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The Vietnamese pharmaceutical market: a comparison of foreign entry

strategies

Article in International Journal of Business and Emerging Markets · January 2008

DOI: 10.1504/IJBEM.2008.019245

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Int. J. Business and Emerging Markets, Vol. 1, No. 1, 2008 61

The Vietnamese pharmaceutical market:

a comparison of foreign entry strategies

Daniel Simonet
Nanyang Business School,
Nanyang Technological University,
Singapore 639798
E-mail: adaniel@ntu.edu.sg

Abstract:
Background. Entry strategies in the Vietnamese pharmaceutical market are
under-researched.
Aim. The first part of the paper provides an overview of the Vietnamese
pharmaceutical market, and the second part a theoretical framework to
understand the various foreign entry strategies.
Methodology. Literature review and interviews with professionals.
Contribution. Preference for one mode over another depends on market and
company characteristics, the firm’s objectives and risk aversion level.
Recommendations. There are few joint ventures. Licensing and acquisition of a
local drug firm appear risky owing to lack of IP rights and cultural clash.
The long-term pay-offs of wholly owned subsidiaries are higher.

Keywords: pharmaceutical drugs; Vietnam; market entry strategy; joint

venture.

Reference to this paper should be made as follows: Simonet, D. (2008)

‘The Vietnamese pharmaceutical market: a comparison of foreign entry
strategies’, Int. J. Business and Emerging Markets, Vol. 1, No. 1, pp.61–79.

Biographical notes: Daniel Simonet was a post-doctoral fellow at the Wharton

School, the Joseph L. Mailman School of Public Health (Columbia University),
a visiting Faculty and Consultant in Asia and Middle East and a researcher with
the University of Venice (Italy), and an Assistant Professor of Strategy with
Nanyang Business School (Singapore).

1 Introduction: The Vietnamese pharmaceutical market

1.1 An overview
Compared with other emerging economies (e.g., China), Vietnam is still one of the least
researched economies in Asia. Despite the opening-up of its economy, structural reforms
towards an export-oriented market, and major investments from foreign multinational
companies (e.g., Ford, Unilever), there has been little management research owing to a
lack of access to data and a language barrier. However, Vietnam is attractive.
The government has adopted a market economy, and its strategic location amidst

Copyright © 2008 Inderscience Enterprises Ltd.

62 D. Simonet

emerging economies (e.g., Cambodia, Laos, Thailand) makes it a possible platform for
exports. The Gross-Domestic Product per capita (GDP is estimated at US$ 43.7 billion in
2005, equal to US$ 528 per capita) and health expenditure (Vietnam spent around 5.1%
of its GDP on healthcare in 2005, i.e., US$ 1.1 billion)1 has increased in recent years at
more than 10% annually. In 2004, the annual consumption of medical drugs stood at an
estimated US$ 8 per inhabitant (WPM Outlook, 2005) vs. US$ 7.6 in 2003, US$ 5.5 in
2000 and US$ 0.3 in 1990 (Table 1). That figure should reach US$ 12–15 by 2010.2
Vietnam’s birth rate is high: 16.63 births/1000 population (2007 est.), but child
mortality is high and compounded by malnutrition. Disease patterns are consistent with
those normally found in tropical developing countries: there are infectious diseases
(flu, cold), viruses, parasitic diseases and malaria. To this, add health problems resulting
from high pollution, urbanisation and cardiovascular diseases that were thought to be
restricted to western countries. High blood pressure, diseases associated with
occupational hazards or ageing, and traffic accidents are also on the rise. On the other
hand, generally, malnutrition and infectious diseases are not as common as those of ten
years ago.

Table 1 Medical expenditure in Vietnam

1990 1993 1996 2000 2003 2004

Per capita spending on medicines (US$) 0.3 2.53 3.99 5.5 7.6 8
Source: WPM, Medicine and Health Magazine No. 205–206, 2005

1.2 Market characteristics

Pharmaceutical market growth rate is about 4.5% per annum (WPM Outlook, 2005), and
its size was about US$ 638 million in 2005 (Table 2). As manufacturing technologies
became more accessible to state-owned companies, domestic production substituted for a
higher share of imports. Local companies enjoy a low-cost advantage: locally produced
drugs are less expensive that those imported from the West, Malaysia and Thailand.
According to WPM Outlook (2005), there were 170 pharmaceutical manufacturers
(130 were owned by provincial governments) and 18 government-owned drugs firms in
the late 1990s in Vietnam (203 according to GC.Comm, 2004). According to Invest
Consult Group (2002), privately owned enterprises have increased from 168 in 1999 to
290 in 2000 in the healthcare sector, and according to GC.Comm (2004), local
pharmaceutical companies produced 384 substances in 2002 against 365 in 2001, 175 in
1997 and 80 in 1995. Antibiotics, cold remedies, painkillers and vitamins make the bulk
of the domestic production, estimated at US$ 264.5 million in 2003, compared with
US$ 184 million in 2001, US$ 121.5 million in 1999, and US$ 92.3 million in 1997
(Table 2).

Table 2 Market for pharmaceutical products

Year 1997 1998 1999 2000 2001 2002 2003 2005

Domestic production ($US Mill) 92.3 105.2 121.5 152 184 219.2 264.5 na
Market sales ($US Mill) 387 415 361 398 417 457 480 638
Source: GC.Comm (2004)
 The Vietnamese pharmaceutical market 63

In the early 1990s, in response to a dearth of certain drug types (e.g., antibiotics), the
authorities granted import licenses to buy equipment and materials necessary for local
production. There was also a rise in the import of foreign drugs and a diversification of
import sources. Imports increased steadily by 7% annually from 1996 to 2001
(Invest Consult Group, 2002), and in 2003, the leading suppliers were France (22.9% of
total imports), Korea (14.3%), India (12%), Singapore (6.1%), Switzerland (5.7%),
Thailand (5.5%), and Germany (5%) (WPM Outlook, 2005). Looking at the number of
registered drugs and their country of origin, France also tops the ranking with 18.95% of
the registrations (Table 3).

