the name of it has changed to “Bill of Lading”
and it is added in with more functions than long-ago.
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The bill of lading issued by different shipping offices and agents would be different
in terms of appearance. But all of the B/L issued to ship the goods in sea route
internationally must be controlled by the only international source: the International
Convention on the bill of lading and sea transport. These international rules stipulate the
significant issue, for instance, the obligations and responsibilities of shippers, the carriers,
the B/L content as well as problems of claim for compensation and other legal actions.
Currently, there are 2 main kinds of international conventions constituted for the
merchants to comply on international trade, which are International Convention for the
Unification of Certain Rules of Law relating to Bills of Lading (known as "Hague
Rules") and United Nations Convention on the Carriage of Goods by Sea ("Hamburg
Rules"). When implementing business in transaction of goods by sea, the traders must
refer to these two conventions as a prerequisite. For Vietnamese merchants, the use of
B/L on carriage of goods on sea has officially accepted and recorded in Maritime Law
of Vietnam. Maritime Law of Vietnam was released on June 6, 1990; its starting date to
be in valid is on January 1, 1991 and amended in 2005. In principal, this Law is similar
to Hague Rules – Visby. The relation between the carrier and the consignee under B/L
has been claimed in article 1, clause b of Hague Rules and article 81, clause 3 of
Maritime Law of Vietnam, “The bill of lading determines the legal relationship between
the carrier and the consignee. Provisions of the contract of carriage are binding upon the
consignee only when the bill of lading refers thereto”
In general, the usage of B/L has been far and widely accepted and governed under
the international convention of rules related to Bill of Lading during the twentieth
century. Owing to the prevalent existence of these rules, the companies all over the
world and in Vietnam can implement their international carriage on sea route with the
most standard practice.
3. Methodology
In the work of conducting this research, the data and information are in great need
to support the working group. With the great effort of the whole group, the information
and materials and documents necessary are sought through two types of source: external
sources and internal sources.
The data taken from external source are mainly available on internet and reference
books which provide with core knowledge about B/L. Moreover, with the usefulness of
searching tool – internet – the process of finding data is conducted with rapidity. Especially,
a number of academic writings and many needed laws and codes are widely posted on
websites. This did help the researchers to obtain official information at ease. In terms of
references books, the authors give clear and systematic presentation about the overview of
the issue and details of the matters from different angles with the clear-cut view.
Another valuable source for this research to be worked out is through external
source – through the support of officers and specialists who have worked directly with
profession related to B/L. By conveying face-to-face interview as well as telephoning
interview, the researching group attains supportive information which is not available
online or in text books. Furthermore, the researching group have chance to get closer to
the profession of dealing with B/L in reality.
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4. Bill of lading
4.1 Definition
A Bill of lading (Ocean Bill of Lading or Marine Bill of Lading – abbreviated B/L)
is one kind of transport documents by sea-way, issued by a carrier (a transporter of
goods) or carrier‘s agent to a shipper (an exporter), and signed by the captain, agent, or
owner of a vessel. It is, in addition a receipt of the goods (cargo) which must be
presented for taking delivery at the destination, a contract of the carriage and the
engagement to deliver goods at the prescribed port of destination to the lawful holder of
the Bill of lading. The Bill is issued in a set of originals, which can be made up by any
number of originals but two or three are the most usual, other than a set of numbered
originals the carrier can issue some copy ones as required. These copies do not have
legal status as originals, are non-negotiable, used in case of checking goods, notifying
about delivery and making import and export clearance.
Content of the B/L is exposed in both sides of paper. In the front side, it contains
some main parts such as: shipper (consignor), consignee, notify party and carrier’s name
and address, names of the ports of departure and destination, name of the vessel, list of
being transported goods with number of packages and kind of packing, marks and
numbers on packages, gross weight/volume of cargo, freight details/charges, place and
date of issue and signature of captain, carrier’s agent, or owner of a vessel. Terms and
conditions of shipping company are printed in the back side, yet sometimes these terms
and conditions are set in the front side and the back side is blank. These terms and
conditions are in accordance with the provisions of conventions and international
custom and practice on carriage of goods by sea; currently there are two major sources
of international law applied: Brussels Convention 1924 and United Nations Convention
on the Carriage of Goods by Sea (The Hamburg Rules). In fact, the carrier prints and
issues the B/L to the shipper by himself, therefore, each company has its own form of
Bill with different color and content; however, it still has the core parts written above.
(A Bill of Lading sample is in appendix 1)
4.2 Functions
The Bill of lading has three functions, which are a receipt of goods being
transported, evidence of a transportation contract between carrier and shipper, and a
document of title to goods - proofs of who has title to the goods covered by the document.
Firstly, when the bill of lading in the hands of the shipper, it becomes a receipt for
the quantity of goods received by the carrier; it is a confirmation about receiving cargo
with quantity and quality noted in the Bill of lading. Due to issuing this receipt the
transporter has responsibility to ensure the amount and state of goods along with deliver
these to who show a legal B/L issued by the transporter. The task of carrier can be
considered complete when one original Bill of lading is recovered and then the other
originals are worthless.
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Secondly, Bill of lading is regarded as evidence of a transportation contract because
it contains only one signature. According to practices, a contract must have two
signatures of two parties. Although it is not an actual contract, it still has legal value as a
real contract; hence content of Bill of lading is used to deal with any conflicts arising
between the carrier and a holder of Bill of lading. The Bill of lading is independent to
transportation contract if any.
Last but not least, the function as a document of title is presented that the person
who holds the legal original Bill of lading will take possession of cargo noted on the
Bill. Therefore this person has right to offer the carrier to deliver goods at the place of
destination. The holder of Bill of lading can be a person named on B/L (in case of a
straight bill), or an endorsee of B/L (in circumstances of an order bill), or anyone keeps
B/L in hand (in case of endorsement B/L in blank). Thanks to this function, the Bill of
lading can be easily to trade and transfer in the market by endorsement. However, it has
to notice that in two basic types of B/L – a straight bill and an order bill - the straight
Bill of lading is a non-negotiable document as it is made out to a specially named
consignee so the consignee cannot trade or transfer this transport document, in other
words, cannot endorse. For that reason, the endorsement function is applied to only an
order bill in two kinds of B/L.
As functions mentioned above, it can be seen the Bill of lading is significant to each
parties involved – an exporter, an importer, a bank … With the exporter, B/L is a
document confirmed that goods has been sent to the carrier for delivering to the
importer, it also expresses the legal relation with the carrier and the way to pay freight
charge. In side of the importer, B/L is a receipt helping to receive goods at a port of
destination as well as a document to possess cargo. Under the letter credit (L/C) method
of payment, Bill of lading contributes an important role in the document package
needed to present. While issuing L/C, bank has to stipulate the exporter present a full set
of original B/L, if not it must be issued to the order of bank so that bank could have a
right to control goods.
5. Endorsement of Bill of lading
5.1 Definition
Bill of lading, as well as other types of document such as Letter of credit, Insurance
document or bill of exchange, engages with one of distinguishing characteristics in
general international payment – endorsement. Endorsement is generally known with
common knowledge as the act of signing on the back of a note, bill, or other written
instruments documents. From time to time, this is totally acceptable understanding of
this term. However, according to a legal understanding, endorsement should be
understood in relation with involved individual or with another party. In this
understanding, the definition of endorsement, under B/L, is clarified as following:
“Endorsement is an act of transferring the proprietorship of a beneficiary to
another beneficiary. The endorser (the previous beneficiary) signs on the back of the
B/L and hand over the B/L to the endorsee (the subsequent beneficiary). Legally, the
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action of endorsing of endorser on the B/L means the acceptance of endorser to reject
his proprietorship of goods reported in B/L and to transfer it to another beneficiary”
Consequently, the application of endorsement in B/L requires the involvement of at
least two parties – the previous beneficiary and the subsequent beneficiary.
5.2 Features of endorsement in B/L
In accompany with definition of endorsement under B/L, it is crucial to pay
attention to the relating properties of endorsement, for the reason that, these are the
guidelines to general instruction of endorsement. The readers can be aware of two main
features of endorsement as following:
• Endorsement is unconditional and abstract. It means that the endorser is able to
endorse without any action of making a list of causes to endorsement, or informing the
previous transferor and the carrier of his endorsement to another beneficiary.
Simultaneously, the endorser is not allowed to require any condition enclosed with B/L
for the endorsee to obey.
• Endorsement is the claim of endorser that he has undertook to confirm the
ownership of goods reported on B/L is given to the endorsee. Therefore, the current
endorser confirms to transfer the obligation and responsibility of the previous endorser
to the current endorsee.
5.3 Types of transport document with transferable feature
Transport documents comprise many types of instrument, which are Bill of lading
(used for ocean transportation), multimodal transport, seaway bill, airway bill, truck bill
of lading, railway bill of lading or inland bill of lading. With the wide network of
international trade, ocean traffic becomes more and more essential. In the view of ocean
transportation, there are three types of document, which are Bill of lading, Multimodal
transport and Seaway bill. Nonetheless, only two of them have the property of
negotiability or transferability, which are Bill of Lading and Multimodal Transport. It is
to say that endorsement is applicable to Bill of lading and Multimodal Transport only.
In the context of profound study of Bill of Lading, the uses of Seaway bill (SWB)
and Multimodal transport B/L are mentioned briefly. It is noticeable that the functions
of the three transport documents are the stressing point in order to explain the existence
of transferable feature for each.
5.3.1. Definition of Multimodal transport and functions of Multimodal transport B/L
“International multimodal transport means the carriage of goods by at least two
different modes of transport on the basis of a multimodal transport contract from a
place in one country at which the goods are taken in charge by the multimodal
transport operator to a place designated for delivery situated in a different country. The
operations of pick-up and delivery of goods carried out in performance of a uni-modal
transport contract, as defined in such contract, shall not be considered as international
multimodal transport” (United Nation Convention on international multimodal
transport of goods, Geneva, 5/24/1980).
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Multimodal transport bill of lading is B/L issued for containerized door-to-door
shipments that have to use different ships and/or different means of transportation
(aircraft, railcars, ships, trucks, etc.) from departure to destination. Unlike a through bill
of lading, the principal carrier or the freight forwarder (who issued the multimodal B/L)
takes on full liability under a contract of carriage for the entire journey and over all
modes of transport.
Both multimodal transport and ocean B/L have three main functions as shown below:
• Being a receipt for the delivered goods.
• Being the proof of the previous contract between the carrier and the shipper.
• Being a title deed to loaded goods on board.
5.3.2. Seaway bill (SWB) and its functions
Seaway bill is used as a non-negotiable shipping document issued by shipping
company as an alternative for Bill of Lading.
SWB has two functions, first is a receipt for the delivered goods and second is the
proof of the previous contract between the carrier and the shipper. These functions are
applicable the same as multimodal transport Bill of lading and ocean B/L.
In short, the three above transport documents have two similar functions- a receipt
of goods and a contract of the carrier. However, multimodal transport bill of lading and
ocean B/L have an additional function as being a title document to loaded goods. This
function is the determinant key for the application of endorsement so that multimodal
transport bill of lading and ocean B/L can be negotiable in the market while SWB,
without the third function, becomes a non-negotiable instrument.
5.4 The significance of endorsement under B/L
Under the light of 3 main functions of B/L as indicated previously, it is undeniable
that endorsement plays an important role to contribute the prevalence of B/L in the
worldwide trade as today. The significance of B/L endorsement results from the feature
that ownership of B/L is transferable from one to another; endorsement has improved
the liquidity of B/L in the free–trade market.
Definitely, the endorsement of B/L can be utilized to transfer the ownership for
unlimited times. In particular, this is very convenient for the trade of goods among the
subsidiaries and agents of a company. Due to the fact that the subsidiaries belong to one
company, the buyer can resell the goods to another agents and this process still goes on
and goes on. In reality, the transfer of B/L would be done even before the shipment of
goods approach the named place.
