Electronic Library of
Volume 47 / No. 6 / 1999
One of the globalization processes resides in the formation of conditions for the origin of bankassurance and the origin of bankassurance per se.
Regarding the globalization tendencies, the origin of bankassurance companies is a natural process. Hence, bankassurance includes the advantages carried by both sectors, i. e. both banking services and insurance sector. On the one hand the bank provides its distribution network of branches and agencies as a place where insurance products are offered, on the other hand it solves its problem of effectivity within its primary distribution network.
Banks in economically advanced European countries form the presuppositions in order to enter the insurance activities, often by establishing their own insurance companies.
In some countries, especially in the United Kingdom, the life insurance market has noted a decrease recently and the insurers are now trying to gain and work out new business. The intensification of competition caused by bankassurance and subsequent decrease in the market share of insurers causes that the latter can only watch their clients purchasing long-term insurance products from their banks, rather than from their insurance agents.
One of the defence measures protecting the insurers from such development is the move toward banking traditional territories. There exists a certain synergy between some (long-term) bank products and long-term insurance products. This synergy can be used by insurers since they have the necessary experience in the finance management just as well as banks do.
Many banks have begun to offer risk products. For this new form of bankassurance to succeed, banks and insurers must co-operate to meet the demands of today’s customers.
A new era has dawned in the history of insurance sales as banks around the world add risk products to their inventory of established savings programs. Yet many banks are unprepared for the demands these products place on their current retaling capabilities. Fortunately, recent experience in insurance and other financial services retailing provides insights into how banks can turn high-cost, marginal insurance sales into a major contributor to their financial success.
Most banks that have attempted to sell insurance risk products have failed to achieve significant penetration of their customer bases. Similarly, most insurers that have tried to penetrate middle markets through alternative access, such as banks, have not done well. Clearly, a change in approach is necessary. For banks and insurers to succeed in bankassurance, they must help each other achieve their goals. They need to co-operate to establish a retailing environment that meets the demands of today’s customers.
As the partner with the primary customer contact, the bank has to determine what customers are looking for product features, sales approach, delivery and service. Then, it must restructure its branches and add marketing support to deliver what customers want. The insurer must also understand what customers want is. It can provide the wholesaling, underwriting, marketing and sales support the bank lacks.
Banks, particularly mortgage lenders, have vast amounts of customer information, which are largely used to drive product administration. Banks are actively building usable customer profiles to tap this information for marketing. The customer data can be used to define a few actionable customer segments, identified more by buying behaviour than by demographics. Segmentation can lead to the identification of particular buying behaviours that help the bank add value to the customer relationship.
Traditionally, banks have relied on passive, transaction-oriented branches for retailing, while insurers have relied on highly independent and often aggressive agents. Both need to reassess market support activities to capitalise on their growing knowledge of individual and segmented buying behaviour. One form of market support is the packaging of products and services.
Historically, financial services distribution has been aligned with certain products. There are mortgage brokers, insurance agents and mutual fund representatives. Packaging products and services around life events requires that product distribution be realigned to handle multiple products through multiple distribution channels. There must be co-operation between package co-ordinators (e. g. of home purchases) and individual product and service producers (e. g. of mortgages, business loans and variable life products). Call centres can respond to customer requests for information regarding purchases transactions and other services in co-operation with other channels.
Most banks that have been active in annuity and risk product sales find that the revenue and profit do not meet their expectations. This arises from low levels of sales productivity and customer penetration rather than the insurer taking a high level of underwriting profit. A partner ship that addresses the retailing issues discussed here, can also achieve sales cost advantages, providing a satisfactory basis for profit and risk sharing on underwriting to both partners.
Most banks and insurers understand that they need to adjust their approaches to make bank marketing work. Yet there is a strong temptation for both to return to familiar patterns of operation. When customer buying behaviour information is difficult and expensive to acquire, institutions revert to their own ideas of what customers need and want. When they face the cost of building controlled sales systems, they tend to hire former life agents and mutual fund sales men who choose their own ways to find and sell to their customers. Commitments to a major change in the operating and financial dynamics of insurance product sales are the essential ingredient to success in bankassurance.