Table 3 Drug registrations by country of origin

Country Number of drugs Percentage

France 643 18.95
India 635 18.72
South-Korea 362 10.67
Germany 214 6.31
Switzerland 192 5.66
Source: Drug Administrative Bureau, Invest Consult Group (2002)

1.3 Investment patterns: the dominant role of Ho Chi Minh City

Investments and drug consumption are concentrated. Though the core cities of Hanoi,
Ho Chi Minh City and Hai Phong accounted for only 13% of the population in 1989, they
captured about 70% of joint-venture investments in all sectors, and their neighbouring
province only 20% (Nguyen and Meyer, 1999). A high level of infrastructure
development entices foreign firms to sign joint-venture agreements in these cities
(Meyer and Nguyen, 2005): transportation infrastructure serves incumbent firms (mostly
state-owned firms) efficiently, making them attractive partners, and though one could
have expected foreign firms to avoid areas with state-owned firms or national incumbents
for fear of reprisals, foreign investors are willing to engage the latter as they provide
access to government institutions, and consequently, joint ventures locate primarily in
regions with many state-owned firms (Meyer and Nguyen, 2005). Healthcare markets are
concentrated in Hanoi and Ho Chi Minh City: both cities represent about 80% of the
national market, offer the best infrastructure (e.g., transportation, telecommunication,
electric power) and house populations with the highest education levels and higher
incomes. There are differences between the two cities though: Ho Chi Minh City has
more insurance companies than Hanoi, the population is larger and medical equipment is
readily available. In the near future, investments are unlikely to be spread more
evenly between major cities and the provinces: the core-periphery theory assumes that
investments concentrate in core cities at early development stages, and subsequently
move to the periphery and neighbouring regions to take advantage of cheaper resources
and manpower. That peripheral movement is further fuelled by State investments in
infrastructure in the periphery to maintain social equity, the emergence of a local market,
thanks to rising wealth (as the periphery supplies more products to the core/main cities),
and lower costs relative to those of the core cities. This scenario is unlikely in Vietnam
because Hanoi and Ho Chi Minh City continue to attract labour from rural areas that
64 D. Simonet

accept to work for very little. As long as this constant population flow from the poor rural
areas to the main cities continues, there is little need to relocate activities to the low
labour-cost periphery, which results in a widening of the rich/poor gap between cities
and rural areas (Smith, 1996). This will foster more population movement of the
northern-based workforce towards the south, leading to a brain drain from the north,
because foreign investment is principally directed to areas that offer the most literate and
highly qualified labour forces (Nguyen and Meyer, 1999). This is a major difference with
other emerging markets where foreign companies primarily invest in wealthier areas
because of better market prospects (Nguyen and Meyer, 1999). In contrast, foreign
investors in Vietnam look primarily for provinces with higher quality manpower
(i.e., higher level of literacy), even if those provinces are economically poorer.
The economy-geographic literature and the economic agglomeration theory provide
another framework to understand the attraction of Ho Chi Minh City. According to
Krugman (1991), Foreign Direct Investments (FDIs) locate primarily in the vicinity of
firms in the same industry, and near other FDIs, in particular FDIs from the same country
of origin. That has been observed in China too (Chen and Kwan, 2000). Following this
theory, Ho Chi Minh City, which has accommodated foreign companies early on during
the Doi Moi times, continues to be a magnet as these companies cluster in geographic
areas that benefited from earlier investments from similar countries (Table 4).

Table 4 Localities in attracting Foreign Direct Investment (as of October 2005)

Number of Investment capital Realised capital

Locality projects (million US dollars) (million US dollars)
Ho Chi Minh city 1,772 11,937 5,936
HaNoi 636 9,236 3,154
Dong Nai 688 8,408 3,731
Ba Ria-Vung Tau 119 2,177 1,224
Hai Phong 178 1,948 1,203
Vin Phuc 87 726 413
Source: Mofa.gov.vn

1.4 Regulations, licensing and entry barriers

The State plays an important role in the Vietnamese pharmaceutical market. From the
1960s to the recent opening-up, the government followed a strict price-control policy
(e.g., prices were fixed by the ‘Prices General Committee’), and foreign pharmaceutical
firms barely made profits as prices were set too low. That changed in 1989: the
government entrusted the management of drug exports and imports to the Ministry of
Health. Exchange developed with France, Canada, Japan and Australia.4 In the late
1990s, there were about 20 multinational joint ventures (WPM Outlook, 2005), and at the
end of 2003, there were 28 projects with foreign investment capital (e.g., Novartis,
Sanofi-Aventis) (GC.Comm, 2004).5 Up to 31 March 2002, 233 foreign pharmaceutical
companies operated legally in Vietnam. Pharmaceutical companies were given freedom
to decide on the use of inputs (e.g., wage levels), production levels and selling prices, and
government subsidies were cut (Invest Consult Group, 2002). Consequently, the price of
drugs went up sharply, rising by 30% in 2003, followed by nearly a 10% increase in 2004
 The Vietnamese pharmaceutical market 65