Besides, B/L can not only be considers as document of title but also as a collateral
in the market. B/L is totally regarded as a valuable instrument; as a result, the buyer can
use the original B/L in exchange for other kinds of asset or cash. This is to say that B/L
is fairly preferable and flexible in circulation.
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Another reason that B/L plays a vital role as a necessary document in Documentary
Credit is that B/L is used a tool of hedging risk for Bankers. In reality, many banks
require their exporters to indicate bank as consignee in B/L. In this case, bank is in
possession of goods and bank has full right and obligation to goods on shipment. If the
importer wants banks to transfer the ownership of goods to him, he is in need of
capability to pay full or partial of the amount of money to bank. Definitely, bank has
more security and assurance when bank pay money on behalf of the buyer.
After all, from the angle of buyers or importers, B/L is such a beneficial document
because the endorsement process in B/L would improve the circulation of cash flow in
the market.
5.5 Parties involved in the B/L
For any document, it is very necessary to shed light on (make clear) each party
involved in the process, because it would help to determine the obligations and
responsibilities of each one to the others. Especially, for any endorsement document in
the international payment, endorser and endorsee are always the two main mentioned
parties. We also take concern about the endorser and endorsee for the case of the Bill of
Lading or Multimodal transport comprised the endorsement. Furthermore, it would be
clarified in this research in detail, which parties can act as endorser? Which one can be
the endorsee? What are their senses of duties?
First of all, endorsers, in practice, can be known as the shipper, the issuing bank or a
third party. Whenever the Bill of lading is made out to “the order” or “to the order of the
shipper”, or “blank endorsed”, it is automatically understood that the shipper will be the
party – which can endorse the B/L. In other situations, when the Issuing bank acts as a
consignee, it also means that bank will be the endorser party. In reality, with the view to
controlling the merchandises, the Issuing bank often regulates that the goods would be
delivered to their order. Besides, the endorser can also be another third party, such as an
individual, an organization or a company- which are all under “the order of a named
party” type.
It, however, makes no difference to which party is the endorser. Why? As
mentioned above, because Bill of Lading represents a very important function: title of
document; therefore, it is negotiable, totally can be traded in the market. Hence, no
matter it is, either shipper, the issuing bank or a third party- as long as they own the
B/L, can endorse it to another party. It is proved that, the Bill of lading, is, on the whole,
endorsed in almost of the transactions in international payment.
Secondly, referring to the endorsee, it can be known as a person or firm to whom a
negotiable instrument transferred by endorsement. It is also called a transferee or
payee. The endorsee becomes a holder-in-due-course upon delivery of the endorsed
document. Like other types of financial documents such as Bill of Exchange, deliver
orders, the terms and conditions in Bill of Lading also allow the endorsees to prolong
the endorsement list. It is a continuous succession, which is very convenient in
commercial trade.
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Finally, understanding the requirements and tasks of each party also plays a very
important role in making the international transactions smooth and fluent. The endorser
will be responsible for transferring the ownership of the B/L, whereas, the main duty of
the endorsee is to take over the B/L to get the goods (in case of no other endorsements).
Any mistake or discrepancy should be dealt basing on the full set of original Bill of
Lading. More particularly, it is also crucial for the endorsee to bear in mind that he/she
can only recourse their previous endorser for any unexpected problem.
In conclusion, for either Bill of lading or Multimodal transport comprised of seaway document (MTD), parties involved should always be taken into account carefully,
to avoid any troublesome things.
5.6 The endorsement process
Endorsing is a complicated process that is always performed cautiously by the bank
checker. One of their duties is to determine which kind of the B/L belongs to. What
rules should be followed for different situations of B/L endorsement? Within the scope
of this research, we only concern about the Bill of Lading endorsement rather than the
endorsement for the MTD.
Basing on the title of the goods, it is divided into three different kinds of Bill of
lading. They are: “straight B/L”, “B/L to the order of…” and “to bearer B/L”. The
Straight Bill of lading is issued when the goods are consigned to a specified person
named on the consignee blank of B/L. For this characteristic, straight B/L cannot be
endorsed for another party. The non-endorsement is also applied the same for the bearer
B/L- which allows anyone who holds the B/L to be the consignee. Finally, among those
above kinds of B/L, only the “B/L to the order of…” is employed in case the endorser
wants to transfer their ownership of the goods to another party.
Under the second kind of B/L, we now keep on breaking up it into different forms
of order B/L. First of all, the B/L is endorsed to a named person- which implies that
only the one with the precise name on the back of the B/L can be the consignee and can
get the goods. In reality, due to the inconvenience of this form, the endorser will prefer
the second type to the first one. The second kind is the “bill of lading to the order of a
named person…” This is known as the most popular endorsement type- which can
benefit all parties and make the endorsement process become more flexible and
convenient (Huy, 2008). Thirdly, the endorser can leave blank or write “deliver to order
of bearer” at the back of the B/L, this represents that anyone who keeps this B/L is the
legal owner of the goods, and he/she can totally transfer the B/L to any other parties.
However, due to the feature of unknown B/L holders, in fact, bearer order bill is not
widely brought into play.
While conducting the endorsement, it may concern the related parties an issue about
the responsibility of each others in case there is any inconsistency or any problem. This
is really very significant and vital for both of the endorsers and endorsees. And the
appearance of the phrase “without recourse” is extremely important for the endorsers;
otherwise, they may cope with unexpected matters. In order to avoid any responsibility
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with those holding on this bill of lading, the endorser often adds a notation “without
recourse” beside their signature. As the result, if there is any misunderstanding or
litigation, later on, the endorser can use the B/L without recourse as an evidence for
their immunity. However, the rule of “without recourse” is not applied for the shipper,
because they are always the final party to bear the responsibilities if all other endorsers
record without recourse.
With the aim of making it clearly in terms of the endorsement process, this report
will give out the step-by-step procedure in the case that the bank acts as a consignee and
they have the right to endorse the Bill of lading. In practice, for the sake of bank, while
making the Letter of Credit (L/C), the Issuing bank often requires that they would
perform as the consignee of the goods and it must be stated very obviously in the L/C.
Following that requirement, the carrier will issue a bill of lading “to the order of the
Issuing bank”. As the rule of the bank, the request of making an ordered endorsement
must be submitted by the applicant of L/C (the importer). It is open to a question that
why the applicant needs to summit the order while they are not the endorser. The reason
is that the bank has engaged itself in the L/C that it will act as the consignee- which
means that they are the owner of the goods. The purchaser wants to get the
commodities; therefore, they need to make an ordered endorsement application for the
bank to endorse the B/L later on.
The guidelines for this claim will vary from bank to bank due to the reason that
there is no common, detail and specific instructions about the Bill of lading and the
endorsement process. Consequently, each bank will make up its own instruction. Still,
it, in general, comprises of some steps (refer to the appendix):
• Application for an endorsement of Bill of lading
• Documents attached (Bill of lading, commercial invoice, sale contracts…)
• The commitment of the company (importer)
It may appear some other requirements at other banks, but those three-mentioned
necessities above are the focus.
Figure1: The first and the back side of an endorsement application:
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Figure 2: A bill of lading with the endorsement “to the order of…”
6. Practice
• Document submission
With the intention of matching up the theory and the practice in the use of
endorsement the bill of lading, this study tends to provide some information about the
actual daily transactions of the bank dealing with endorsement orders. All of the
information is gathered not only in the Internet or newspapers, but it is also the
experience of the researchers at banks.
At the previous, the report has mentioned some necessary steps that must be
complied with if there is an order of the endorsement. According to article 23, UCP 500
(article 20- UCP 600), the B/L can consist of a sole original B/L, or, if issued in more
than one original, the full set as so issued. Basing on this article, the bank also strictly
requires the exporter to hand in the original B/L. Even though it may not be stated in the
L/C but the exporter always needs to submit the full set of original documents. After the
seller has finished shipping goods to the importer, they will have to send the L/C,
together with the B/L issued by the carrier for the bank to check. In accordance with the
theory, in case the bank does not act as the consignee (which has already been stated in
the L/C at the Consignee box), after checking, bank will send directly the B/L to the
importer for them to get the cargos. However, as mentioned above, for their sake, the
bank normally insists on their consignee position. And most banks are applying this in
their transactions. At this time, bank will require the importer to make the “application
for endorsement” (see the appendix). It happens that the B/L is issued under the
“straight B/L” term to the bank- which means that no other party except the bank can
get the merchandises. Thus, in this case, the importer needs to produce “an authorized
letter to receive goods” for the bank to authorize them to get the cargos.
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The necessary documents needed to be presented:

Application for endorsement/ an authorized letter to receive goods
Commercial invoice
Original bill of lading
Identity card
The bank may also ask for some other requirements to guarantee that the importer
will pay them money. For example, Vietcombank may ask the customer to fulfill some
commitments such as to escrow, borrow at the bank, or engage in some forms of
collateralizing. Or, Agribank asks their client to escrow 100 % of the payment value so
that the bank can trust them and agree to endorse the B/L.
• Wrong endorsers, wrong endorsees
When conducting several interviews with few staffs in banks, we also discover
some very interesting things about the endorsement in practice. From the opinion of one
banker in the Bank of Tokyo- Mitsubishi bank, she has experienced some very difficult
circumstances that she had never learned through books before. “The theory and the
practice are at the two different sides” she said. One of the most complicated cases that
the bank checker may cope with in dealing with endorsement the Bill of lading is the
wrong endorser or endorsee in the B/L. Especially, these situations do not appear in any
book, and just doing practice reveals it.
So, what does it mean by wrong endorser? As we know, when endorsing, the
endorser will sign at the back of the B/L, write their name and the endorsee party.
However, sometimes, for the case of a company, it requires that the endorser - who
signs the B/L, must be the director of that business or bank branches. Therefore, if there
is signature of any other people such as the vice-president, or head department… B/L
will not be accepted by the bank and they consider it as the discrepancy. How to fix this
problem? According to the banker, in that situation, the bank will ask for an authorized
letter signed by the exact endorser (say, director), confirming that he had given
permission to his assistant to sign on behalf of himself. By that way, the B/L can be
acknowledged and become effective. It is also very important to bear in mind that any
correction of the Bill of Lading endorsement will not be allowed and must follow the
instruction from the bank. The statistical data at the bank shows that there has been a
numerous of circumstances of wrong endorsers as described above- which can be seen
as a reminding for the endorsers.
Besides the mistakes related to the endorsers, there are also mistakes referred to the
endorsees. From the opinion of another interviewee- a staff at the Eximbank- where
many international payment transactions are performed every day, he said that he had
resolved quite many cases of endorsement. The name of the endorsee at the back of the
bill of lading is inconsistent with the actual person to receive the B/L. This fault may
occur when the endorser writes wrongly the name of endorsee party, or, they want to
endorse to another person later on, not the named party anymore. Hence, what are the
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solutions for this state? Normally, to make everything become easier and smooth for all
parties, bank may ask the endorser to fill in a “confirmation letter”, affirming that he/she
is wrong and then, he will notify the correct name of the endorsee. The endorser party
needs to commit that he will bear all the responsibilities in case there is any unexpected
problem. The bank may accept the confirmation of the endorser party afterward and
allow the B/L to become effective.
• Particular situation of the straight B/L to be endorsed
As mentioned at the beginning of this finding and discussion, it is known that the
straight B/L is endorsed to a specific named person; therefore, it cannot be used to
negotiate, transfer or trade in the market. But in the textbook “ Thanh toan quoc te va tai
tro ngoai thuong” of Master Nguyen Van Tien and in article 84 of Maritime Law of
Vietnam 2005, stated that the straight B/L, in reality, still can be utilized to trade if it
has got the official permission from the local authority. This approval of the authority
can make the trading market of documentary credit happen to be more flexible.