Bankassurance in brief is “distributing and manufacturing cost effectively banking and insurance products to a common customer base”.
Most banks have sold insurance products for many years, usually via an agency agreement with an assurance company by which they receive commission for sales. The key difference about bankassurance is that the bank also becomes a manufacturer by having an insurance company such that it can also receive the manufacturing profits as well as the commission. Such an insurance company might be bought, joint ventured with an existing insurer or started from scratch. Also there is of course the reverse situation where the insurance company might purchase the bank or start it up.
Another key difference about bankassurance is that on activating the life assurance company it is almost always necessary for the bank to gear up its life insurance sales to a much higher level in order to reach the critical mass necessary to make the whole operation viable.
Some bankassurers have made fundamental mistakes in starting up their sales forces with too aggressive a sales philosophy or in attempting to run multiple distribution channels without considering all the ramification of integration.
Superior productivity from farming the warm customer base is the single most important factor in the success of bankassurance. This whole subject covers an enormous range including agent recruitment, training, motivation, remuneration, lead generation and strike ratios.
The traditional agents are known as hunters because they are selected for their selling prowess, drive and aggression. Such people are rarely suitable for bankassurance, where it is vital that the full time-agents fit into the culture of the bank, which is customer service driven.
However, getting the culture right is a lot more than just putting a different style into the sales force. The culture of a bankassurer must start at the top with a commitment from all the senior executives of both the bank and bankassurer. In particular it is vitally important that the bank management supports and fully understands the rationale for the bankassurer to avoid the bank branch staff being prejudiced against sales people who might be earning more than they are.
In making the move to bankassurance, it is important not to lose sight of the profitability, which was previously transparent in commission payments. Therefore, all bankassurers publish the increase in their embedded values so that all staff can see the value of the bankassurer to the whole organisation.
One lesson that has been learned from many bankassurers is that they have made products far too complicated with too many options which has ended up in confusing both the customers and agents. If anything, the bankassurers are leading the way in simplifying products. The products, which will be of most interest to a bankassurer, will be the protection or repayment of a loan and an alternative investment product to those already offered by the bank.
The greatest advantage of a bank is its customer relationships. Most banks have in excess of 2 million customers. However, just having lots of customers is a waste of potential unless there is a customer database system, which can sort the data characteristics by customer and then segment the lists for marketing action. It is not uncommon for banks to hold multiple databases e.g. one for current account customers, one for mortgage customers, one for credit card holders, one for insurance customers etc. – without the ability to talk to each other and subsequent advantage for marketing purposes of the bank.
When a bankassurer first starts up it will rely heavily on introductions from its branch staff. However, the bigger it grows, the more necessary it will be to do customer database analysis in order to write to customers to generate sufficient good quality leads for the full-time agents.
The fact that the combination of bank with insurance company brings about a substantial decrease in administrative costs and costs associated with infrastructure, is highly advantageous.
The strategy of bankassurance was elaborated as soon as in the 1980’ s. Subsequently, a whole series of world banking and financial institutions have accepted it. The future of banking resides in rationalisation of their own activities. The competition of other subjects in the field of financial services is tough and uncompromising, and thus the company which wants to succeed within this competition has no other option than to subordinate itself to the logic of maximum effectivity of its own services.
Félix HUTNÍK – Rudolf ŠTANGA – Ján TOMOVČÍK – Artan QINETI
The speed of the process of the Slovak agro-food sector adaptation to the world market rules is inadequate. The increasing deficit of foreign trade balance on agricultural and food commodities is a fact that supports the above mentioned conclusion. This way is leading to an increasing external economic dissequilibrium.