caused by manufacturers who were then free to set prices, resulting in widespread price
variations at the national level. There was an influx of imported drugs that were typically
15–20% more expensive than locally made drugs. There was no law on the maximum
amount of profit for distributors at the wholesale or retail level. The adoption of GMP
standards and payments to physicians to incite them to prescribe more expensive drugs
also contributed to price increases. In response, a new regulation stipulated that foreign
drug companies could not increase prices without prior authorisation from the Ministry of
Health. The government has other leverages on price: it can order the public listing of
prices,6 refuse to reimburse a drug, it may de-register the drug if it deems it too
expensive, or will seek to use its bargaining power to negotiate the lowest price possible.
For instance, the Ministry of Defense and the Home Office Affairs can force prices down
because they are important purchasers of drugs and medical equipment for hospitals.
Besides, beginning in June 2004, foreign pharmaceutical companies holding operating
licenses in Vietnam were allowed to supply pharmaceuticals to any local import-export
company in Vietnam, thereby ending the monopoly on foreign imports held by a few
local companies. Previously, foreign firms were only permitted to sell to local
Vietnamese companies holding registered drug trademarks. The resulting increased
competition shall help contain prices.
A major entry barrier is the license. Any locally produced or imported medicine must
obtain a license from the Ministry of Health. The product registration follows Decision
No. 1203/BYT/QD of the Ministry of Health Promulgating Regulation on Medicine
Registration, and costs about US$ 2,000 per product. Approval requires about three
months for a locally made medicine, and 6-12 months for an imported drug, sometimes
longer. The validity of the approval is for five years, although it is sometimes less
(e.g., about a year) with no explanations offered to clarify the reduction. At the end of the
1990s, the Vietnamese authorities had granted 213 licenses to foreign companies that
marketed 699 specialties and raw materials. In 2001, there were 9978 drugs registered
with the Ministry of Health. Of these, 6052 were domestic drugs, and 3926 were foreign
drugs (Invest Consult Group, 2002).

2 Literature review

2.1 Location factors and entry strategies

The Ownership, Location, Internalisation (OLI) theory (Dunning, 1977) stipulates that
the entry mode depends on three sets of advantages: ownership, internalisation, and
location advantages. Dunning (1977) argues that the more the OLI advantages, the more
likely a firm will adopt an entry mode that permits a high level of control (e.g., wholly
owned subsidiary). Ownership advantages are specific to the owner, e.g., the firm
possesses superior resources such as cutting-edge technology, experience, and a strong
brand name. Ownership advantages prompt firms to prefer a wholly owned subsidiary to
a low-equity entry mode (e.g., licensing, business cooperation contract7). A firm will
prefer an internal market (e.g., wholly owned subsidiary) to partnering if contract costs
(e.g., writing and enforcing the contract) are high, if it might divulge some critical
knowledge the protection of which is a priority (Hill et al., 1990). Conversely, when
contracts and property rights are duly enforced, a firm may be more willing to partner.
66 D. Simonet

A wholly owned subsidiary is also preferred in a highly competitive market. Peinado

and Barber (2006) found that highly competitive markets require significant marketing
efforts (e.g., to establish a reputation, brand name), and thus are more conducive to
high-control entry modes (e.g., wholly owned subsidiary). When there are many similar
products or multiple substitutes, branding is important. Should a multinational company
face the risk of a partner acting opportunistically (e.g., producing substandard product to
cut on costs), which may result in a dilution of the brand and thus affect its reputation,
it will adopt an entry mode that allows full control of its activities in the foreign country
to prevent that risk. Empirical evidence highlights a positive relationship between higher
control entry modes and higher levels of product differentiation (Caves, 1982; Coughlan,
1985). Large firms are better positioned to absorb the aforementioned costs: there is thus
a positive relationship between firm size, direct investments and product differentiation
(Kimura, 1989). Since the pharmaceutical industry is a highly marketing-intensive
industry, high ownership entry modes (e.g., joint venture, wholly owned subsidiary) are
thus likely to prevail over low-equity mode (Fladmoe-Lindquist, 1995; Gomes-Casseres,
1989). However, in Vietnam, competition is more often between Western and Japanese
foreign firms than between foreign and local firms, the latter competing in the low-end
segments, offering cheaper products with low brand equity.
P1: In the Vietnamese pharmaceutical industry, ownership advantages more that
competition intensity prompts a foreign firm to chose a high equity entry mode over a
low equity entry mode.
Since there is a lack of efficient patent protection in Vietnam, one can expect many
licensing agreements (Rajshekhar and Wright, 2003): though licensing out is a
low-risk/return alternative that provides little control to the licensing firm (Agarwal and
Ramaswami, 1992), it enables the latter to make a rapid entry and obtain some, but not all
(e.g., compared with a fully owned subsidiary) return on investment when facing
potential future copycats.
P2: Weakly enforced ownership advantages lead foreign drugs firms to prefer
a licensing agreement to a wholly owned subsidiary
The OLI theory also addresses location advantages: its role is even greater for emerging
economies than for developed economies. Hosting countries in the developing world
have generated a wide range of measures to attract foreign investors, including joint
ventures: the latter are appropriate where access to certain intangible resources such as an
understanding of local regulations and business networks are critical (Meyer and Nguyen,
2005). Where possession of land is not permitted, foreign investors will too opt for a joint
venture (Nguyen et al., 2004). The decision to commit more resources or to increase the
company stake in the Vietnamese market (e.g. via a joint or sole venture in Vietnam)
stems from country location advantages such as low salaries, high literacy rate, inflation
control, interest rate and entrepreneurial spirit (von Glinow and Clarke, 1995) and strong
market potential (Agarwal and Ramaswani, 1992). Compared with exports, a joint or sole
venture entry mode will facilitate product adaptation.
Entry mode decisions depend on conditions that not only vary between countries, but
also within the host country (Wright et al., 2005): the ability to attract foreign investment
varies from region to region depending on regulations and demographic factors. This is
documented in Russia where local governments use reforms to attract investments
(Meyer and Pind, 1999), in China with the creation of special economic zones, and in
 The Vietnamese pharmaceutical market 67

