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Why is Vietnam appeal to
Outsourcing investors?

TMS - Quality partner for your software solutions

1
CONTENT

I. ABSTRACT .................................................................................................. 3
...
I. ABSTRACT
Outsourcing is the contracting a part of a business process to a third party
to decrease some specific costs s...
II. Detailed Analysis
1. Technological
In a recent report taken by the Ministry of Information Technology of
Vietnam, Viet...
The outsourcing market has been considered one of the fastest growing
segments of the IT Market in Vietnam.
Recently, Viet...
2. Legal
Serving the goal of transforming Vietnam into a modern, industrialized
society by 2020 (World Bank. 2012), Vietna...
the country is constantly strengthening its protection and enforcement of
intellectual property rights.
Since its inceptio...
3. Economics
Vietnam has an average growth rate at about 5.4 percent a year
(According to WB) and has been very successful...
Enterprise

Survey,

political

stability

ranks

among

the

top

three

determinants behind foreign investment into a co...
References
1. Earnst

&

Young,

2013

Asia-Pacific

R&D

incentives,

<http://www.ey.com/Publication/vwLUAssets/2013_Asia...
9. World

Bank,

Country

Data

Report

for

Vietnam

1996-2012,

<http://info.worldbank.org/governance/wgi/pdf/c234.pdf> ...
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Why is vietnam appeal to outsourcing investors

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This paper analyzed the rationale why Vietnam has been becoming a new destination for outsourcing

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Transcript of "Why is vietnam appeal to outsourcing investors"