Generally, agro-food companies remain in loss. They fight with a huge insufficiency of their own resources needed for the purposes of reproduction. The production of value added is not only unstable (this is an usual phenomenon even for developed countries) but is also insufficient and ineffective.
Macro-economic studies forecast a decline in value of the economic growth of the Slovak Republic, associated with a possible decrease in the real purchasing power of the population. On the other hand, food consumer prices are not expected to grow faster than in the previous years. This fact however narrows a space for possible increases in the prices of food and agricultural products. With the current rise in prices of inputs stagnating (or even falling) prices like this create the preconditions for the complex rationalisation of the agro-food production.
Based on experience and development of the developed countries economies, we emphasize the strategic active role of their agribusiness. When an appropriate business climate is created, they can generate new job opportunities, or can initiate new economic activities and an additional increase in value added.
From this point of view, we have tried to prepare the forecast for the agri-food sector (that is the production part of agribusiness) for the time period up to the year 2015.
Taking into consideration the recession of agricultural and food production, we conclude that it will stabilize not earlier than year 2000 and options for a positive growth in the agri-food sector will be real after the years 2004-2005.
Till 2015 we foresee a reduction of the arable land by cca 70 000 hectare and meadows & pastures by cca 20 000 ha. The harvest per hectare for different crops will increase from 19% to 46%. Grain production will reach the level around 690 kg per inhabitant, that is only 7% higher than the 1998 level. It is supposed a more rapid growth in the production per inhabitant of potatoes, cereals, vegetables and fruits.
The increases in the value of animal production per inhabitant are predicted at a lower rate, around 10– 16%. Dairy cow production (excluding the milk production) will strengthen remarkably. This will respond to the less intensified use of lower-productive land, that is recently calculated at a space of 900 thousands hectares.
Even in the forecast period, the agricultural machinery, buildings and technology will be used in the same structure and basic technical and construction solution as in recent days. It will be improved their equipment with elements of automatization, that will enable the increase of machinery labour quality, the simplification of their service and the reduction of the bad impacts on environment.
It will be implemented such a technology policy that will secure the reproduction of machinery and buildings and their financial coverage. It will be realized the settlement of farms technical services of regional character. A part of the mentioned services will be represented by the complex advisory activity.
A special problematic field, will be the satisfaction of energetic requirements in agriculture and food industry by such energy resources that have minimum negative impacts on environment.
In the stabilization period (2001– 2005) will be possible the correction of “the income deficit of agri-food sector”. We propose the implementation of regulated minimum prices for the basic food products. This will help strengthening the creation of own reproduction resources of land, labour and capital. We don't account for a real and important increase of subsidies, that on the other hand will be adjusted to the needs for supporting the rationalization of agricultural and food production. We recommend that the subsidies should support cooperation and integration of agricultural and food production. In the narrow economic relation of agriculture and food industry we see the strong basis of a prosperous future of agri-food sector.
We expect essential changes in the capacity and in the form of businesses in the whole vertical chain of food industry. The diverse economic activity of agribusiness will be a result of differentiated forms of cooperation and integration between processing industry and farmers under the so called “big and small finalization”, that we have tried to explain in this paper. The same expectations apply in the field of business forms settlement. Their diversification will be realized by defending the interests of owners and businessmen under the saturation of food domestic supply and their exports.
After the period of stabilization, it is predicted the following real growth of Agriculture Gross Domestic Product at an annual rate between 1– 2%, and in the food industry between 2– 3%.
This paper consists of three parts. The first part has described current situation in research and development in Slovakia, considering recent developments in the transformation process and an international ranking of Slovakia in this field. The next two parts have outlined both basic assumptions underlying long-term scenarios and future prospects for research and development in Slovakia up to 2015.
One could say that the unique historical opportunity of the years of 1989– 1998 to promote a very efficient transformation of research and development (hereafter referred to as “R&D”) system has, at least partially, been wasted in Slovakia. The performance of all actors involved in transformation processes was very far from the highest quality of R&D system and was almost totally dominated by short-term approaches. There was no actor able to design and implement long-term strategic thinking and comprehensive policy in the field of R&D.