7. Limitations, conclusion and recommendation
• Limitations of research
In spite of enormous endeavor from the researching group, our carrying out this
research has met some obstacles and inconvenience. Consequently, the findings in this
study still do not achieve such a perfect outcome in consequence of lack of information
and database.
Even though a lot of useful information is available on external sources such as on
websites or in book materials but there is still a shortage of statistical data under the
content of B/L and B/L endorsement. In particular, in Vietnam, databases and figures
on the official websites is virtually inadequate and unavailable. In addition, there is not
much prior research worked out in this issue. The lack of data and practical information
leads to the absence of description overall outlook of B/L and B/L endorsement usage in
Vietnam, which may have been an attractive part to concern in our study.
In addition, although we have chance to interview some bank checkers, but the
information got are not enough to bring more reality into the research. It is definite that
B/L and B/L endorsement have closed relation with involved parties - the companies
and the entrepreneurs who operate their transaction oversea. With little assistance from
the person who works directly with B/L, this research has excluded the proximate view
of entrepreneurs, how they deal with problem of B/L when performing international
transaction what disadvantages or difficulties have come up with them. It is a regrettable
restriction in this research.
• Conclusion
In conclusion, it can be seen very obviously that Bill of lading has become very
popular in the world. As a result, understanding its functions, type and its use is an
important operation in the commercial trade, especially in the import and export
operation. It relates to not only the exporter, the importer but also the bank- which is the
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intermediary providing the services for both parties. The role of the bank turns out to be
more significant when there exists the appearance of the endorsement operation for the
bill of lading. With the purpose to promote the development in the international
payment, it is very important for Vietnamese businesses and banks to fully comprehend
the context and the procedure of ordered bill endorsement- which can help to increase
significantly the numbers of international transactions between Vietnam and the worldwhich, in turn, enforce the economy to grow up (Ngan, vneconmy.com).
• Recommendation
As mentioned above, Bill of lading is an important document in document package
presented to the issuing bank, so that bank should check B/L carefully to prevent from
any dispute about cargo afterward. According to Eximpro webpage (a website supports
to import and export - http://www.exim-pro.com/) some points which bank should
notice while checking the Bill are:
Whether name and address of shipper, consignee, notify party are matched with
a content in a L/C or not.
Whether name of port of loading and port of discharge are the same as what is
noted in the L/C or not.
An authenticity of Bill of lading (check up the signature on Bill of lading of
captain, agent, or owner of a vessel and his legal status).
Whether Goods is identical to what is described in the letter of credit and other
documents like insurance documents, invoice … or not.
Type and number of original Bill of lading.
Any amendment and supplement on B/L need confirming by signature and
printer of a shipper, carrier or captain.
Transport condition and fee charge.
The second recommendation is consignee or anyone who is authorized to receive
goods should notice time to take delivery of goods because over free time from the date of
discharge, they have to bear all demurrage and/or damage to risk of cargo and container.
The last recommendation is given about a wrong endorsement situation mentioned
in the practice section. As stated, this case occurs when a person who does not have
enough right to endorse the Bill of lading signs as an endorser or when the endorser
writes name of endorsee incorrectly. Both cases can lead to a dispute about title to
goods in the future unless any correction is made at once. Therefore, the endorsee
should pay attention to the authority of the person who is regarded as the endorser –
whether he has a right to endorse or not. Moreover, the endorsee and the endorser
should check up again a name of endorsee in order not to arise this mistake.
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Cục Hải quan TP.HCM. 2008, “Vận đơn đường biển và chứng nhận thực xuất”. Available
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Edward G. Hinkelman. 2003, A short course in International payments, 2nd edition, World
Trade Press publisher, California.
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International Convention for the Unification of Certain Rules of Law relating to Bills of
Lading ("Hague Rules"), and Protocol of Signature, Brussels, 25 August 1924.
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Maritime law of the Socialist Republic of Vietnam number 40/2005/QH11, 14/6/2005.
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Michael
Dennis.
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(Accessed 10 May 2010)
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Nguyen Huu Duc. 2010, “TO ORDER BILL OF LADING AND ENDORSEMENT”.
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toán quốc tế, Tài chính publisher, Vietnam.
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PGS.TS Nguyễn Văn Tiến (Banking Academy). 2009, Cẩm nang thanh toán quốc tế bằng
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United Nations Convention on the Carriage of Goods by Sea ("Hamburg Rules"), Hamburg,
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Vũ Hoàng Anh. 2010, “Vận đơn đường biển (Ocean Bill of Lading - B/L)”. Available at
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EFFECTIVENESS OF INNOVATIVE TRAINING
Written by: Do Duc Thu (4K -07)
Duong Hong Hanh, Nguyen Hai Yen (1D-07)
Supervisor: Nguyen Le Phuong Tram
ABSTRACT
Training refers to a process of acquiring different skills and competencies through a series
of learning activities specifically designed for increasing performance. Training is a major
input of skills, some of which are not feasible to be accumulated through one’s life, for a parttime cleaner to a highly professional Wall-street trader. Every new entry to an unfamiliar
occupation needs to be trained in order to desirably undertake the tasks required. Training
traditionally takes two forms which are on-the-job training and off-the-job training. The need to
have innovative training emerges to not just provide practitioners the skills required in a more
advanced way with regards to time, distance, finance and technology, but also to collaborate
other methods of training to create the most all-rounded entries. This paper will provide a
glimpse into the concept of innovative training, its methods, how it is applied from industries to
industries and finally, some recommendations to make training become more innovative.
I. INTRODUCTION
Nowadays, any organization which wants to survive in such an aggressive business
world should be able to invest in its workforce. One common method used is training.
The workforce belonging to each company, besides being trained about the company
philosophy, they also learn how to work effectively. Different company employs
different method; however, they aim for better future income. Nonetheless, whether
only training is enough is still a rough question for every company. Hence, some
companies have changed their traditional training method into better ones which fully
exploit employees’ potential. This method is generally known as innovative training.
Innovative training can take different forms, dependent on the culture and the
organizational mission and goal. This research paper, with the purpose of providing
more information on this new type of training, discusses how it is employed around the
world as well as in Vietnam and finally, what can be done to improve innovative
training in Vietnam.
II. THEORETICAL UNDERSTANDING
1. Training:
a. Definition
In Human Resource Management, training plays as a key role in the employee
development. Training can take both two stages in a career of an employee: the job
orientation- when employees just begin their job or during their job- while either they
cannot catch up with some changes with equipment, technology, etc or they have
insufficiencies in work performance. Training can be defined in some ways, for
example: “The term training refers to the acquisition of knowledge, skills, and
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competencies as a result of the teaching of vocational or practical skills and knowledge
that relate to specific useful competencies” or “Training is about the acquisition of
knowledge, skills, and abilities (KSA) through professional development” or just simply
“Training is the process of providing employees with specific skills or helping them
correct deficiencies in their performance”.
b. Training process:
A training process normally takes three steps: First, it is from the organization itself,
top managers should always be kept updated with changes or challenges in the outside
or even inside the organization. The sooner the need is recognized, the sooner it is likely
to be tackled. The second step is to gather employees who need training to deliver
training. Finally, when training ends, it should be evaluated under tight control to see if
the training provided is working appropriate or not.
c. Role of Training:
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As the diagram illustrates, no business does not face with any challenges or
movement of the environment. When those things happen, they cannot stand in one
place unless they want to be the losers or go bankrupt. What they have to do is to adapt
to the changes and challenges through training their own staff. Through learning and
training, the staff may comprehend how to adjust themselves to the job and to get it
done with more ease. This surely leads to the enhancement in their job and generally,
the success of the whole business.
d. Types of Training:
Training in any organization can take two forms:
On-the-job training: On-the-job training takes place in a normal working situation,
using the actual tools, equipment, documents or materials that trainees will use when
fully trained. On-the-job training has a general reputation as most effective for vocational
work. However, since the trainees still lack skills and job experience, this type of training
can cause slowdowns that decrease production or even irritate customers.
Off-the-job training: Off-the-job training takes place away from normal work
situations. Employees are gathered to study in a classroom — implying that the
employee does not count as a directly productive worker while such training takes
place. Off-the-job training has the advantage that it allows people to get away from
work and concentrate more thoroughly on the training itself. This type of training has
proven more effective in inculcating concepts and ideas. However, the trainees lack
realism, hence, time for getting used to the actual tools, equipment, documents or
materials will be demanded.
2. Training and Career Development:
Training and Career development differentiate themselves to some respects: In
training, the focus is mainly on the current job whilst in development, the focus is on
both current job and the future jobs that employees may hold in their career paths. The
scope of training is on individual employee while that of development is on the whole
work group and organization. That is, training job specific and it is used to tackle
deficits or problems existing in the job. On another extreme, development tends to
associate with the work force skills and versatility. Another difference is, training
focuses on the immediate need of the organization when development can be saved for
the future use. Finally, the goal of training is enhance the workers’ performance quickly
and the development goal is to enrich the overall human resource of a company.
III. INNOVATIVE TRAINING
1. Definition of Innovative Training:
Recently there are influxes of new training definitions that focus on competencies
rather than purely performance orientated methods. These are known as innovative
training. It is though hard to find out the most apparent definition of innovative training
or what it is combined of. Innovative training can be understood as a collaboration of
activities which differentiates from the past methods. Innovative training is of great
variation, depending on the very nature of the industry.
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2. How to apply innovative training in an organization:
Table 1: Organizational Training Development Refining Process
Effective training strategies are core to the development of an effective training
solution including snippets. Guided by the framework, one can design, develop,
evaluate and implement training snippets with appropriate instructional strategies and
delivery methods. By integrating instructional strategies with appropriate delivery
mechanisms, organizations achieve better results and a high return on investment.
Table 2 Snippets design strategies, delivery and evaluation mechanism
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An example provided by Chaturvedi (2008) on taking role-play as an innovative
training method. The trainee develops a strategy to how should he react or think in a
particular situation and possible suggestive solutions for resolving the problem or
analyzing the situation.He also learns and forecasts what the other party or as per the
case may be what can be the other reaction. This technique thus not only leads to self
learning about expected job outcome or to create a fit in the job but also helps in
understanding others perception about the task or issue.
The objectives of this activity are:
1. It helps in developing a better understanding of the job
2. It helps in understanding how to handle a particular situation.
3. It helps in developing better understanding of the issue a better decision making
4. It helps in anticipating reaction of other party
5. It helps in developing communication, management development and leadership quality
6. It helps in improvement of interpersonal relationship.
7. It helps in providing an insight to understanding behavioral patterns of others.
She also identified the benefits of applying role-play in the training process as follow:
1. It helps in both cognitive and effective development of trainees and better
learning by doing.
2. It permits practice by repetition and helps in better reinforcement
3. It also helps in improving human relation since it helps I developing empathy
4. It helps in making people sensitive towards others
5. It helps in better SWOT analysis of individuals and thus the feedback given
helps in identifying and overcoming the deficiencies.
6. It enables the role player to control his behavior and enact as if he is enacting in
a real life situation
7. It helps in bringing attitudinal changes in the employees as trainees
It is a more practical approach than other technique since in this the learning by
doing and feedback that whether a behaviour reflected is acceptable or requires change
can be given.
IV. INNOVATIVE TRAINING TREND
1. In the world:
In today's fast-paced business world, employee training has become an essential
component to maintaining a competitive edge. Training programs not only benefit the
organization as a whole but help boost employee morale through enrichment of their
professional development. Especially, Innovative Training program which has recently
played a significant role in improving the employee’s work outcome and the
performance of a huge number of organizations as well. Therefore, it is not surprising
when recognizing that Innovative Training has been employed in different kinds of
business across many countries in the world.