  1. 1. Why is Vietnam appeal to Outsourcing investors? TMS - Quality partner for your software solutions 1
  2. 2. CONTENT I. ABSTRACT .................................................................................................. 3 II. Detailed Analysis ..................................................................................... 4 1. Technological.................................................................................................................. 4 2. Legal.................................................................................................................................... 6 3. Economics ........................................................................................................................ 8 4. Political .............................................................................................................................. 8 5. Social/Environmental .........................................................................................................................9 TMS - Quality partner for your software solutions 2
  3. 3. I. ABSTRACT Outsourcing is the contracting a part of a business process to a third party to decrease some specific costs such as labor cost, energy cost, regulations and high taxes, etc. with a view to specializing in core business. Recently, rising cost in developed countries has raised a new trend of outsourcing software development to utilize resources in developing countries. With that current situation in Information Technology industry and a variety of available resource, Vietnam undoubtedly should be put into consideration when deciding a country to outsource to. The report of Gartner has stated that over the last 5 years, Vietnam has been continuously listed among the world’s top 30 most attractive software outsourcing countries and among Asia Pacific’s top 10, while it has been the market leader in software outsourcing at low cost. This report will analyze external factors in Vietnam market, providing the rationale behind the multitude of worldwide technology corporations’ choices to invest in Vietnam and the current position of Vietnam in software offshore market. PESTEL model is utilized to analyze Vietnam software outsourcing market. Vietnam software outsourcing market will be considered from different angles including political, economic, social, technological, environmental and legal aspects. Based on the attributes of software outsourcing industry, the report will focus more on technological and political/ legal aspects. TMS - Quality partner for your software solutions 3
  4. 4. II. Detailed Analysis 1. Technological In a recent report taken by the Ministry of Information Technology of Vietnam, Vietnam enterprise IT industry has been estimated to have the potential to rack up over $1 billion a year. The total revenue has reached approximately $25.5 billion by the end of 2012, which represented an 86.3% increase compared with 2011. Revenue from hardware sector standing at $23.1 billion accounts for approximately 92% of the total revenue. The software industry and digital content industry generated around $1.2 billion each (White Book, 2013). TMS - Quality partner for your software solutions 4
  5. 5. The outsourcing market has been considered one of the fastest growing segments of the IT Market in Vietnam. Recently, Vietnam has attracted many high-technology companies such as Intel, Microsoft, HP, Nortel, Avaya, Alcatel-Lucent, IBM, Oracle, Juniper Networks, Flextronics, Electronics Arts, France Telecom, Fujitsu, NTT, Hitachi, NEC, Canon, Renesas, Nidec, Andrew, Samsung, etc. to outsource into the country. As declared by a Japanese newspaper report (27/9/2013), Vietnam Software outsourcing is one of the most attractive markets to Japanese businesses, which have a growing tendency to shift outsourcing contracts from China to Vietnam. There are 31.5 percent of Japanese IT enterprises choosing to outsource to Vietnam while this statistics represent 20.6 percent and 16.7 percent to India and China respectively. The rationale for this significant shift is the availability of human resource with low cost in Vietnam and the growing transparency of Vietnam economy. In terms of the amount of total number of employees in the IT Industry Sector, Hardware industry hover about 208,680 employees by the end of 2012. Meanwhile, this statistics stand at 80,820 and 63,242 person in software and digital content industry respectively. (White Book, 2013) TMS - Quality partner for your software solutions 5
  6. 6. 2. Legal Serving the goal of transforming Vietnam into a modern, industrialized society by 2020 (World Bank. 2012), Vietnam Government has concretized into many practical incentives for enterprises operating in IT industry. Preferential tax treatments of Vietnam create a momentum to promote IT industry and foreign investors. According to Vietnam Ministry of Finance, newly established software enterprises in Vietnam (both local and foreign invested) will generally be entitled to a 10% reduced tax rate for 15 years (receiving a four year exemption commencing from the first profit making year, and 50% CIT reduction for the subsequent nine years). In addition, software products and software related services will receive a zero VAT rate and be free from export tax. For the purpose of encouraging Research and development (R&D) in IT industry, The Ministry of Finance also states that enterprises investing 25% or more of their revenue in R&D investment projects will be entitled to a five-year import duty exemption. Any import of materials supporting R&D activities will also be free from tax. Besides tax incentives, Vietnam's laws and public policies favor foreign investment and TMS - Quality partner for your software solutions 6