Transformation of the R&D system has not created a quantitative and qualitative improvement in the ranking of Slovakia on the global scene. Moreover, budget tensions, insolvency in the business enterprise sector and brain drain somehow diminished the competitive edge. However, changes are not dramatic and Slovakia still has a relatively good ranking in comparison with the countries of European periphery (e. g. Greece, Portugal). Nevertheless, it is true to say, that part of the R&D potential has loosen its former value due to geopolitical changes and strategic position of former Czech and Slovak Federation since 1989 (split of Council of Mutual Economic Assistance (Comecon) and that of Warsaw Pact).
An interpretation of the Slovak R&D system basic characteristics takes into account the impacts of structural determinants, and observes the current situation through an international “focus”. It starts from the hypothesis that R&D in the advanced market economies is the criterion for the Slovak R&D functioning. Thus the greater analytical value lies in inter-spatial difference comparisons, mainly with advanced countries of a similar size like Slovakia.
A more detailed comparison of Slovakia’s data with those of other countries indicated that the number of R&D personnel was not over-staffed in 1998. This can be supported by a comparison of researchers per 1000 labour force in the SR. However, from the structural point of view, the government sector is still over-staffed. As far as expenditures are concerned, the volume of Slovakia’s expenditures is very low compared with the small advanced economies and it could be expected that, in real terms, its real value would be even lower (due to the overestimation of SKK purchasing power parity compared with USD). In the performance structure, there is again a high share in the government sector and a low share in the higher education sector.
The sector of R&D until the year 2015 in Slovakia will be shaped by the following factors and developments: completion of transformation towards the market economy and the R&D policy of governments. Further, a growing wealth of the bushiness enterprise sector will create a pull-effect in the field of R&D.
A sustained R&D effort is necessary to create a knowledge-intensive economy and to support Slovak efforts to increase its share on the world-class science. Therefore, in years to come, it is fully justifiable to expect substantial changes in the field of R&D funding. A diversification of funding is also expected through the development of private foundations, and an increase in the share of foreign funding (e.g. by the participation of Slovak researchers on international projects, the utilisation of foreign foundations' grant). It is also obvious that the State will continue, in various ways, to support the invention and innovation process worked out by enterprises. This State support is indispensable not only now, but will also be vital in the next two decades, for the survival of the R&D system to continue. But we assume that the State will also keep its important role in the financing of R&D activities after the year 2000 like in other industrial countries.
Up to now, R&D transformation in the field of research personnel has caused rapidly growing average age of research personnel. Therefore, speculations on future development in research personnel (growth by 10 to 50 per cent compared with 1998) will have to count on both with a great number of persons leaving R&D system due to retirement age, and with a low interest in research training, as well. Moreover, measures recently approved were not fully accepted by the research community. As far as research training is concerned, three influence factors can be expected: effort to provide research training corresponding to world-wide standards, taking into account labour market changes and broader use of research training possibilities in abroad.
All expenditure on R&D scenarios have taken into account that their growth rates will be the same or higher than that of GDP. Considering this assumption and the population growth by the year 2015 in Slovakia, it would be possible to reach per capita expenditure at the average level reached by the European Union in 1997. Therefore, one could really not speak about removing the technological gap between Slovakia and the EU, at the utmost compared with countries of periphery, i. e. Greece and Portugal.
Among the persistent problems, one, for which a satisfactory solution should be found quickly, is the need to establish an efficient and effective structure for science and technology policy institutions. This state of affairs finds its roots inherited from the socialist society in Slovakia, which main principle was an egalitarian distribution of wealth among all its members. This inevitably has repercussions: as a rule there is the lack of a long-term focus and the resources are broken into the large number of research and development activities of sub-critical size.