Being the pioneer in the hospitality industry, Hilton Garden Inn Austin NW hotel
which is in the Northwest Arboretum area of Austin*s Golden Triangle uses Innovative
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Game-Based Technology to Enhance Guest Experience and Recruit Next Generation
Team Members. Hilton Garden Inn launched of its training program on January 2009,
Ultimate Team Play for PlayStation Portable (PSP). After an intense introductory
session Hilton Garden Inn General Managers Conference now underway in Austin, each
hotel will receive a PSP handheld entertainment system and the Ultimate Team Play
game featuring guest satisfaction training for positions in housekeeping, food and
beverage, engineering and maintenance, and the front desk. This program is initially
being rolled out to hotels in the United States with global implementation to follow in
the later part of 2009.
“We take the guest experience as well as our team member training very seriously
but we believe that having a little fun along the way will enhance our team members’
ability to deliver incredible service to our guests,” said Adrian Kurre, senior vice
president, brand management - Hilton Garden Inn. “Ultimate Team Play responds to the
evolving training needs of our employees while focusing entirely on enhancing the
guest experience which has made Hilton Garden Inn an industry leader. Particularly in
this economy, it is imperative that each interaction with our guests acknowledges their
needs as effectively and efficiently as possible.”
Not only is Hilton Garden Inn the first in its industry to develop a game-based
training tool in the hospitality industry, it is also the world’s first hotel brand to offer an
interactive employee training system created specifically for Sony Computer
Entertainment Inc.’s PSP system.
Ultimate Team Play puts team members in a 3-D virtual Hilton Garden Inn hotel
where they must choose how to respond to various guest-related scenarios in a given
timeframe while also ensuring that they complete their specific hotel duties and so forth,
answering the telephone, checking guests in and out, and general guest interaction (in
the front desk scenario). The level and speed as well as the appropriateness of their
response directly affect the simulated guest’s satisfaction.
Another famous ones, the Innovative Training Program - Electrical Power
Technology Program has filled critical need as well as brought bright futures for next
generation of energy industry employees in Miami since June 2009 which used to be in
the midst of difficult economic times. This program was an innovative partnership
between Miami Dade College (MDC), Florida Power & Light Company (FPL) and the
International Brotherhood of Electrical Workers (IBEW) and is designed to support
workforce development and respond to the growing energy need in the Miami-Dade
County area for employees trained in the latest energy technologies. “The nation is
experiencing a critical shortage of energy and nuclear-skilled workers. This situation is
particularly acute in the nuclear energy sector. This partnership addresses that
challenge,” said James Auld, college and community coordinator for FPL. “We are
pleased to be able to tap into a natural resource in our area – students eager to learn
important and valuable skills – and offer them the opportunity to build a career with
FPL for years to come. We all benefit from this partnership.” In addition,
“Groundbreaking. Innovative. Progressive. These words describe this great program,”
said a jubilant Victor del Cid who graduated and received a job offer from FPL. “I
finally feel I have plotted the right course for me, my family and this community.”
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Additionally, an innovative training program as part of a joint initiative to
proactively plan and secure the availability of key skilled resources for the $1.8 billion
was launched on February 2010 by Adelaide Desalination Project South Australia
Water and Adelaide Aqua that was developed to help secure skilled welders for South
Australia. The specific aim is to attract, train and enhance the skilled resource capacity
in the area of specialized welding, welding supervision and welder qualifications.
SA Water ADP Director Milind Kumar said the desalination project has a need for
specialized welding trade’s people, due to the highly-technical infrastructure for its
seawater reverse osmosis operations. “This joint initiative will build essential capability
and capacity not only to service the needs of the highly specialized area of welding for
the ADP, but also build on local South Australian resources which can service other
similar projects nationally and worldwide,” SA Water ADP Project Director Milind
Kumar said. Furthermore, Mr. Tracey who was the Adelaide Aqua Project Director said
he envisaged the creation of a specialized welding expertise and resource pool which
will benefit many local industries well beyond the project’s completion date.
Moreover, today’s Innovative Training providers are increasingly in many fields
under the pressure of the demand of many organizations. Center For Innovative
Training And Education could be a typical illustration. It is located in a large city, in
Philadelphia, PA. The school is a private, for – profit institution. Degree level at Center
For Innovative Training And Education top out at the Certificate.
Table 3: Center For Innovative Training And Education Programs (2008-2009)
General Category
Most Common Majors
Office And Administration
Office data entry, general office occupations
Business And Management Banking
Table 4: Student Body’s Diversity in Center For Innovative Training And Education
(2007-2008)
Age
Percent
20-21
4%
22-24
6%
White
10%
25-29
26%
Black
77%
30-34
23%
Hispanic
11%
35-39
17%
Asian
2%
40-49
20%
50-64
4%
Race
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The table 3 and table 4 show that Innovative Training can be employed in various
majors with the diversification of educators in terms of both age and race. Moreover,
most of trainees are adults being from 25 to 34 year olds. Especially, a number of
candidates enjoying the Innovative Training are black people contributing
approximately 77 % in total.
The other instance that is The Innovative Training Company (TITC) made up of a
team of experts who initially supplied successful training and consultancy solutions to
the financial, manufacturing and technology service industries in the United Kingdom.
TITC provides tailored training and consultancy solutions developed by the unique
combination of practical skills, industrial experience and training interventions for a
range of clients in the area of Information Technology Security, Leadership and
Management; Recruitment and Selection to meet all requirements. Focusing on
providing bespoke training and consultancy, which when applied to a clients’ business
adds real value and has helped to distinguish TITC.
WMware, Inc. is also one of the leading providers offering an innovative training
solution for the of Net services software. Available immediately worldwide to Novell
authorized education partners, Novell Quick Classroom allows for dramatically reduced
classroom set-up time for Novell classes and freeing technical staff, equipment and
classrooms for billable training activities. Furthermore, students can freely experiment
without damage to the operating system and its applications. Furthermore, Training
centers can better manage their hardware resources since VMware Workstation allows a
complete network to be built on a single computer.
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As seen from the list above, the network of VMware has been extended in all most
continents on the earth that shows off the popularity and vitality of Innovative Training
highly appreciated by customers.
Besides those providers offering The Innovative Training, there are a lot of other
companies working quite well such as Heartland Innovative Training Company, Praesto
Company, Marlin Training Company, DOCEP SafetyLine Institute and so forth. All
those are very supportive and helpful in Innovative Training programs of companies
who are both performance- and employee-oriented.
2. In Vietnam:
In spite of the application of innovative training popularly and effectively in the
world, there is no attention paid to creating the innovation in training workforce.
Recently, the improvement of the knowledge, job skills, behavioral culture and creative
working environment has been ignored by lots of Vietnamese companies since they are
production- and market share-oriented. Another reason is their special characteristic that
is almost Vietnamese enterprises being small and medium. Hence, the effectiveness of
innovative training has been not appreciated highly as a solution improved employees’
performance that plays an important role in the development of an enterprise. Moreover,
due to the limited capital, they often regard training workforce as “cost” instead of
“investment”. Therefore, some traditional training methods have been applied usually
despite its ineffectiveness and obsolescence.
However, there are still some companies being aware of the significant role of
innovative training in keeping pace with the changing business environment. Viglacera
Ha Long Company is one of those clear-sighted enterprises in Vietnam. It could be the
typical illustration in fostering workforce provided worth experiences that others should
study and learn. “In the corporate strategy in development, one of the most vital factors
contributing our company’s success is the way we training the workforce that helps to
level up and encourage the job skills for each employees” said Mr. Nguyen Quang Mau,
Viglacera Ha Long Company’s CEO. Nowadays, Viglacera Ha Long has provided
employees with both short- and long-term courses that offer not only professional
knowledge but also job skills. Additionally, it also shakes hand with some universities
and vocational training college such as Hanoi University of Technology, Hanoi
University of Civil Engineering, Hong Cam Vocational Training College and Training
Center of Quang Ninh Province to hold some classes trained employees in order to
improve the quality of staffs. Moreover, all officials are motivated to take a part in
English and computer skill course meeting the changing work’s requirement. Especially,
Viglacera Ha Long Company often sends its co-workers abroad to learning technology and
experience so that they can apply better to the practical condition of company.
Besides, Viglacera Ha Long usually brings favorable conditions in terms of time,
facilities and budget to encourage its employees enjoy training courses. Furthermore,
company always creates the dynamic and creative working environments in every
activity originated from for innovation. Due to innovative training for workforce, the
huge amount of money has been flown in terms of budget spent and productivity
reduction. Impressively, Viglacera Ha Long Company has gained the great
achievements since applying this strategy focusing on fostering employees. For
instance, the revenue of company had increased by 15 times in the period between 2000
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and 2007. Thereby, employees’ average salary also goes up constantly and it is expected
to be VND 2.5 million per month on average. In addition, the level of job satisfaction is
also improved with the happiness and passion when working. Viglacera Ha Long
Company has given a good lesson for other Vietnamese companies in terms of taking
the full advantage of the innovative training.
In recent years, Petro Vietnam Exploration Production Corporation (PVEP) has
been well-known with the successful application of innovative training in developed
human resource strategy since it has the guideline of “People- the foundation of the
constant development”. Beside trying to attracting talent and excellent candidates and
providing with the favorable environment, PVEP has also paid attention to the training
workforce, especially innovative training. In 2008, it offered new employees training
programs giving good conditions to revise the theoretical knowledge and approach the
modern technology of PVEP as well with the purpose of simulating the work passion
and creation ability. Additionally, its employees also take a part in both the short- and
long-term courses abroad go along with self-studying. Moreover, in 2009 International
Human Resources Development Corporation – the top consultants in human resource
development of petrol field - helped PVEP standardize the evaluating workforce system.
Based on the results, PVEP set the plan to training staffs and had salary, compensation
as well for each position and job type. That has been expected to bring new success and
achievement in the near future of PVEP.
V. E-Learning – A innovation solution for innovative training
The Internet has been a very influential medium that fueled the technological
movement of the 21st century. It has an encompassing effect on our society most
especially on the corporate world, where information dissemination could automatically
spell life or death for a company.
Any company owner in the world would not contend with the fact that Internet and
the booming information technology have paved the way for more efficient operations,
and of course the ability to connect to various markets that were impossible to reach in
the past. The Internet has also helped companies manage internal workforce
performance, not only in terms of output, but also in terms of developing skills of new
and existing employees. Traditional corporate training methods have been replaced by
an innovative approach called E-Learning.
A few years ago, David Dam, head of sales development for Golden Harvest Seeds
Inc., was frustrated with his company's sales-training program for 250 employees and 2,000
independent crop-seed dealers. Mr. Dam would rent meeting rooms for 30 people, and only
15 would show up. He had trouble finding great trainers. Fuel prices were making travel
more expensive, and the sessions took valuable time out of workers' days. But in the spring
of 2004, Mr. Dam's company tried planting some seeds in a new field – online training.
Golden Harvest hired EJ4 LLC, a video-based online trainer in St. Louis, to produce
and post online videos for teaching sales reps how to sell Golden Harvest seeds. Mr.
Dam tracked the results and found that employees were watching the videos, mostly on
Saturdays or Monday mornings. Sales increased, as did demand for more courses, and
training costs fell to less than $100 per person from between $175 and $200. "This
would have been next to impossible if we had just standard [face-to-face] training," Mr.
Dam says. Now, Golden Harvest, of Waterloo, Neb., offers about 120 training courses
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on its internal Web site, with 2,000 page views a month. "We're getting more done with
less money," he says.