  7. 7. the country is constantly strengthening its protection and enforcement of intellectual property rights. Since its inception into the World Trade Organization, in recent years, Vietnam Government has issued a number of laws, ordinances, decrees and directives to establish a legal framework and measures on IP rights. In 2005, the Law on Intellectual Property Rights was issued by Vietnam’s National Assembly, which was then amended in 2009. Aside from local IPR legislation, Vietnam also signed several multilateral or bilateral trade agreements. More specifically, Vietnam has become a participant of several international IPR conventions such as the Paris Convention for the Protection of Industrial Property, the Berne Convention for the Protection of Literary and Artistic Works, the Rome Convention, Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement, and the Madrid Protocol. These involvements have contributed to illuminating Vietnam’s willingness to open its door to international economic market. Policy and regulatory environment for ICT development have strengthened the transparency and clarity of Vietnam economy, which is a critical determinant for choosing which country to invest in of almost every corporation. Another competitive advantage of Vietnam compared to the other countries is the low cost labor. The average wage rate of the software industry is only 5,009USD per person per year. Meanwhile, hardware engineer only earns on average 2,281 USD/person yearly. (White Book, 2013) Vietnam Government also focuses on the long-term development of IT Industry, which can be illustrated from their attention on IT educational system. The educational system on ICT human resource was scaled up in both quantity and quality. In a recent report, in 2011, there are around 290 universities and colleges that own IT faculties or department. TMS - Quality partner for your software solutions 7
  8. 8. 3. Economics Vietnam has an average growth rate at about 5.4 percent a year (According to WB) and has been very successful in attracting foreign direct investment, sustaining FDI level around USD 10-11 billion a year over the last five years (Bureau of Economic and business affair, 2013). Two underlying factors that lay the foundation for the choice to invest to Vietnam encapsulate rich reservoirs of human resource and low salaries. It is certified by Forbes that work force of Vietnam will jump to 65 million in the next 20 years. Moreover, it is estimated that the cost to hire workers in Vietnam is less than 60 percent of what it costs in China (according to Mc Kinsey outsourcing and off shoring practice location 2010). 4. Political Vietnam’s stable politics has laid the cornerstone for the tremendous longterm growth of Vietnam economy, which has been the trump card in attracting foreigners to invest in. Currently, Vietnam is a Socialist Republic country with a one-party system led by the Communist Party. Vietnam sustains a unitary government and has centralized control over the state, military, and media. Affirmed By communist party Vietnam, there has been no sign of any possible change in power in the medium term. By virtue of such consistency as one-party state, together with the stable mechanisms, Vietnam ranks on top of the political stability countries worldwide. Regarding Political Stability and Absence of Violence Index, Vietnam has been stable over the period 1996-2012, which has stood at approximately 65% (World Bank, 2013). According to Global Peace Index Report undertaken by Institute for Economics and Peace, Vietnam ranks at 41th in the world on global peace in 2013. Meanwhile, two other robust software-outsourcing countries, China and India only hold the 101th and 141th position respectively (IEP, 2013). According to Foreign Invested TMS - Quality partner for your software solutions 8
  9. 9. Enterprise Survey, political stability ranks among the top three determinants behind foreign investment into a country. 5. Social/Environmental There has been a growing in importance of IT from Vietnamese youth’s perspective in recent years. The number of applicants for IT universities is rising, which is a signal to reveal the perception and interest of Vietnamese about IT industry. The total number of students studying in IT faculties or departments in universities is around 173,107, which promises new talented IT generations for the coming future of Vietnam. TMS - Quality partner for your software solutions 9
  10. 10. References 1. Earnst & Young, 2013 Asia-Pacific R&D incentives, <http://www.ey.com/Publication/vwLUAssets/2013_AsiaPacific_R_and_D_incentives/$FILE/2013_Asia-Pac_RD_Incentives_Guide.pdf> [accessed 8 October 2013]. 2. Fast Market Research, Vietnam Information Technology Report Q3 2013, <http://www.fastmr.com/prod/648420_vietnam_information_technology_report_q3_201 3.aspx> [accessed 5 October 2013]. 3. Institute for economics & peace, Global peace index 2013, <http://www.visionofhumanity.org/pdf/gpi/2013_Global_Peace_Index_Report.pdf> [accessed 2 October 2013]. 4. Laurence Goasduff, Gartner Identifies Top 30 Countries for Offshore Services in 2010-2011, <http://www.gartner.com/newsroom/id/1500514> [accessed 8 October 2013]. 5. N. Nahar & L.Kuivanen, An Integrative Conceptual Model of Vietnam as an Emerging destination for Offshore Outsourcing of Software <http://users.jyu.fi/~naznaha/Nahar%20and%20Kuivanen%2039-74.pdf> Development, [accessed 8 October 2013]. 6. The Ministry of Finance of the Socialist republic of Vietnam, Tax rates and tax incentives applicable to newly established software enterprise, <http://www.mof.gov.vn/portal/page/portal/mof_en/FAQs/Search?m_action=4&p_id=46 09&p_detail=1> [accessed 4 October 2013]. 7. Vietnam Breaking News, IP rights protection beneficial to business, <http://vietnambreakingnews.com/2013/05/ip-rights-protection-beneficial-tobusiness/#.UlKQdWT08Vl> [accessed 29 September 2013]. 8. Vietnam Briefing, Intellectual Property Rights in Vietnam, <http://www.vietnambriefing.com/news/intellectual-property-rights-in-vietnam.html/> [accessed 7 October 2013]. TMS - Quality partner for your innovative mobile solutions 1
  11. 11. 9. World Bank, Country Data Report for Vietnam 1996-2012, <http://info.worldbank.org/governance/wgi/pdf/c234.pdf> [accessed 8 October 2013]. 10. Le Van, Vietnam now targets premium software outsourcing segment, <http://english.vietnamnet.vn/fms/science-it/84687/vietnam-now-targets-premiumsoftware-outsourcing-segment.html> [accessed 8 October 2013]. 11. <http://www.dnafor.net> [accessed 3 October 2013]. Copyright © 2013 - TMA Solutions

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