India where states use tax incentives to attract foreign investment (Oman, 2000).
Compared with North Vietnam, the general business atmosphere is better in South
Vietnam: the economic reforms have re-ignited the entrepreneurial spirit that had existed
following several decades of Western influences, while the North still grapple with a
more conservative attitude when doing business. Population composition is also a factor:
in Ho Chi Minh City, there is a strong Chinese community that dates back to the 19th
Century which has established ties with other business networks around Asia. These
southern-based clusters are stronger and more integrated to foreign-based networks than
those of North Vietnam (Khanh, 1993), and became highly instrumental when Hong
Kong and Taiwanese investors decided to enter the Vietnamese market. Hong Kong, in
particular, capitalised on the ties it had with about 500,000 ethnic Chinese, primarily
located in Ho Chi Minh City (Hiebert and Goldstein, 1992). This is not unique to
Vietnam, and the role of Chinese networks in internationalisation of Asian firms has been
widely documented, e.g., the ‘Spirit of Chinese Capitalism’ (Redding, 1990): in China,
the Pearl Delta River and Guangdong continue to attract strong investments from
Hong Kong despite competition from new special economic zones (e.g., Shenzhen,
Zhuhai, Guangdong) not only because of increased bureaucratic efficiency, better
infrastructure, but also because of closer cultural links with Hong-Kongers (Wang, 2006):
the common identity, linguistic closeness (e.g., Cantonese), background, e.g., the
majority of Hong-Kongers are either born or descend from countries and villages in the
PDR area (Mondejar, 1994), family connections, e.g., about 80% of Hong Kong Chinese
populations has relatives in Guangdong (Hobday, 1995), reduce transaction costs
(Wang, 2006).
Apart from the existence of close networks, another determinant of the attractiveness
of an investment zone are capital implementation rates (i.e., an indication of how
successful, thus attractive, a local government is). Between 1988 and 2003, there were
3096 foreign-invested projects approved, representing $ 38 billion in capitalisation.
However, 1094 projects with capital up to $ 5 billion, have not been implemented since
they were licensed.8 Implementation rates have been higher in Ho Chi Minh City than in
Hanoi. In 1997, out of the US$ 913 million worth of licenses granted in Hanoi, only 34%
were implemented while 47% of the US$ 1.8 billion received in Ho Chi Minh City were
carried out (Chung, 1997). In the pharmaceutical industry, as many as 266 foreign
businesses had registered to operate in Vietnam in 2005, 76% of which were engaged in
producing drugs, according to the Vietnamese Ministry of Health. But only 42% of
combined investment capital of US$ 240 million has been disbursed, and authorities had
licensed just 35 foreign-invested projects.9 Time spent in dealing with local authorities
must be taken into consideration: it varies significantly between Vietnamese provinces,
and is shorter in investor-friendly locations (e.g., Ho Chi Minh City, Dong Nai province)
(Tenev et al., 2003). Because Ho Chi Minh City has higher implementation rates and is
culturally Closer to the West in its business practices, it has more high-equity entry
modes than Hanoi: indeed, most pharmaceutical joint ventures or wholly owned
subsidiaries are located in Ho Chi Minh City (e.g., Aventis Vietnam, Sanofi Pharma
Vietnam) or in the vicinity (e.g., Novartis Vietnam in Bien Hoa City).

2.2 Cultural distance, international experience and ownership

Hill et al. (1990) determined that a high level of cultural distance between the country of
origin and the targeted country is a deterrent to entry modes that involve high levels of
68 D. Simonet

ownership and control. Managers are reluctant to deepen involvement in markets they
know little about, restrain their commitment (e.g., financial stake) when differences in
values and beliefs between shared home and host countries are large: the costs of
acquiring information to monitor a business are higher in a less culturally familiar
environment (Erramilli and Rao, 1993; Gatignon and Anderson, 1988). Shared
commitments through a joint venture diminish sunk costs in case of a market withdrawal,
a possible occurrence in transition economies with changing regulatory frameworks.
But while other scholars (Jung, 2004; Tatoglu et al., 2003) too argue that “firms are more
likely to have difficulties in managing foreign operations alone”, that stance has not
reached unanimity: Hymer (1960) and Shenkar (2001) assert that ownership and the
resulting full control allow managers to conduct business in their own way, which is
thought to be more efficient and straightforward than relying on local agents whose
behaviour is little known or cannot be predicted.
P3: There is U-shaped relationship between high ownership entry modes
(e.g., wholly owned subsidiary) and cultural distance intensity.

Government regulation, institutional and historic ties play a role in reducing the cultural
distance (Padmanabhan and Cho, 1996): strong diplomatic ties between the host country
and the country of the parent firm favour high-equity operations over low-control and
low-equity entry modes (Tse et al., 1997). Thanks to their long-established historical and
political ties, China and France have had one of the highest number of drug firms
registered in Vietnam: out of the 213 companies from 28 countries that were granted a
license to operate in Vietnam, 20 were Chinese and 28 were French (Table 5).