Figure 1: Corporate Training Methods:
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Many people may question why E-Learning has been used in training workforces
popularly and utilized effectively. Since lots of imagining benefits that it could bring for users.
a. Saving time without decaying learning benefits and minimizing time away from work
Fletcher (1990) after carefully reviewing over forty independent studies found that
E-Learning used for training workforces yielded timesaving of 35-45% over traditional
classroom instruction while obtaining equivalent or better gains in learning retention
and transfer. Adams (1992), Cantwell (1993), Baradley (1994) and Hofstetter (1994)
later confirmed these results across several years and hundreds of studies. Likewise
Hall’s (1997) in-depth review of over 130 case studies found that computer-base
training required significantly less time than instructor-lead training. The amount of
reduction in time ranged from 20-80%with 40-60 % being the most common range for
timesaving. More recently, Hemphill (2005) found that E-Learning saves time but it
does not negatively impact effectiveness of learning.
b. Minimizing travel costs
For years corporate America realized that travel and entertainment (T&E) made up
the bulk of their training costs. However, numerous studies have shown that E-learning
can cut the travel and entertainment cost associated with training by at least 50% (Hall
1997). Other studies have shown that if implemented properly these costs can be
reduced by at least 80% (Hemphill 1999).
c.Being cost effective
Numerous studies have shown that the cost of developing multimedia training is
significantly higher than creating custom classroom instruction approximately four
times (Hall 1997). This is obviously not cost effective for small class size but as the
number of employees increases, the cost per trainee is dramatically reduced. This is the
cost efficiency of e-learning; it can reach more people in a shorter amount of time than
traditional learning.
d. Meeting better the needs of geographically diverse employees
E-Learning is flexible. It is self-paced and can occur any time any place. As such, it
is ideally suited for training employees who are dispersed globally. E-Learning is easily
modified thus making it more adaptable for translation an change of content for
different cultures and languages.
e. Providing more consistent course delivery
We are all aware that “live” theatrical performances vary in times and sometimes
obviously ways from one performance to another. There are days when a particular
actor may feel good and give a good performance as well as those in which they may
feel bad and give a poor performance. Moreover, lots of times those trainers can miss
lines and make mistakes. In contrast, when a performance is filmed or taped the actors
and director can review their performances and redo as well as edit those areas that are
not up to the standards. No matter how many times you view the film or tape it will be
the same. Adam (1995) found an average delivery variance of 59% between
presentations by classroom by instructors. Whereas, E-Learning is very similar to a
performance until it is just right.
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It is not a surprise that most industries would rather integrate e-learning into their
system rather than using traditional modes of improving the performance of their
employees. This training innovation has found its way into various industries, such as,
information technology, engineering, architecture, and the health care industry.
Professionals from different parts of the globe can now have access to the latest
practices in their field, which would contribute to better performance, quality service,
and growth of their industry. It would also help industries measure the impact of human
resource development programs on employee performance and its return on investment.
Gains and achievements of employees will be transformed into a comprehensive and
quantifiable report that managers and executives can use to evaluate and assess their
business development.
VI. Conclusion
In short, through out this paper, it has been found out that innovative is even more
essential to organization. It not only motivates trainees but also benefit the businesses to
some extent. Even though it is not widely applied, it is believed that, in the future, with
the help of technology and changes is competitive advantages, innovative training will
become more popular among the workforce. Investing in the workforce is the most
precious investment of a business.
VII. Recommendations:
Recommendation:
To make use of Innovative training and apply it successfully in your organization,
our group has some suggestions considered as training tips, training icebreakers. That will
help your training classes hold interest, capture imagination, and help employees learn.
Firstly, in a training class, a trainer should think about how to develop an Ice
Breaker? You can develop an ice breaker that will warm up the conversation in your
training class, reinforce the topic of the training session, and ensure that participants
enjoy the training.
- Divide the meeting participants into groups of four or five people by having them
number off. (You do this because people generally begin a meeting by sitting with the
people they already know best.)
- Tell the newly formed groups that their assignment is to share their five favorite
movies of all time, or their five favorite novels, or their five least liked films, and so
forth. The topic can be five of anything - most liked or disliked. This ice breaker helps
the group explore shared interests more broadly and sparks lots of discussion about why
each person likes or dislikes their selected five.
- You can also use this ice breaker for topical discussion. As an example, in a
session on team building, you might ask, "What are five dysfunctional behaviors you
have experienced when participating on an unsuccessful team?" Or, "Think about the
best team you have ever been on. What are five key factors that made it your best or
most successful team?"
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- Tell the groups that one person must take notes and be ready to share the
highlights of their group discussion with the whole group upon completion of the
assignment.
- Debrief the team building ice breaker by asking for a volunteer to read their list of
five of anything. Or ask the volunteer to list any movies, for example, that more than
one person had in common and shared as their favorite. Then, ask each group to share
their whole list with the whole group. Because people are almost always your best
source for laughter and fun, the reading of the lists generates a lot of laughter and
discussion. You can also catch the drift of the conversation in the small groups based on
the transitions made from item to item.
- When the volunteer from each group is finished, ask the rest of the participants if
they have anything they'd like to add to the discussion before moving on with the rest of
the session.
This team building icebreaker takes 10 – 15 minutes, depending on the number of
groups that need to report their discussion.
Tips about How to Develop an Ice Breaker:
• Decide how much time, relative to the length of the training session, you have to
invest in an ice breaker. Keep in mind that with adult learners, the facilitator should talk
and present 60-70% of the time. Thus, your time for trainee participation, including the
ice breaker, is 30-40% of the training time.
• Figure out the characteristics, interests, and preferences of the participants for
whom you want to develop the ice breaker. Different groups have varied preferences.
Determine the goal of your ice breaker. Is the purpose of the ice breaker to warm
up the group and provide the opportunity for participants to meet each other? Is the goal
to bridge the group into the topic of the training session? Is the goal of the ice breaker to allow
participants to demonstrate what they know or have experienced on a particular topic?
•
Or, is the goal to let the attendees participate in an activity that will demonstrate
insights about the participants' functioning together? The ice breaker can combine any
of these goals. Just match the goals to the needs and preferences of your participants.
Secondly, how to create team norms?
The members of every team and work group develop particular ways of interacting
with each other over time. Effective interpersonal communication among members and
successful communication with managers and employees external to the team are
critical components of team functioning. With the potential power of the impact of these
interactions on team success, why leave team interaction to chance? Form team
relationship guidelines or team norms early to ensure team success.
Thirdly, Training and Development for Motivation and Retention: Training and
Development Options:
One key factor in employee motivation and retention is the opportunity to continue
to grow and develop job and career enhancing skills. There are a couple of secrets to
what employees want from training and development opportunities, however. Plus, training
and development opportunities are not just found in training classes and seminars.
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Training and Development Option: Job Content and Responsibilities:
You can impact training and development significantly through the responsibilities
in an employee’s current job.
Expand the job to include new, higher level responsibilities.
• Reassign responsibilities that the employee does not like or that are routine.
• Provide more authority for the employee to self-manage and make decisions.
• Invite the employee to contribute to more important, department or companywide decisions and planning.
• Provide more access to important and desirable meetings.
• Provide more information by including the employee on specific mailing lists, in
company briefings, and in your confidence.
• Provide more opportunity to establish goals, priorities, and measurements.
• Assign reporting staff members to his or her leadership or supervision.
• Assign the employee to head up projects or teams.
• Enable the employee to spend more time with his or her boss.
• Provide the opportunity for the employee to cross-train in other roles and
responsibilities.
Training and Development Option: Formal Training and Development
• Enable the employee to attend an external seminar.
• Enable the employee to attend an internally offered training session.
• Perform all of the activities listed before, during, and after a training session to
ensure that the learning is transferred to the employee’s job.
• Ask the employee to train other employees with the information learned at a
seminar or training session.
• Purchase business books for the employee. Sponsor a book club or offer the time
at a department meeting to discuss the information or present the information
learned to others.
• Offer commonly-needed training and information on an Intranet, an internal
company website.
• Pay for the employee to take online classes and identify low or no cost online training.
• Provide a flexible schedule so the employee can take time to attend university,
college, or other formal educational sessions.
• Provide tuition assistance to encourage the employee's pursuit of additional education.
Last but not least, besides sitting in the class, the trainees should be taken out on
field trip to the place will be working on. There, let them spend some time observing the
real work by themselves. They can make questions on the work if they want to. This can
help trainees somehow understand the operation of the company. Besides, watching
others working and handling problems in real can be an interesting experience because
no matter how much theory they have, the real situation is varied and different.
The development of a life-long engaged learner is a positive factor for your
organization no matter how long the employee chooses to stay in your employ. Use
these training and development activities to ensure that you optimize the employee's
motivation and potential retention.
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REFERENCES
Luis R.Gosmez-Mejía, David.Balkin, Robert L.Cardy, 2006, Managing Human Resources,
5 edition, page 239-250.
Journalist, Leonardo da Vinci, 2007, Index of innovative training practices in SME,
[online]. Available at URL: http://www.smelearining.eu (Accessed 18th May 2010)
Journalist, Manfred Walleborn, 2009, Innovative training for poverty reduction in rural
central asia, [online]. Available at URL: www.adb.org/Documents/TARs/AFG/ tar-afg38044.pdf (Accessed 18th May 2010)
Journalist, Trace A. Urdan, Cornellia C. Weggen, 2000, Corporate E-Learning: Exploring a new
frontier, [online]. Available at URL: www.educause.edu/.../CorporateELearningExploringaNe/151480
(Accessed 18th May 2010)
Journalist, A. William Wiggenhorn, 2002, A vision of E-Learning for America’s workforce,
[online].
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URL:
www.educause.edu/Resources/AVisionofELearningfor
AmericasW/151554 Accessed 17th May 2010)
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http://www.cdc.gov/niosh/topics/Training/ (Accessed 19th May 2010)
Anonymous, 2010, Innovative Training Company [online]. Available at URL:
http://www.theinnovativetrainingcompany.com/product.html (Accessed 19th May 2010)
Anonymous, Marlin Training [online]. Available at URL: http://www.marlinnet.co.uk/firstaid/OutdoorFA.html (Accessed 19th May 2010)
Anonymous, Firms Go Online to Train Employees [online]. Available at URL:
http://online.wsj.com/article/SB118704261866596434.html (Accessed 16th May 2010)
Anonymous, Hilton Garden Inn Austin NW/ Arboretum. [Online]. Available at URL:
http://www.istaygreen.org/property.cfm/hid/11294433 (Accessed 19th May 2010)
E-learning – An Innovative Training Approach to Improve the Workforce [online].
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Tín hiệu mới cho E-Learning tại Việt Nam [online]. Availlable at URL:
http://www.sara.com.vn/detailNews.aspx?id=240&lang=vi&Cate=35 (Accessed 16th May 2010)
AdelaideAqua, Innovative training course developed to help secure skilled welders for
South Australia [online]. Available at URL: http://www.newsmaker.com.au/news/2447
Heartland Innovative Training [online]. Available at URL: http://www.heartlandinnovativetraining.com/.
Licensed training providers [online]. Available at URL: http://bizline.docep.wa.gov.au/
safetyline/pages/providers.cfm (Accessed 16th May 2010)
VMware Partners With Novell to Provide Innovative Training Solution [online]. Available at
URL: https://www.vmware.com/company/news/releases/novell.html (Accessed 16th May 2010)
th
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ANALYSIS OF THE DEPENDENCE OF TOURISM REVENUE
ON THE NUMBER OF VISITORS, INVESTMENT, CPI
Written by: Hoang Thi Hue, Ngo Van Lung (TR-08)
Supervisor: PhD DAO Thanh Binh
Abtract
Nowadays, tourism is considered a very important industry with many chances to enlarge
and develop. Each year, tourism has a big contribution to GDP of the whole country (15.7%).