To sum up, Slovakia can only become a respected partner in the international co-operation in research and development, if it has its own strong home base and if its national system is attractive for partners beyond its borders.
1. Methods of Industrial Engineering and Reengineering
In connection with reengineering we can often find some confusion on quite frequently used terms. It happens mainly with the term: (1) restructuring and (2) transformation. Under restructuring we understand functional changes, e. g. cut in the number of employees, or a change in the organizational unit structure of the company. Reengineering aimes at a higher efficiency through the proccessual approach removing functional units in the company. Nevertheless, transformation is targeted to the human thinking, with the aim to make better use of the potential of all employees. This is the way how to change the company culture.
However, it is always necessary (1) to specify the reason of any change, (2) to specify the aims, and (3) to select the appropriate method. The market environment, and often also survival reasons, view reengineering as the best and preferable method. However, it has been proved that reengineering of company processes is a base for the fundamental changes allowing the company to become competitive. Success achievement is dependent mostly on the company management, however, all changes made must be radical indeed.
Reengineering and continual improvements has represented different approach, however, they are both complementary. Both approaches are vital for achieving success. Since the request for speed of company reactions against any changes in the external environment and its flexibility has dramatically increased, the radical solution offered by the reengineering is a must. The key question for the company is the way in which significantly better results can be achieved. The understanding of the technical side of the problem does not guarantee the success. What can give a guarantee of higher chances to achieve success is the efficient implementation of the change management principles. Rejections management in the process of implementing changes in the company has proved to be the most difficult part of the reengineering. There are two essential differences between the two approaches. Reengineering is focused on big, cross-sectional processes and on the overall commercial system. Due to that, reengineering cannot be initialized and maintained from a lower or medium organizational level. It should be directed from the very top and its leading manager, who is ready to do his/her best for successful implementation of the reengineering must believe that there is nothing more important than the reengineering.
For better understanding of the relationship between the industrial engineering and reengineering, it will be useful to have an overall view how the managerial methods and methods of industrial engineering can be utilized in the process of Business Process Reengineering (BPR). There is no substantial difference in techniques, but the difference dwells in the basic philosophy approach.
2. Business Process Reengineering – Reengineering of the Entrepreneurial/ Business Processes
There are two driving engines for introduction of new ideas, implementing substantial organizational changes and these are changes in competition and changes in the customer demand. Usually, a company for many years had been considered as safe, if it was competitive at least in one of three following fields:
Only recently there was a must that the company must be good in two of the above mentioned aspects. For example, being successful meant to achieve a high quality at low costs. This requirement very quickly changed and now it is a must to achieve a high level in all three aspects at the same time. The companies must learn how to provide a high quality of products / fast services together with flexibility and relatively with low costs. Companies with ambitions to achieve all that has developed new processes offering results which are customer oriented. Best companie have been searching for ways how to become more flexible and being able to respond to the quick changes on the market.
Currently, increasing demand for speed, flexibility and feedback has prompted companies to develop simple processes. Such processes can be created only through direct contact of people who can and must be able to execute a complex, multidisciplinary task. This is the reason why we understand the business process as a compact process. In addition, we are talking about BPR (Business Process Reengineering), i. e. reengineering of the company business process. Such an approach integrates the company to become more customer orientated and to improve its performance in all units and company processes.
Especially the processual understanding of business activities of the company, the ties between production, trade and marketing are frequently the description of a shortcoming which is returned if you ask: “Which company processes should be essentially changed?” Production and trade are often at rows instead of looking for common solutions beneficial for both parties.
2.1 Selection of Company Processes for Reengineering
A decomposition of the overall company business process gives way for selection of partial processes where reengineering would bring significant turn in the company performance. Processes adding value are processes which are important for customer expectations and needs, and for which is the customer ready to pay, those are processes which would deliver or create something what is she/he interested in as a part of the product or offered service.