Table 5 Countries with the highest number of registered companies until early 2001

Country No. of companies

India 31
France 28
China 20
Source: Drug Administrative Bureau, Invest Consult Group (2002)

Experience and firm size are also factors in determining an entry mode. The more
international experience a company has, the higher the propensity to adopt a high-control
entry mode (Evans, 2002; Hermann and Datta, 2002; King and Tucci, 2002;
 The Vietnamese pharmaceutical market 69

Erramilli, 1991). This is supported by the development theory (Johansson and

Wiedersheim, 1975) that links entry mode and firm development stage: more mature
firms (e.g., Roussel, Sanofi) opt for development modes that entail moderate risk and
control (e.g., a joint venture), as opposed to less developed firms that prefer low risk and
low control strategy (e.g., exports). That is in line with the internationalisation theory
(Johansson and Wiedersheim, 1975; Johansson and Vahlne, 1977): a firm enters a market
through indirect exporting, and moves to exporting via an independent representative
(e.g., agent) in the host country, and later a sales subsidiary as market uncertainty clears
and foreign firm’s commitment becomes stronger. The disproportionate use of exports to
Vietnam shows that market and political uncertainty has not cleared yet. Parent firm size
(Benito, 1996), possession of some knowledge-based and firm-specific strategic assets,
also prompt a firm to opt for entry modes with a higher control level (Tan et al., 2001):
the larger the firm, the higher the propensity to adopt a high equity mode that allows full
control (Leung et al., 2003; Kogut and Harbir, 1998). Conversely, firms that are smaller
and possess only limited international experience may not have sufficient resources or
skills to enter a large foreign market like Vietnam, and thus adopt joint ventures more
often than leading drug firms (Contractor and Lorange, 1988; Fayerweather, 1982).
Market potential of the host/target country (Agarwal and Ramaswani, 1992) and country
experience (Gomes-Casseres, 1989; Bell, 1996) also favours a high-equity entry mode
(e.g., a sole venture or a JV) over a low-equity mode. Aventis and Sanofi-Synthelabo
who control two major joint ventures in Vietnam (Aventis Vietnam, formerly known as
Vinaspecia, and Sanofi Pharma Vietnam) have had a presence in Vietnam since 1938 and
1983, respectively. The Sanofi Pharma Vietnam joint venture was formed as early as
1992 with Usine 23, one of the major national pharmaceutical companies, and as Sanofi’s
market experience grew, the firm raised its initial 50% stake in the company to 70% in
June 1995. In this case, the foreign partner’s acquisition of local knowledge may have
been a factor in increasing its financial stake (Puck et al., 2006).
P4: Experienced multinational drug firms prefer high-equity entry modes to
low-equity entry modes.
The transaction cost theory (Williamson, 1975; Coase, 1937) stipulates that
transaction-specific assets, external and internal uncertainties and free-riding problems
determine the entry mode and the resulting optimal level of control. Transaction-specific
assets, be they human or physical, are assets that cannot be redeployed without a
significant loss to their original value. In the transaction cost theory, a company will opt
for a high-control entry mode when assets involved in the transaction are highly specific.
Environmental uncertainty is another factor: in unstable environments (marked by
country risk, political instability, currency fluctuations), firms will opt for a low-control
mode because it allows them to exit the market quickly: there is a negative association
between the political and economic risk in a host country and the degree of control in the
entry mode (Aulakh and Kotabe, 1997; Shrader et al., 2000). Firms perceiving high levels
of risk will opt for a joint venture and avoid wholly owned subsidiary altogether
(Brouthers, 2002; Tsang, 2005): in a risky market, a foreign investor will first use a joint
venture to build local knowledge and may eventually commit more resources later on
(Brouthers and Brouthers, 2003). There are two notable exceptions: first, when
transactions imply highly specific assets (e.g., pharmaceutical R&D), firms will opt
for high-control modes regardless of environmental uncertainty; second, when there is a
free-riding problem (e.g., when a partner enjoys higher benefits without supporting much
70 D. Simonet

of the costs involved in the alliance), a firm will prefer a high-control mode over a
low-control entry mode (Anderson and Gatignon, 1986): monitoring Vietnamese partners
can be costly; if a firm cannot delegate that role to a local agent, it will internalise all
activities in a wholly owned subsidiary to avoid bearing the monitoring costs. Preventing
free-riding problems is a stronger factor than asset specificity (e.g., pharmaceutical R&D)
when adopting a subsidiary because most agreements with Vietnamese partners do not
involve R&D.
P5: When entering the Vietnamese drug market, foreign firms opt for a subsidiary to
prevent free-riding problems.

2.3 Bargaining power, investment duration and entry mode

Bargaining power exists between MNCs that have a preference for a high-control mode,
especially if the project is long-term; the government of the hosting country, which hopes
to create jobs and earn tax; and the local firms that need foreign support to expand their
activities. Return of investment in a specific time frame is another consideration: a
foreign investor is less likely to opt for a high-equity entry mode if it fears that the
contract duration might not be enough to recoup its investment, or if it feels that the
benefits of the entry mode will not fully materialise within the specified timeframe of the
project. To make its US$ 16 million investment in a plant facility worthwhile,10 Novartis
benefited from a 35 year license. Time is a factor because foreign investments are slow to
implement: as of February 1998, US$ 30.4 billion of projects had been licensed
altogether in Vietnam. But only 40% (US$ 12.4 billion) had been implemented (Vietnam
Economic Times, 1998). Competition is another factor: if few MNCs are willing to enter
a foreign country, its government and the local companies can hardly play one MNC
against another to extract more favourable contract terms (e.g., obligation to enroll a local
partner into the alliance).
P6: As the bargaining power and project duration of the foreign drug firm increase,
the foreign firm opts for higher equity entry modes.