Tourism not only supports for government in general but also increases the standard of living
for the people participating in tourism industry. Being concerned about this fact we decide to do
this project with the topic: “Analyzing the dependence of tourism revenue on the number of
visitors, investment, and CPI in Viet Nam from 2000 to 2007”.After collecting the data from
some believable sources we have the model with three independent variables: visitors,
investment and CPI. Firstly, we do model specification to make an overview about the model
and have some predictions of the sign of the independent variables. Next, we do the individual
partial test to find out the impact of each predictor on the prediction. Also, we do the test of
overall significance as well as the test of drop variable. Moving violations part, we do with
three problems that may be exist in the model, they are multicollinearity,heterocedasticity,
autocorrelation. Seeing R2 and t-statistics of coefficients and using auxiliary regression, we can
conclude that multicollinearity exists in our model. About heterocedasticity, we use white’s
Heterocedasticity test without cross term to detect it. Similar to multicollinearity and
Heterocedasticity problems, the violation of one of the OLS assumptions gives rise to
autocorrelation. We use Durbin- Wastson d test to detect autocorrelation.
1. Introduction
The issue of priority to tourism development, creating the best conditions to convert
tourism into the spearhead economic sector of our country is currently being concerned
more and more by the Party and the State of Vietnam.
Like many countries, our tourism is being viewed as one of the leading economic
sector by the huge benefits of economy and society that the tourism industry itself
brought about.In addition to economic efficiency, the development of tourism also
impacts directly the national economy, promotes the production and services sectors.
In fact, the tourism performance has brought the growth of important steps to
contribute to the industrialization, modernization of the country, reflected in the
proportion of GDP of the sector in the economy(according to the General Statistics
Office, in 2005 the revenue reached $2.3 billion, in 2008 has reached over $ 4 billion
and the average growth rate reached 15.6% per year), offering great revenue to the
country, creating jobs for the society, contributing to ensuring and maintaining the
security and defense.
This project with the objective of forecasting the tourism revenue of Vietnam,
actually, based on the secondary research and the information resources available in the
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Internet and others printed media is to test how the number of visitors, the total
investment as well as the CPI affected the revenue of Vietnam Tourism for the period of
2000-2007.
This study was conducted on the basis of constructing a model to reflect the
relationship between the variables just mentioned above, testing their significance and
the errors of the model to find out the BLUE one. Due to the limit of time and available
resources, the project cannot cover all the factors influencing the revenue of Vietnam
Tourism, rather than the number of tourists, the total investment and the consumer price
index. The object of this study is to give the readers and the people who are concerned
the detailed insight into the inter-relationship between the revenue of Vietnam Tourism
and the influential factors, the importance degree of each factor so that ideas can be
formed to foster the further development of Vietnam Tourism in the coming years.
2. Sample data
Obs
Revenues
(billion VND)
2000
2001
2002
2003
2004
2005
2006
2007
4458.5
5869.4
7855.9
8649.8
10734.5
14693.4
16732
20078.4
Number of
visitors
(thousands)
12727.8
17205.4
24280.5
24660.4
29257.4
32339
33004.3
37233.6
Investments
(billion VND)
CPI (%)
4453
2975
3847
4230
5549
6628
8613
9899
100
100.1
100.3
100.2
100.8
100.7
100.5
101
Table 1: Data table includes one dependent variable and three independent variables.
Acording to the collected data, it can be seen that all the variables have the same
trend which increased through the period from 2000 to 2007. It seems that there is a
relationship between the independent and depependent variables. Thus, to check it, we
do the hypothesis testing
3. Model specification
Base on the data of “Vietnam National Administration of Tourism & General
Statistic Official”, in this project we will define whether Y-Revenue of Tourism is
influenced by three factors: the number of tourist visited, the consumption price index
and the governmental projects invested in Tourism. Applying the economic theory, we
construct the following model:
Y= β 1 + β 2 * X 2 + β 3 * X 3 + β 4 *X 4
Y: revenue of tourism
X2: number of visitors
X3: investment
X4: consumption price index
In the model above, Y is set to be dependent variable and the rest are independent one.
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The first concept is Y-the revenue of Tourism yield. This concept is measured in
billion people that means total number of money created by Tourism. Understanding
this concept seriously is very important because it helps us to see a large of distribution
of Tourism to GDP every year and crucial role as the whole in economy. For example:
it makes rising in GDP, change the face of centre and countryside, create many different
jobs to local community as an result is the living standard of citizens improves, motivate
trading not only between people inside the county also people outside of country, etc.
The second concept is X2-the number of tourist. It is clear that the number visitor is
the most important factor which affects to the revenue of tourism. Base on the
searching, we see that in recent years the number of tourists visit Viet Nam has
increased significantly. In 2000 there are 12727.8 foreigners went to VN, however, it
tripled in 2007 at 37233.6 (people). This result made dramatic increase in interest of
tourism, reached 51 billion VND and played an important role in GDP. Another
example about influence of number of tourist on revenue is event in 2009, with global
crisis and going down in economy of almost countries, inflation rose as a result the price
was high. That is the reason why foreigners trended to save money and cut-off spend on
relax activities such: travelling or entertainment. It made a remarkable decrease in total
number of tourist at 8% in comparison with last year and had negative effects on
tourism. In contrast with outbound tourist, inbound tourist in Viet Nam had strong upward
trend with 19% equal 25million visitors. GDP gained 70billion from tourism in 2009.
The third one is investment in tourism. As we know just 20 years ago, tourism in
Viet Nam was far from foreigners’ knowledge, only a little awareness they had. But it
changes; Viet Nam is well-known country not only in Asia but also in all over the
world, nowadays. Now, people in the world know Vietnamese characteristics, history,
traditional value,etc. We have those achievements are due to governmental projects,
plans, and strategic marketing to show images of our country. Furthermore, tourism
organizations have combined together to improve and develop tourism and make
tourism –“smokeless industry” become a real strength in the near future. In recent years,
seeing the importance of tourism in developing economy, most of provinces have
noticed their potentials, invested more to exploit and get revenue. Some typical
governmental strategies as positive prospects to motivate tourism with projects: “Viet
Nam-hidden charm”, “amazing Viet Nam” “develop in 2010-2913, the view in 2020”…
others: national action on tourism is granted 40 billion VND, to promote products
related to tourism, human resource, promotion tourism programs, building
infrastructure, resort to attract more tourist. Therefore, Investment is factor that has to
be noticed if we want develop tourism.
The last concept is CPI; in this case CPI is the price of goods and services. We have
to know that, when do travelling, tourist will be willing to spend much on recreation
such as: shopping, movie, theater or outdoor activities,etc. From the matter of fact that
most of foreigners said that: “Viet Nam is a cheap place”. Actually, the price of goods
and services in Viet Nam is very low compared with around countries, that is the reason
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why revenue of tourism still low level. To some extent, if CPI increases reasonably,
people are still willing to travel and the revenue of tourism also rises.
To sum up, we can estimate the sign of all parameters (
,
,
) are positive.
4. Result & Discussion:
4.1 Hypothesis testing
4.1.1 Eview table & Interpretion
Dependent Variable: Y
Method: Least Squares
Date: 05/18/10 Time: 14:36
Sample: 2000 2007
Included observations: 8
Variable
Coefficient
C
122850.1
X2
0.384061
X3
1.210804
X4
-1282.461
R-squared
0.985694
Adjusted R-squared 0.974965
S.E. of regression
873.5519
Sum squared resid
3052371.
Log likelihood
-62.75946
Durbin-Watson stat
2.754617
Std. Error
t-Statistic
217767.0
0.564136
0.106824
3.595266
0.248612
4.870259
2190.142
-0.585561
Mean dependent var
S.D. dependent var
Akaike info criterion
Schwarz criterion
F-statistic
Prob(F-statistic)
Prob.
0.6028
0.0229
0.0082
0.5896
11133.99
5520.925
16.68986
16.72959
91.86822
0.000382
Interpreting the result
From the Eview table, we have the summary for the results of regression analysis:
^
Y = 122850.1 + 0.38* X2 + 1.21* X3 – 1282.5* X4
Se
= (217767) (0.10) (0.25) (2190.14)
t
= (0.56) (3.59) (4.87) (-0.58)
p
= (0.6028) (0.0229) (0.0082) (0.5896)
R2
= 0.985694, df
=7
∧
β 1 = 122850.1 is the intercept of the line, which indicates that Tourism revenue
will be 122850.1 billions VND on average when the number of visitors and investment
and CPI are equal to zero. It has no economic meaning because they are never equal to
zero.
∧
β 2 = 0.38 is the slope of the line which shows that tourism revenue will increase by
0.38 billion VND on average when the number of visitors increases by 1 thousand,
holding other independent variables constant
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Th¸ng 5 - 2010
∧
β 3 = 1.21 means that the tourism revenue will be higher by 1 billion VND on
average when the investment rises by 1 billion VND, holding other independent
variables constant.
∧
β 4 = -1282.5 indicate that tourism revenue will decrease by 1282 billion VND
when CPI increases by 1%, holding other independent variables constant.
To test the influences of independent variables on the tourism revenue, we make
hypothesis testing.
4.1.2. Individual partial coefficient test:
This hypothesis testing is the test for the impact of each independent variable on the
dependent variable. All of the test below is tested through a time- series of 8 years, from
2000 to 2007 and at the level of significance: α = 0.05
Test for the number of visitors:
Ho: β 2 = 0
H a: β 2 ≠ 0
∧
t- statistic: t =
β 2− β2
=
∧
se ( β 2 )
0 . 38
= 3 .8
0 .1
Critical value: tc = t0.05,7 = 1.895
We have: tsta > tcri => reject Ho
Conclusion: the number of visitors is statistically significant and is significantly
different from zero.
Test for the investment:
Ho: β 3 = 0
Ha: β 3 ≠ 0
t-statistic:
∧
t=
β 3 − β3
∧
se( β 3 )
=
1.21
= 4.84
0.25
We have: tsta > tcri => reject Ho
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Conclusion: the investment is statistically significant and is significantly different from zero.
Test for CPI:
Ho: β 4 = 0
H a: β 4 ≠ 0
∧
t-statistic: t =
β4 − β4
∧
se( β 4 )
=
− 1282.5
= −0.6
2190.14
Decision: t sta < t cri => Do not reject Ho
Conclusion: The CPI is not statistically significant and is not significantly different
from zero.
4.1.3. Testing the overall significance of the multiple regression:
Now, we consider a joint null hypothesis that all β are jointly or simultaneously
equal to zero. This test is a test of overall significance of observed or estimated
regression line, that means whether the value of tourism revenue is linear related to all
the number of visitor, investment, and CPI
Ho: All variables are zero effect. ( β 2 = β 3 = β 4 = 0)
Ha: At least one variable is not zero effect, at least one variable has the
effect.
( β 2 ≠ 0, β 3 ≠ 0, or β 4 ≠ 0).
F-statistic:
R 2 /(k − 1)
0.98 /(4 − 1)
F=
=
= 65.33
2
(1 − R ) /(n − k ) (1 − 0.98) /(8 − 4)
F-critical value: Fcα,k-1,n-k = Fc0.05,3,4 = 6.59
Decision: Fsta > Fcri => Reject Ho
Conclusion: There is evidence to conclude that there is at least one variable has
effect on the tourism revenue.
4.1.4 Testing the drop variable in the regression model:
From the result of t- test as well as the P- value (P-value of X4 = 0.5896), we can
see that CPI (X4) is not statistically significant or have a very small effect on the
tourism revenue. Consequently, we use this test to find out whether our model be better
if we drop the last independent variable (X4) out of the origin model.
The new model after dropping X4:
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^
∧
∧
Th¸ng 5 - 2010
∧
Y = β 1 + β 2 *X2 + β 3 *X3
New Eview table:
Date: 05/18/10 Time: 14:39
Sample: 2000 2007
Variable
Coefficient Std. Error
t-Statistic
Prob.