Basic tasks of reengineering of company processes (BPR) are processes which are strategic and at the same time added a new value. If the business process can be broken to 12 or 24 processes, more often only half of the 12 can be considered to be strategic and adding a new value. In the BPR we do not focus only on strategic processes adding value, but also on all systems, policies and organizational structures helping these processes:
3. Crucial Aspects and Key Factors of Successful Business Process Reengineering
For successful implementation of BPR it is inevitable to consider the key aspects listed below. The first step of all company efforts is being customer oriented. An overall understanding of the business process of a company should be derived from a profound knowledge of customers and from market trends. The requirement of the respective products functions, supplier terms and conditions actually specify the parameters of the company business process. In other words, the company business process should be organized in such a way to be able to fulfil all requirements at the best possible way. A new understanding of the company mission statement, its goals and the business process specifies the requirements on the organizational layout, on tasks for single organizational units and appropriate managerial skills. BPR has brought essentially new requirements as for the company management system and its culture. All these aspects are being modified within the frame, which has been given by the technology development (mainly information technologies), corporate identity (patterns, rules, values, priorities, attitude towards innovations) and company strategy (mission statement, system of goals, trade and marketing strategy, key factors of success, competition advantage). All the effort within the BPR is heading to achieve essentially new performance parameters within the selected business unit through processes, products and services.
The experience of BPR experts identified two groups of specific aspects – visible and invisible ones, which should be analyzed, if we have ambitions to achieve extra standard results. In regards of the above fundamental aspects the more detailed specification is found in the following table.
The experience of consulting firms has shown that the management of Slovak companies had focused on visible aspects of reengineering. Those are easier to be identified and have solutions. Not knowing non-visible aspects and therefore neglecting them may cause serious problems in the BPR implementation.
3.1 Key success factors of reengineering
The introduction of the BPR experience has indicated the chance of generalization of the key factors which, if followed, would lead to success. In order a change was introduced and maintained the following prerequisites must exist: idea, skills, motivation, resources, project and contingency plan.
4. The Experience of Slovak Companies from Restructuring and World Trends in Reengineering
When specifying restructuring programs, Slovak companies usually encounter a serious problem of non sufficient funds. Companies which were privatized in the form of a direct sale are enormously in debts. Companies which were privatized in the form of the coupon privatization did not see the capital inflow. Financial problem of all companies were further aggravated due to the development of banking system. Another bottleneck of the Slovak economy is the lack of skilled labour.
The quality problem of the Slovak products should also not to be neglected. Only a few brands have maintained a good image. Readiness of management to solve problems associated with restructuring and a further company development is in most cases contradictory. Technical and technological skills of the top and medium management has achieved West European standards. More serious shortcomings have occurred in the field of economic and marketing thinking, in using methods and tools of financial economy, in financial market and bourse performance.
Over-investment also adds up to problems of the Slovak companies. The majority of companies has been equipped with large volumes of tangible investment assets and supplies. On the other hand, capacity which were not used represent a considerable reserve allowing acceptance of new productions and a flexible response to the market demand.
It is vital quickly to improve the company efficiency to compare the current low level and become highly competitive. The prerequisite for that is to find new markets corresponding by their size with the capacity of Slovak companies, to find qualified management, to introduce the system of total quality, and implement perfect marketing and dramatically cut all costs.
When the restructuring experience of the Slovak companies is has been confronted with the world trends in implementing the reengineering we can see the opportunities of explicit system solution of the question: How to achieve an essential and quick increase in company performance? Very different understanding of reengineering and a weak experience with its introduction have often caused refusal and confrontations with the method of industrial engineering. The approach called Business Process Reengineering represents implementation of reengineering to the overall business company process, and thus giving solutions for improvement of the selected company processes impacting particular activities of the company. A consistent implementation of the BPR is based upon the usage of a large number of industrial engineering methods. Due to that the permanent improvement of a company performance should be based on the parallel implementation of both complementary methods.