3 Foreign entry strategies: a comparison of the options

There are many entry modes (e.g., exporting, licensing, joint venture, and sole venture)
available to foreign entrants in the Vietnamese market, and some are difficult to change
without incurring considerable sunk costs (Root, 1987). Exporting is the easiest and most
common entry strategy and is a safer bet than the local production of drugs, the quality of
which cannot be guaranteed. However, widespread violations of Intellectual Property (IP)
have been reported in Vietnam despite a 20-year patent term, a protection of registered
trademarks, and a pledge from the government to strengthen IP protection in future years.
This is a major deterrent to exporters, and prompts foreign pharmaceutical companies
operating in Vietnam to rely on representative offices (Vietnamese agent or distributor):
these do not sell products but collect payments, and will also report copies of its drugs to
the relevant authorities (e.g., National Office of Industrial Property or Ministry of
Health), and take legal action against the perpetrators.11
Licensing is a relatively economical entry mode that allows the firm to circumvent
import restrictions. Like exports, licensing is often part of a staged approach: investors
 The Vietnamese pharmaceutical market 71

enter the market with a licensing agreement and later move to some kind of direct
investment: as the foreign firm absorbs local knowledge and develop trust in his partner,
the perceived risk diminishes, and the foreign firm can increase its stake. For instance,
OPV, which is now part of one of the largest state-owned pharmaceutical companies,
Central Pharmaceutical Company No. 24, has been distributing both its own brands
and licensed products from multinationals (e.g., Bayer, Ciba Geigy, Mead Johnson,
Merck Sharp and Dohme, Roche, Sandoz, Smith Kline and French, Upjohn, and
Warner Lambert) since 1993. Ten years later, it benefited from a major foreign-invested
project to complete a pharmaceutical factory in Bien Hoa under international GMP
standards that meet contract and licensed manufacturing needs of other drug
multinationals in Vietnam. Exports and license remained in use until a factory was
completed.
A joint venture is another option. In the late 1990s, the Vietnamese government
required foreign firms to form a joint venture with a local counterpart
(e.g., Roussel-Vietnam, Sanofi Pharma Vietnam – a joint venture between Vinapharm
represented by Usine 23 and Sanofi-France represented by SPI or Sanofi Pharma
Investment) so that locals could absorb technology and human skills from foreigners.
However, cultural differences do not disappear within the joint venture: there is often a
‘we–they’ mentality between Vietnamese partners and their foreign counterparts. There
are also differences in the ranking of values: the foreign partner tends to put the emphasis
on formal procedures, on being practical, while the Vietnamese counterpart give higher
ranking to qualities such as positive relations and communication (Quang et al., 1998).
Vietnamese managers also put the emphasis on understanding the political environment
(i.e., scanning the environment for clues or political signs to implement decision and
policy), while international managers are more focused on creating a multicultural
organisation, and on developing shared values within the joint venture (Quang et al.,
1998). Persistent high cultural distance might also explain why they there have been so
few conversions from joint ventures to wholly owned subsidiaries (Puck et al., 2006).
Cultural distance seems a stronger determinant of an entry mode in Vietnam than
competition, as the latter is often confined to foreign vs. foreign firms rather than foreign
vs. local firms. Competition is intense on the lower end of the market where drugs from
developing countries (e.g., India) compete against Vietnamese drugs. That rivalry often
led to a termination of operations (e.g., Woopyung Mekophar joint venture because it
could not compete against Indian drugs).
A major difference with other regional economies, joint ventures have been
made almost exclusively with state-owned enterprises, with 2% only with the emerging
private sector (Le Dang, 2002). Until 2000, there were 24 foreign projects in the
pharmaceutical industry with a total registered capital of over US$ 20.5 million
(including 14 projects with capital of over US$ 5 million). There were also eight joint
ventures including Aventis Vietnam, formerly known as Vinaspecia, a joint venture with
Yteco, a state-owned company run by the People's Committee of Ho Chi Minh City,
Sanofi-Pharma VN, Woopyung, Mekophar and Hisamitsu VN. The eight largest joint
ventures employed around 1200 workers in 2000, and had a turnover of US$ 41.2 million
(compared with a domestic production of US$ 264.4 million in 2003), though another
source (Invest Consult Group, 2002) states that the output of pharmaceutical joint
ventures only accounted for 12.3% of the total output (i.e., locally produced
pharmaceuticals) in 2001. The first pharmaceutical joint venture between Vietnam and
China is a US$ 2.2 million GMP-standard project (Penicillin and Cephalosporin).
72 D. Simonet