C
-4664.058 1028.832
-4.533352
0.0062
X2
0.338058 0.067459
5.011308
0.0041
X3
1.193937 0.230139
5.187886
0.0035
R-squared
0.984468
Mean dependent var
11133.99
Adjusted R-squared 0.978255
S.D. dependent var
5520.925
S.E. of regression
814.1280
16.52211
Sum squared resid
3314022.
Schwarz criterion
16.55190
Log likelihood
-63.08843
F-statistic
158.4557
Prob(F-statistic)
0.000030
Durbin-Watson stat 2.744549
New model: ^Y= - 4664.058 + 0.34*X2 + 1.19*X3
∧
Ho: β 4 =0
∧
H a: β 4 ≠ 0
F-statistic:
2
F=
( R new − R 2 old ) /# drop (0.984468 − 0.985694 ) / 1
=
= −0.395
(1 − 0.984468 ) /(8 − 3)
(1 − R 2 new ) /( n − k )
F-critical: Fcα,k-1,n-k = Fc0.05,1,5 = 6.61
Decision: Fsta < Fcri => Do not reject Ho
Conclusion: There is evidence to conclude that X4 (CPI) is not relevant to drop out
of our model.
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4.2. Violations
4.2.1 Multicollinerity
Date: 01/01/06 Time: 03:18
Sample: 2000 2007
Variable
Coefficient
Std. Error
t-Statistic
Prob.
C
X2
X3
X4
122850.1
0.384061
1.210804
-1282.461
217767.0
0.106824
0.248612
2190.142
0.564136
3.595266
4.870259
-0.585561
0.6028
0.0229
0.0082
0.5896
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
Durbin-Watson stat
0.985694
0.974965
873.5519
3052371.
-62.75946
2.754617
Mean dependent var
S.D. dependent var
Schwarz criterion
F-statistic
Prob(F-statistic)
11133.99
5520.925
16.68986
16.72959
91.86822
0.000382
Y ∧ = 122850.1 + 0.384061X2 + 1.210804X3 – 1282.461X4
Using Eviews software, we want to check whether the multicollinearity exists in our
model or not. In another word, we want to find out the relationship among independent
variables. From then, the solution to address this problem will be given in order to help
us have better model with more reliable statistics. Imperfect multicollinearity cause
some consequences:From the model.
R2= 0.985694 very high
t stat = 0.564136 & t stat = -0.585561 is not significant
Multicollinearity may be exist
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Auxiliary regression
Dependent Variable: X2
Date: 01/01/06 Time: 00:50
Sample: 2000 2007
Variable
Coefficient
Std. Error
t-Statistic
Prob.
C
X3
X4
-1494685.
1.110948
15078.23
619940.3
0.914562
6212.759
-2.411014
1.214732
2.426978
0.0608
0.2787
0.0596
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
Durbin-Watson stat
0.861659
0.806322
3657.079
66871135
-75.10685
1.556388
Mean dependent var
S.D. dependent var
Schwarz criterion
F-statistic
Prob(F-statistic)
^
Y = 122850.1 + 0.384061X2 + 1.210804X3 – 1282.461X4
^
X 2 = -1494685 + 1.110948X3 + 15078.23X4
Ho: multicollinearity doesn’t exist
Ha: Ho is false
From the model, we have R '2 = 0.861659
Compute F statistic:
2
≈ F
(1 − R' 2 ) / n − k
0.861659 / 4 − 1
F stat =
≈ F = 15.57125
(1 − 0.861659) / 8 − 4
Choose α = 0.05
F c (k-1; n-k) = F c (0.05,3,6) = 4.76
Compare: F stat > F c

F-stat =
R' / k − 1
Reject Ho.
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26338.55
8309.875
19.52671
19.55650
15.57125
0.007118
Th¸ng 5 - 2010
There is enough evidence to conclude that multicollinearity exist in the model.
9 Remedical measure:
From the problem above, we need to give remedial method to correct the problem
and make our model better. The best way here is dropping one variable from the model.
We choose CPI variable to drop it because it has no statistical significance on tourism
revenue. After dropping it, we see that R2 falls from 0.985694 to 0.984468. It is still
high and shows the goodness of fit in our model. Furthermore, t- statistics are more
statistical significance in the model. Using this method, it is clear that our model
becomes more accurate and significant.
Final model: ^Y= - 4664.058 + 0.34*X2 + 1.19*X3
9 Interpretation for the final model
Final model: ^Y= - 4664.058 + 0.34*X2 + 1.19*X3
∧
β 1 = -4664.058 is the intercept of the line, which indicates that Tourism revenue
will be 122850 billion VND on average when the number of visitors and investment and
CPI are equal to zero. It has no economic meaning because they are never equal to zero.
∧
β 2 = 0.34 is the slope of the line which shows that tourism revenue will increase by
0.384 billion VND on average when the number of visitors increases by 1 thousand,
holding other independent variables constant
∧
β 3 = 1.19 means that the tourism revenue will be higher by 1.19 billion VND on average
when the investment rises by 1 billion, holding other independent variables constant.
4.2.2. Heteroscedasticity
Heterosedasticity is the problem of violating the assumption about variance of error
terms. The existence of heteroscedasticity means that the variance of ui is not constant
for all the observations. To see whether this problem exists in our model, we use the
White‘s general heteroscedasticity test without cross term:
Ho: homoscedasticity Var (ui) =
H1: heteroscedasticity Var (ui) =
i
White Heteroscedasticity Test:
F-statistic
Obs*R-squared
0.293521 Probability
5.102631 Probability
Test Equation:
Dependent Variable: RESID^2
Date: 01/01/06 Time: 03:16
Sample: 2000 2007
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0.885543
0.530719
Variable
Coefficient
Std. Error
t-Statistic
Prob.
C
X2
X2^2
X3
X3^2
X4
X4^2
-4.87E+10
-290.5845
0.003997
-1139.503
0.078147
9.66E+08
-4795803.
7.94E+10
842.5364
0.020192
1141.223
0.088215
1.58E+09
7844231.
-0.613130
-0.344893
0.197921
-0.998493
0.885866
0.612275
-0.611380
0.6498
0.7886
0.8756
0.5005
0.5385
0.6502
0.6507
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
Durbin-Watson stat

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0.637829
-1.535198
713975.4
5.10E+11
-110.8626
3.074313
Mean dependent var
S.D. dependent var
Schwarz criterion
F-statistic
Prob(F-statistic)
381546.4
448412.1
29.46564
29.53515
0.293521
0.885543
^
Y = 122850.1 + 0.384061X2 + 1.210804X3 – 1282.461X4
^
u = -4.87E+10 – 290.5845X2 + 0.003997 X 2 ^ 2
0.078147 X 3^ 2 9.66E+08 X4 – 4795803. X 4 ^ 2
– 1139.503 X3 +
Compute W = n * R 2 = 8*0.637829 = 5.102631
χ 2 (0.05,6) = 12.59
Compare W & χ 2 we have seen that: W< χ 2
Do not reject Ho
There is not enough evidence to conclude that Heteroscedasticity exist in the model.
4.2.3. Autocorrelation
To check whether this disturbance term of 1 observation has influence on the error
term of the other observation; we use Durbin – Watson test
DW
2.754617
*. ρ ∧ = 1=1= -0.3773
2
2
Negative autocolerration.
Ho: ρ = 0 no autocorrelation
Ha: ρ < 0 yes, negative autocorrelation
We have DW = 2.754671
α = 0.05, N=8, k’= 3
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Th¸ng 5 - 2010
Look at the table D.5A we find that:
d l = 0.368
d u = 2.287
If d l ≤ (4-d) ≤ d u not reject Ho
We have 0.368 < (4 -2.754617) < 2.287 0.368 < 1.245< 2.287
Not reject Ho
There is not enough evidence to conclude that Autocolerration exist in the model.
Dropping a variable is very important because it helps our model more accurate and
significant. If we drop CPI from the model, there are many changes in t- tests and R2. ttests. They are very statistically significant and show the goodness of fit in our model. It
imply that tourism revenue depend a lot on number of visitors and investment. CPI
seems that it has no impact on tourism revenue. After using remedial method, we can
fix the multicollinearity problem. Two rest problems are heterocedasticity and
autocorrelation is shown that they doesn’t exist in our model. Generally, three errors in
our model are illustrated and fixed necessarily.
5. Recommendations:
Through our research, we would like to give out some recommendations for
Vietnam tourism following:
1. Have a clear objectives and a strategic plan to attract the visitors come to
Vietnam, especially to improve the quality of services in order to increase tourism
revenue
2. In addition to, the government should have policies to attract more the
investment projects from both domestic and foreigner investors in tourism industry.
This is one reason to increase the sale revenue.
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THE FACTORS AFFECTING STATISTICS FINAL RESULTS
OF FMT STUDENTS
Written by: Pham Viet Dung, Luu Dieu Linh (BA-08)
Nguyen Thi Dung (BA-08)
Supervisor: PhD. Dao Thanh Binh
Abstract
Realizing that the subject of Statistics and Probability much related to the subject
Econometrics which is being learnt by almost all of the students in Faculty of Management and
Tourism – Hanoi University (FMT – HANU), our group which consists of three students from
Econometrics Tutorial 3-BA08 has decided to conduct a survey regarding the results of
Statistics and Probability as well as the factors affecting this subject’s result.It was carried out
in the end of April 2010, using questionnaires distributed to 45 FMT-08 students. The data
collected are used to test how significant the FMT-08 students’ result of Statistic and
Probability is affected by the factors such as: gender, Mathematics mark of university entrance
examination, IELTS mark, time of self-study and the participation in part-time jobs, etc. A
multiple regression model was estimated using figures with the help of Eviews software. Then,
Tests of Significance, Test of Multicollinearity, Test of Heteroscedasticity and Test of Autocorrelation were carried out. In details, the Test of Significance was tested directly by the t-test
and F-statistics shown in the estimation output table obtained by running Eviews; the Test of
Multicollinearity was conducted by the Auxiliary Regression method; the Test of
Heteroscedasticity was based on White Heteroscedasticity Test and scatter diagrams and the
Test of Auto-Correlation was carried out by the Durbin-Watson d Test.
Surprisingly, the Test of Significance showed that the variable of Calculus mark did not
have much impact on the Statistics’ result, while the variables of Mathematics mark and
Entrance exam mark and Self-study time appeared to be the determinants. The test of
Multicollinearity unexpectedly forced us to drop Self-study time though it at first is considered
to be the key factor. Also, the White Heteroscedasticity Test revealsed the Heterocesdasticity did
not exist. Finally, by using the Durbin-Watson d Test to detect the Auto-correlation, the result
appear to be negative. Eventually, a regression function illustrating the relation between
statistics mark and some of its explanatory variables was successfully established despite of the
unexpected absence of self-study time (of Statistics).
1. INTRODUCTION
Statistics in the last semester was considered one of the most challenging subjects,
and the results of our FMT’s students did appear to be generally low. Depart from that
fact, we are interested in finding out the possible relation (if any) between the Statistics
final results and a number of relating variables. Based on some subjective ideas, we
target the following variables as the explanatory variables for our models:
• Entrance Mark (Group D)
• Math Mark
• Self-study time per week
• Calculus final average mark
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After collecting necessary data from both our real survey and from the internet, we
first specify the model and identify the one the best fit the data and illustrate
appropriately the relation between statistics final mark and the explanatory variables.
Having the right model on hand, we estimate the slope coefficients for each
regressor and provide the explanation for them. Then we test our established model with
the test of significance, test of multicollinearity, test of heteroscedasticity and test of
autocorrelation.After all, some ending conclusions are given about the concerned
relation between statistics final mark and the explanatory variables.