HOANG VAN BANG
Vietnam became an official membership of ASEAN in 1995, the integration into ASEAN Vietnam get more opportunities to open its economy to the rest of the world, but also has more difficulties that has to deal with. Harmonisation of trade and tax policies with others in region making Vietnam has to pay attentions on its advantages. This paper begins with an analysis of global and regional trends in the role and size of FDI in East Asia. This paper discusses both the direct and indirect FDI consequences of Vietnam’s membership of ASEAN. Vietnam’s FDI flows to April, 1997, are profiled, and how pending trade reforms will impact the size and nature of future FDI flows are discussed. The implications of an ASEAN Investment Area (AIA) are surveyed.
The International and Regional Perspective
The impact of ASEAN arrangements on FDI inflows to Vietnam requires an appreciation of the general impact of FDI on an economy, and of the leading role it is playing in restructuring the economic relationships of East Asian economies in the 1990s. FDI is a source of funding for development, and a means of acquiring foreign technology. But it is also much more. The transfer of ideas and information are often more important than technology. Further, FDI is a mechanism by which a national economy becomes integrated into the international flow of goods and services. FDI speeds up the process of identifying and exploiting the comparative international advantage of economies. FDI also meets demands for goods and services where domestic supplies are weak and underdeveloped. Therefore, in the pursuit of profits, FDI can fill gaps and shift the economy’s productive focus towards comparative advantages.
The data in Table 1 comes from the World Bank Debt Tables. The overwhelming importance of rising investment in China is evident, although FDI in other ASEAN countries, except Thailand, has also risen in recent years. The Vietnamese totals are very modest, although FDI disbursements have reportedly increased significantly since 1994. Vietnamese data uses a broader definition of implemented foreign investment, although most reported data is simply total project commitments. Total commitments are a poor guide to FDI activity as only a fraction ever gets fully implemented and considerable time lags are involved. In China, for example, USD 111.4 billion of FDI was contracted in 1993, while only USD 27.5 billion was implemented. A more detailed analysis of Vietnamese data is presented later.
Much FDI in East Asia has come from East Asian countries themselves. During 1986– 1992, Hong Kong invested USD 21.7 billion in East Asia, two-thirds of which went into China (much due to “roundtripping”) Japan has been the largest foreign investor in ASEAN (USD 11.7 billion during 1986– 1992), although the United States and Europe were also important (USD 6.9 billion and USD 6.5 billion respectively). FDI has created new productive capacity through joint-ventures and 100 percent foreign owned investments. Privatisation has been less important in attracting FDI to East Asia than elsewhere.
Foreign Direct Investment in Vietnam, 1988– 1996
Total FDI commitments to Vietnam totaled almost USD 27 billion during 1988 to April 1997 (Table 2). Most of these commitments were made during 1995– 1997. Several large construction projects were approved during 1995– 1997, and this pushed up average project size to USD 20.5 million, compared to USD 13.3 million during 1988– 1994. In Table 2, a more internationally comparable figure for FDI commitments is calculated by deducting the Vietnamese shares in joint-ventures. From this total we have also deducted 12 % as a proxy estimate, based on Chinese data, of over-valuation of the foreign contribution.
Figure 1 shows annual data up to 1996. The sharp rise in commitments after 1994 is evident, although legal capital rose less rapidly. In 1996, the number of projects approved fell, but commitments still grew by 28 % due to two large construction projects. The trend in 1997 is for a decline in both the number and volume of FDI commitments, which may be expected given that 1996 total commitments were about 36 percent of GDP.
Table 2 showed that the project weighted Vietnamese share of total commitments rose during 1995– 1997, compared to 1988– 1994. This was despite a steady decline in the unweighted average Vietnamese share in projects (Figure 1). The unweighted average declined because of the increasing number of 100 % FDI projects, which were 37 % of all projects approved during 1995– 1997, compared to 27 percent during 1988– 1994. Nevertheless, the Vietnamese share of FDI commitments rose after 1992, and has remained above 25 %. This is due to the high shares of Vietnamese partners in the larger projects, and in particular in import-substituting industries where market access and protection are negotiated for high ownership shares.