The Vietnamese side, holding a 49% stake, includes the Central Pharmaceutical
Company No. 1 (Pharbaco) and the Vietnam Pharmaceutical Co. Ltd., while the Chinese
side comprises the Chinese Medicine, Pharmacy Foreign Trade Company and the Zhang
Jiakou Pharmaceutical Co., Ltd.12
However, joint ventures lack flexibility and do not permit changes in the arrangement
terms. Many ended up in disputes because the Vietnamese minority partner could and did
exercise significant power on his foreign partner because of the law on foreign
investment. To this, add the meddling of ministries and provincial authorities if the local
partner is a state-owned enterprise, a lack of knowledge of Vietnamese laws, and the fear
that a partner may eventually become a competitor. Wholly foreign-owned subsidiaries
are thus increasingly preferred over joint ventures as the Vietnamese partner often proved
disappointing due to either uncooperative attitude, or acquisition of the joint venture by
the partner (Vietnam EIU country report). From 1988 until November 1997, the failure
rate of investment projects in all sectors was 16% (694 investment projects were
dissolved out of 4514 projects)13,14, but the failure rate of the joint ventures is thought to
be at least twice as much (Thu, 1998). The number of equity-based relationships
(e.g., joint ventures) and other business relations between foreign investors and private
sector companies has been fairly disappointing (Freeman, 2002).
Foreign firms that opt for a direct investment (e.g., joint venture, sole subsidiary)
usually focus on the domestic market (e.g., 90% of the sales of the joint venture between
Sanofi Pharma Investment and Usine 23 – Sanofi Pharma-Vietnam – were for the
domestic market): high import protection makes production for the domestic market more
profitable than for the export market. Investment depends on the intended production
volume: the higher the targeted production, the stronger the incentive to increase the
stake in the JV: Otsuka OPV Company, a joint venture between OPV, Otsuka
Pharmaceutical Company (a leading Japanese pharmaceutical company) and Nomura
Trading Company (a large Japanese trading company) is to manufacture and market
large-volume parenteral solutions in Vietnam. However, this is changing. Vietnam is
more often viewed as an export zone of pharmaceutical drugs, notably to its traditional
economic partners such as the former Eastern block countries,15 Laos, Cambodia and
Cuba. For instance, Sanofi Pharma Vietnam exports to Hong Kong, Thailand (both
countries representing 60% of exports), Cambodia and Russia.16 Over time, more FDI in
Vietnam were assigned to export activity rather than on serving the domestic markets
(Freeman, 2002). BV Pharma Co., a US$ 5-mil joint venture between Britain’s
Commerce and Technology Transfers, Vietnam's Medicine joint-stock Co. (Vimedimex),
and the Vietnamese drug maker Huong Duong, is one of the 23 Vietnamese enterprises to
have met the WTO international standards, and its locally made drugs are exported to the
European Union, Russia, Japan, Singapore and Thailand.
Because Vietnam is undoubtedly a promising market because of its sheer size, central
location and rapid development, sole ventures (e.g., wholly owned subsidiary or
acquisitions) are more common than the other entry modes. In 2000, on 24 foreign
projects invested in the Vietnamese pharmaceutical industry, there were 15 enterprises
with 100% foreign investment capital and eight joint ventures only (Invest Consult
Group, 2002). That is in line with earlier work: Makino and Neupert (2000) found that
strong market growth (e.g. health expenditure has been growing at more than 10%
annually in Vietnam) prompts managers to prefer wholly owned subsidiaries to joint
ventures. But while Caves and Mehra (1986) found that firms are most likely to prefer
acquisitions when growth is very high, a foreign firm opting for a sole venture strategy is
 The Vietnamese pharmaceutical market 73

more likely to build a subsidiary from scratch rather than acquiring a local firm. Though
mergers and acquisitions were eased with the adoption of a legal framework (e.g., Decree
24 in July 2000, along with the Ministry of Planning and Investment Circular 12 of 15
September 2000), which stipulated the legal tax and economic conditions of such
operations, acquisitions have been confined to a foreign company taking over another
foreign company rather than a foreign company taking over a Vietnamese firm (Meyer
and Nguyen, 2005). Acquisitions are less attractive than built-from-scratch wholly owned
subsidiaries because the former are essentially fuelled by rising R&D and marketing
costs, but these factors have little significance in Vietnam because local firms have
insufficient funding for research (i.e., State subsidies are limited), and research is often
limited to generic drugs and conditioning (e.g., packaging and conservation). Production
facilities are scattered, which prevents amortisation of R&D costs, and technology
transfers between foreign and Vietnamese companies are limited. Other factors such as
cultural clash and difficulty in assessing potential targets make acquisitions unappealing
to foreign investors. A worsening factor, Vietnam’s business legislation has not been
particularly conducive to M&A activity. Foreign investors may only acquire up to 30% of
total shares in a local company in Vietnam that belongs to one of 35 approved business
sectors, and must obtain approval of the prime minister’s office (Freeman, 2002).
Consequently, few multinational pharmaceutical companies have had a direct
manufacturing presence in Vietnam. Until 2000, only 24 foreign projects (28 FDI in
2007) have been invested in the pharmaceutical industry with a total registered capital of
over US$ 20.5 million (including 14 projects with a capital of over US$ 5 million), of
which there were 15 enterprises with 100% foreign investment capital and eight joint
ventures only and one business cooperation contract (Invest Consult Group, 2002)
compared with 65 State-owned pharmaceutical firms in 2007 and 450 firms established
under the new Enterprise law. In value, wholly owned subsidiaries are more common in
China: wholly foreign enterprises and joint ventures in China represented, respectively,
53% of total FDI value in 2005 (40% in 2002)17 and 46% of FDI in 2005 (58% in 2002).
In early 2002, wholly owned foreign enterprises in Vietnam accounted for 32.8% of FDI
value, and joint venture for 53% of the FDI value (Table 6). But in terms of numbers of
projects, wholly owned subsidiaries in Vietnam are preferred (61% of licensed projects)
over joint ventures (34.3% of the licensed projects) (Le Dang, 2002) (Table 6). Vietnam
has attracted very little FDI when compared with China: in the early 2000s, FDI into
Vietnam represented about 2% of FDI into China.