2. DATA
Entrance Mark (Group D)
Since entrance mark is a good indicator of general competences of students, high
entrance mark perhaps reveals some advantages for a student regarding to his/her
mentality. On the other hand, English is included as a subject in the entrance exam for
group D and it is even double counted, so that a high entrance mark should illustrates
good English skills, which are considered a big advantage when studying at Hanoi
University generally, and studying Statistics particularly.
Source of data: The data about Entrance mark (group D) collected directly from the
real survey.
Expectation: It is expected that the slope coefficient for that variable take positive value
Math Mark
Math refers to logical analysis, and high Math mark means good logical analyzing
skills which are necessary to study such a subject like Statistics.
Source of data: The data for this variable is collected from the real survey
Expectation: A positive value of slope coefficient attaching to Math Mark is expected.
Self-study time per week
One may think that Math Mark and Entrance Mark are not really good determinant
of Statistics result, and it is his choice. Self-study time, however, cannot be refused as it
is obviously one of the most influencing factors that can affect the result of any subjects.
Practice suggests a high mark for a student who spends enough time and puts
adequate effort on Statistics Course since it is very hard to be handled. Practice also
suggests bad marks for those who spend just limited time and effort studying this subject.
Source of data: The data for this variable is collected directly from the survey
Expectation: Obviously, we expect a positive value for the slope coefficient going
with this variable
Calculus final average mark
Since calculus is a subject focuses more on the mathematic knowledge relating to
economics and well supports the academic subjects like statistics, econometrics… we
expect a student who is good at calculus to perform well in statistics. Moreover, in
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Hanoi university that subject is taught and tested in English which is quite similar with
Statistics course, that is significantly different from the math in the entrance exam.
Source of data: From the website of Hanoi University – FMT. The data we use
include unrounded figures rather than the rounded total mark available, and it means
that we have to re-calculate all the total mark based on the internal marks of each
student in our list of interviewees
Expectation: We expect a positive relation between Statistics mark and Calculus
final average mark.
3. MODEL SPECIFICATION
From the data collected, we first examine the linear model with four explanatory
variables including:
•
•
•
•
Math mark
Entrance mark
Self-study time
Calculus average mark
Abbreviation- MATH
Unit: point
Abbreviation- ENTRANCE
Unit: point
Abbreviation- SELF
Unit: hours
Abbreviation- CAL
Unit: point
a. Drop test
Base on the draft calculation from Eview as follow:
Eview result- linear regression of statistics final marks and the 4 regressors
Dependent Variable: STA
Date: 05/16/10 Time: 23:15
Sample: 1 45
Variable
Coefficient
Std. Error
t-Statistic
Prob.
C
ENTRANCE
MATH
SELF
CAL
-4.050027
0.166739
0.408691
0.523061
0.165666
3.329212
0.108035
0.119336
0.106197
0.143841
-1.216512
1.543378
3.424695
4.925378
1.151730
0.2309
0.1306
0.0014
0.0000
0.2563
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
Durbin-Watson stat
0.755570
0.731127
0.642930
16.53435
-41.32473
2.379016
Mean dependent var
S.D. dependent var
Schwarz criterion
F-statistic
Prob(F-statistic)
6.911111
1.239909
2.058877
2.259617
30.91146
0.000000
It is clear that the variable Calculus average mark (or Cal) appears to be
insignificant. Since the p-value of Cal is about 0.2563, the probability to make Type-I
error is more than 25% which is pretty high, the null hypothesis: β5 =0 is not rejected.
Now we wonder whether it is appropriate dropping that variable or not and a formal
drop test is employed:
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The following result is for the model omitting Cal as an explanatory variable:
Eview result- linear regression of statistics final marks and regressors after dropping
variable “cal”
Dependent Variable: STA
Date: 05/16/10 Time: 23:28
Sample: 1 45
Variable
Coefficient
Std. Error
t-Statistic
Prob.
C
ENTRANCE
MATH
SELF
-3.803626
0.194495
0.423612
0.555000
3.335532
0.105731
0.119103
0.102920
-1.140336
1.839528
3.556702
5.392544
0.2608
0.0731
0.0010
0.0000
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
Durbin-Watson stat
0.747464
0.728986
0.645485
17.08266
-42.05877
2.259929
Mean dependent var
S.D. dependent var
Schwarz criterion
F-statistic
Prob(F-statistic)
6.911111
1.239909
2.047056
2.207649
40.45101
0.000000
The former is the old model, the latter is the new one.
F-Test: Ho: β5 = 0
H1: β5 ≠ 0
Rold2 = 0.755570
Rnew2 = 0.747464
F* =
= 1.3160 < Fcritical ≈ 4 (with α = 5%) -> Do not reject Ho
Conclusion: Base on the result of the F-test, we can drop the variable “Cal” from the
model, and the model then is better.
Without that variable in the model, now we have only 3 independent variables, the
next step is to test and find out the best function for the relation between the regressand
and the regressors
b. Functional model test
Then it is the time to test for the best model illustrating the relationship between
Statistic Final Mark and the explanatory variables. We regress all the functional models,
as well as the linear model, to find out the one providing the least coefficient of variance
(CV)
In different words, the one which has least CV will be chosen.
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CV=
THE LINEAR MODEL:
THE LOG-LIN MODEL
CV=
CV=
= 0.093398
THE LOG-LOG MODEL
CV=
=0.056491
THE LIN-LOG MODEL
=0.051617
CV=
=0.089668
Since CV is the criteria and CV corresponding with the LOG-LINEAR MODEL is
the least out of 4 CVs
We determine that LOG-LINEAR MODEL is the model best fit the data and well
illustrates the relation between dependent variable and independent variables
Conclusion: the model specification process ends with the following result:
LOG(STATISTICS_MARK)^=
β1^
+
β2^LOG(ENTRANCEMARK)
+
β3^LOG(MATH_MARK) + β4^LOG(SELFSTUDY_TIME)
c. Result
Estimation and explanation of parameters
Estimation of parameters
By regressing the dependent variable Y (which is Log(Sta)) on the independent
variables (Log(Math), Log(Self), and Log(Entrancemark)), we obtain the following results:
Slope coefficients of the 3 regressors (excluding the intercept term) in the Log-Liner
model of the regression
Variable
Coefficient
Std. Error
t-Statistic
Prob.
C
LOG(ENTRANCE)
LOG(MATH)
LOG(SELF)
-2.919611
1.042083
0.547531
0.177579
1.724387
0.495089
0.127018
0.032380
-1.693130
2.104839
4.310646
5.484282
0.0980
0.0415
0.0001
0.0000
Formally we obtain the following sample regression:
LOG(STA) = -2.919611345 + 1.042083192*LOG(ENTRANCE) + 0.5475306843*LOG(MATH) +
0.1775794188*LOG(SELF)
Explanation of parameter
From the model, it is obvious that there is a positive relationship between Log(STA)
and Log(ENTRANCE). Other things holding constant, 1 %(0.01) changes in entrance
mark results in an increase on the STA mark by 1.04% on average.
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Likewise, the math mark is positively related to The STA mark. The positive
coefficient slope of log(MATH) = 0.5475306843 indicates that if the MATH mark
increases by 1% (0.01), the STA mark will increase by 0.547% on average with
assumptions that other things hold constant.
Moreover, the slope coefficient of SEFT is also positive. This indicates the positive
relationship between STA and SEFT. The value of estimated slope coefficient of SEFT
= 0.1775794188 reveals that as SEFT time rise by 1%, other things hold constant, the
estimated STA increases by 0.177% on average.
The value of R 2 =0.756846, which is the coefficient of determination of the line,
indicates that approximately 75.68% of variation of STA can be explained by variation
of ENTRANCE, MATH, and SELF.
d. Model testing
Test of significance
• Individual partial coefficients
Individual partial coefficient- Result from Eview
Variable
Coefficient
Std. Error
t-Statistic
Prob.
C
LOG(ENTRANCE)
LOG(MATH)
LOG(SELF)
0.0980
0.0415
0.0001
0.0000
-2.919611
1.042083
0.547531
0.177579
1.724387
0.495089
0.127018
0.032380
-1.693130
2.104839
4.310646
5.484282
It is clear from the result that, given the significant level α = 0.05 all other slope
coefficients are statistically significant since their p-values are not greater than 5%
• Overall significance testing
Eview result- Log-linear model of regression function of statistics final marks and the 3
regressors
Dependent Variable: LOG(STA)
Date: 05/17/10 Time: 16:08
Sample: 1 45
Variable
Coefficient
Std. Error
t-Statistic
Prob.
C
LOG(ENTRANCE)
LOG(MATH)
LOG(SELF)
-2.919611
1.042083
0.547531
0.177579
1.724387
0.495089
0.127018
0.032380
-1.693130
2.104839
4.310646
5.484282
0.0980
0.0415
0.0001
0.0000
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
Durbin-Watson stat
0.756846
0.739054
0.098888
0.400935
42.36171
2.168499
Mean dependent var
S.D. dependent var
Schwarz criterion
F-statistic
Prob(F-statistic)
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1.915773
0.193584
-1.704965
-1.544372
42.53917
0.000000
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We conduct F-test to test the overall significance for the model and since F-statistic
= 42.53917 which is indeed big enough to conclude that the regressors in fact have
impacts on the regressand
Test of multicollinearity, heteroscedasticity and auto-correlation
In order to test multicollinearity to see whether it exists or not, we first establish the
correlation matrix among the independent variables:
Correlation matrix among 3 regressors
LOG(ENTRANCE)
LOG(SELF)
LOG(MATH)
LOG(ENTRANCE)
1.000000
0.476393
0.178240
LOG(SELF)
LOG(MATH)
0.476393
0.178240
1.000000
0.457087
0.457087
1.000000
Since the correlation between Log (SELFSTUDY) and Log (ENTRANCEMARK) appears
to be relatively high, we suspect there may be multicollinearity in the model established.
We decide to form the auxiliary regression, the variable “Log (Self)” is regressed on
the other independent variables. The F-statistic obtained from the auxiliary regression
F=12.33382 (which is small) lead to the conclusion of no multicollinearity.
Then we formally use the white’s general heteroscedasticity (with cross term) to
detect heteroscedasticity. The following table provides E-view result of the model
which has just been adjusted to fix the error of multicollinearity (by dropping
Log(self)). From the output of Eview, n.R2 = 9.212771 follows the chi-square
2
2
distribution and since
(0.05, 5) ) = 11.0705 > n.R we conclude that there is no
heteroscedasticity. We continue to use Durbin Watson d test to detect autocorrelation in
the model, and the output of Eview show dstatistic = 2.262378, which is greater than du
and smaller than 4 – du.Thus, there is no auto-correlation
4. CONCLUSION
Since the interest is to find out whether there is any relation between the statistics
final marks of FMT students and other suspicious factors which are in focus,
specifically they are: Math mark, self-study time and entrance examination mark, we
collect necessary data from our real survey at Hanoi university and examine the
information on hand. Base on Eview package, we successfully establish a regression
function estimating the relationship of the variables. Model specification process (which
we do to determine the best model possible) and testing process to determine the
significance of the model, as well as ensure the model is free from some serious
problems such as multicollinearity, heteroscedasticity and autocorrelation are
completed. We can now safely provide our model to illustrate the relation between
statistics final mark and some affecting factors as follow:
LOG(STATISTICS_FINAL_MARK)^ = -7.611080901 +
2.267310581*LOG (ENTRANCE_MARK) + 0.8471985753*LOG(MATH_MARK)
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5. LIMITATION
Due to limitations in time and capability, we could only implement a small survey
which provided a small number of figures as our model’s raw data. Due to the nature of
the survey, there can be inaccuracy figures that are submitted to us from the
interviewees due to many reasons. Furthermore, the result may also be depended on
other variables apart from the indicators that we chose; therefore, our conclusion in this
writing is supposed to subjective to some extents.
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