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

1. Why is Vietnam appeal to
Outsourcing investors?
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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
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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.
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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).
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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)
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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
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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.
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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
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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.
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10. References
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&
Young,
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Asia-Pacific
R&D
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[accessed 8 October 2013].
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for
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peace
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destination
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of
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applicable
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11. 9. World
Bank,
Country
Data
Report
for
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Van,
Vietnam
now
targets
premium
software
outsourcing
segment,
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