Table 6 FDI by form of investment (as of 31 December 2001)

No. of Total investment

Form of investment projects Percentage (in value $M) Percentage Disbursement
Build-Operate-Transfer 6 0.2 1,227,975,000 3.2 39,962,500
(BOT)
Business Corporate 139 4.5 4,053,387,523 10.7 3,274,371,386
Contracts (BCC)
100% Foreign-owned 1,858 61 12,413,969,370 32.8 5,663,310,743
capital
Joint venture 1,043 34.3 20,166,951,658 53 9,716,048,371
Total 3,046 100 37,861,283,551 100 18,693,693,360
Source: Project Monitoring Department, MPI
74 D. Simonet

Will the number of wholly owned subsidiaries increase in the future? Some may argue
positively because of unreliability of local partners, ongoing economic liberalisation and
increased firm-specific know-how (Kim and Hwang, 1992). A recent example is the Bien
Hoa City-based Novartis Vietnam: the 100% Novartis-owned subsidiary is engaged in
the production and sales of pharmaceuticals for epilepsy, tuberculosis and rheumatism.
In April 2004, Aventis announced its plans to end its joint venture with its Vietnamese
partner the Sai Gon Pharmaceutical Company (Sapharco) to set up an independent and
wholly foreign-owned company in Vietnam. Other short-term incentives to opt for a
wholly owned subsidiary include government interference, transfer price issues and lower
manufacturing costs. For others, there will be few conversions from joint ventures to
wholly owned subsidiaries: the ambiguity, particularly on laws and regulations issued at
the central level, fuels uncertainty, and firms generally avoid a subsidiary in high-risk
countries: investments to create a subsidiary are typically non-redeployable assets; any
major change in the country may lead to their complete loss. For example, there are
occasional authority clashes between the Ministry of Health and the local authorities: a
local government can authorise a drug firm to establish a subsidiary and distribute drugs
in a certain region, but the central government may rebuff that decision on the grounds
that the former has exceeded its authority (e.g., Zuellig Pharma in Hanoi in 2000).
The more uncertain the regulation, the greater the need for a local partner to navigate
through regulations and gain market acceptance (Aulakh and Kotabe, 1997;
Brouthers, 2002; Yiu and Makino, 2002): despite acquisition of market experience
and knowledge from local partners, there were still only 16 pharmaceutical wholly
foreign-invested companies in 2003 (compared with 15 in 2000), and foreign-invested
companies accounted for only 16% of the total production.

4 Conclusion

The institutional environment of Vietnam is difficult to navigate: until the recent

opening-up of the country, local firms have had a virtual monopoly on pharmaceuticals.
There have been major changes in recent years: local production has risen, but prices
remain high, and hospital infrastructure is still in poor condition. Other concerns include
drug distribution (networks, sales representatives), after-sales service (information on
products, pharmacovigilance), consumer protection and compliance with standard
ASEAN GMP. Though Vietnam offers many R&D opportunities to both Vietnamese and
foreign companies, additional investments are needed to improve infrastructure and
replace obsolete equipment. A more favourable fiscal policy (exemption or reduction of
taxes) would also encourage R&D efforts. The specificities of the Vietnamese market
mean that it is unlikely to develop a local pharmaceutical industry as in India. In view of
these shortcomings and inadequacies, foreign entrants opt for safer entry modes that
entail lower sunk costs. Despite governmental incentives, there are few joint ventures,
and though less risky, many failed due to a loss of control. The two other opposite modes
of entry (e.g., licensing and acquisition of a local company) appear risky due to lack of IP
rights for licensing and cultural clash for acquisition. Wholly owned subsidiaries appear
risky too, but the long-term pay-offs are much higher. Foreign investors should favour
that latter entry mode because it eliminates risks entailed in a joint venture with a local
partner (e.g., legal disputes, acquisition), or after they have gained enough understanding
of local market characteristics.
 The Vietnamese pharmaceutical market 75

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Notes
1
Source: World Health Organization.
2
GC.Comm (2004)
3
End of 2003.
4
Until then, many products came from former Eastern block countries, international organisations
and other nations in the form of international aid (US$ 3–4 million per year).
5
Figures vary depending on sources.
6
Pharmaceutical companies in Vietnam have been ordered to publish their drug prices on a public
website by the end of March 2006. Source: PharmacoEconomics and Outcomes News, Vol. 1,
2006-02, p.10.
7
A Vietnamese and a foreign partner sign a contract that defines responsibilities and profit-sharing
without the launch of a new legal entity.
8
CVFG, MBA Program, 10024.03. available at http://www.globalfinance.org/publications
/finance_reports/cfvg_international_finance/fdi_vietnam.pdfCVFG, MBA Program, 10/24.03
9
VNECONOMY. Foreign pharmaceutical companies show interest in Vietnam. 26/09/2005.
Source: Vietnam Agency.
10
It opened in 1997 and met GMP standards.
11
Patent enforcement falls under the responsibility of the National Office of Industrial Property
(NOIP), though some state-owned pharmaceutical companies claim to be exclusively governed by
the Ministry of Health.
12
Source: VNECONOMY/Vietnam Agency. Construction of joint pharmaceutical plant starts in
Ha Noi 19/04/2004.
13
44 expired.
14
There have been a high number of high-profile withdrawal cases such as Chrysler’s abandonment
of a car plant, or the withdrawal of total from a refinery project.
15
Its major current exports destinations are Moldova and Russia.
16
Sanofi has been present in Vietnam since 1983 through its joint venture Sanofi Pharma Vietnam.
17
www.Fdi.gov.cn. Statistics of cumulative FDI by Form as of 2005 and 2002.

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