The Vietnamese shares of total capital may be interpreted as rough indicators of the degree of import substitution in some industries (Table 3). In export-oriented industries, such as textiles, or footwear, or in non-traded services such as health care and banking, the average Vietnamese shares are relatively low. This reflects the limited need for Vietnamese inputs beyond land and labour. Import substituting ventures, however, require protection from competition which is often at the price of a higher Vietnamese share of the project. If this is the case, the relatively high Vietnamese shares in the food industry and electronics suggest substantial import substitution rather than export-oriented FDI.
Foreign direct investment from ASEAN countries, 1988– 1997
Figures 2 and 3 show that ASEAN, mostly Singapore, has totaled 30 % of FDI commitments and 24 % of FDI legal capital during 1988– 1997. The share of commitments by Singapore is noticeably higher than its share of legal capital, due to several large infrastructure projects which have involved relatively low relative legal capital levels.
The characteristics of ASEAN investment have changed little over time, and are basically similar to the over pattern of FDI (Table 4). While the number of ASEAN projects has remained constant at slightly less than one-quarter over 1988– 1994, and 1995– 1997, the ASEAN share of total commitments has grown from 23 % to 33 %. Commitment growth is largely due to a single USD 2.1 billion infrastructure project approved for the Hanoi area in December, 1996 (with a legal capital of only USD 556 million). The ASEAN share of legal capital has, however, also grown from 20 % during 1988– 1994, to 27 % during 1995– 1997. ASEAN investors also seem to favour joint-ventures rather than 100 % investments, which have become more popular in recent years. During 1995– 1997, 66 % of ASEAN country FDI projects were joint ventures, compared to 57 % for non-ASEAN.
The Impact of the ASEAN Free Trade Area
Where ASEAN FDI is going is interesting, but it is a not central to considering the impact of AFTA on the size and scale of FDI flows to Vietnam. If tariffs go down within the CEPT framework, then FDI which has used that protection will face increased competition from imports to the extent that ASEAN countries can meet demand (trade diversion being restricted by the 40 % local content rule). All foreign investors, ASEAN or otherwise, will face adjustment problems if they are in protected import-substituting industries with tariffs falling. Other investments will benefit from lower input prices (less trade tax), which includes export-oriented industries.
Several questions emerge: How import-substituting is the structure of Vietnam’s FDI? And how is FDI related to levels of tariff protection? Which tariffs will be lowered under AFTA? To answer these questions we have taken a database of foreign investment (from the Vietnam Investment Review), and linked it with ASEAN trade and tariff data. Because of this event, at least 2006, there will be fundamental changes in the structure of FDI inflows and of the Vietnamese industrial sector.
An ASEAN Investment Area
Forming some sort of ASEAN Investment Area (AIA) has been on the agenda of ASEAN for some years, but it remains a concept lacking detailed commitment. In the November 1996 meeting of ASEAN economic ministers, agreement was reached on the following Mission Statement: “The establishment of a competitive ASEAN investment area through a more liberal and transparent investment environment”. And then Vietnam will have three investment regimes: one for domestic investors, one for ASEAN investors, and a third for other foreign investors. This is highly inefficient and difficult to enforce. Capital is highly mobile. “Rules of origin” are much harder to apply than for imports. If a company is registered in Indonesia, and the funds are transferred from Indonesia, is that enough for “preferential treatment”?
Vietnam’s reform agenda remains unfinished. The regional investment environment is increasingly competitive, and Vietnam needs to continue working to maintain the relevance and attractiveness of its FDI policies. Recent trends to increase controls on FDI and to direct FDI into “priority areas” are worrying. Policies which try to “push” technology transfer, like work permit systems or local content conditions, do more harm than good. The government must focus on lowering transaction costs, improving information systems, clarifying regulations, and improving the implementation of regulations.