Key aspects of successfully conducting business at the Vietnamese BOP

Key aspects of successfully conducting

business at the Vietnamese BOP

The role of local actors

MSc International Business & Management University of Groningen

Authors: Bart Wijnholds & Tom Op den Kamp Student No. S2221640 & S2651130

Faculty: Faculty of Economics and Business

Supervisors: Dr. B.J.W. (Bartjan) Pennink (University of Groningen Tu Phan A. Ph.D (Can Tho University)

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Abstract

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Preface

This report has been made by us, Tom Op den Kamp and Bart Wijnholds, during a time period of 6 months. The results of this report are our interpretations of the data that we have collected during our 2 months stay in Can Tho, Vietnam. Although the names of the companies that were interviewed are presented we have chosen not to mention the names of the persons that have been interviewed as some requested not to do so.

We would firstly like to thank our first supervisor Dr. B.J.W. (Bart-Jan) Pennink who has been a great support and help for us. We always appreciated his enthusiasm very much and also, thanks to him we were able to do this research in Can Tho, Vietnam. Secondly, we would like to thank Mr. Tu (Tu Phan A. Ph.D) professor at Can Tho University and our second supervisor based in Can Tho. He has helped us not only with the accommodation, hospital visits etc. but he was also our ticket to PepsiCo and the interview with the local government institution the Investment-Trade-Tourism (ITT) Promotion Center. He even made us eat a snake, which was quite an experience.

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Table of content

Research objective (Tom & Bart) ... 9

Research questions (Tom & Bart) ... 10

Conceptual model (Tom & Bart) ... 11

1. Literature Review: The Bottom of the Pyramid ... 14

1.1. Corporate Social Responsibility (CSR) and fighting poverty ... 15

2. Success at the Bottom of the Pyramid ... 18

2.1. Bottom of the Pyramid: Different markets ... 18

2.2. The needs of the consumers at the BOP market ... 19

2.3. Creating Trust, legitimacy and developing Social value ... 20

2.4. Return on Investment for the MNE’s at the BOP ... 30

2.5. Profits for the BOP community: Local economic development ... 31

3. Methodology ... 33

3.1. Qualitative Research ... 33

3.2. Vietnam ... 34

3.3. The interviews ... 34

4. Results ... 36

4.1. Overview of the results... 37

4.2. The Needs of the BOP ... 44

4.3. Business Capabilities ... 49

4.4. Networking: Liability of Outsidership and Local (non-traditional) partners ... 51

4.5. Trust ... 60

4.6. Legitimacy ... 63

4.7. New Business Models and Business Strategies ... 67

4.8. Return on Investment ... 69

5. Discussion ... 71

5.1. The needs of the BOP ... 71

5.2. Business Capabilities ... 72

5.3. Networking: Liability of Outsidership and Local (non-traditional) partners ... 72

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5.5. Legitimacy ... 75

5.6. New Business Models and Business Strategies ... 76

5.7. Return on Investment ... 78

6. Conclusion (Tom & Bart) ... 80

6.1. Research contribution ... 82

7. Limitations & Future research ... 83

Appendix A: Conceptual model Pennink (2014) ... 86

Appendix B: The interview (Tom & Bart) ... 87

Appendix C: Interview with BOP Innovation Center ... 90

Appendix D: Interview with PepsiCo ... 99

Appendix E: Interview with Inclusive Business Accelerator ... 106

Appendix F: Interview with Fresh Studio ... 115

Appendix G: Interview with Local government: Investment-Trade-Tourism Promotion Center ... 124

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Introduction

Globalisation, foreign trade and the rise and expansion of multinational enterprises (MNE’s) throughout the world are well known topics and have been investigated thoroughly. A number of articles discussed the motives for MNE’s to go abroad such as the market seeking motive, the knowledge seeking motive and resource seeking motive (Eden and Miller, 2004).

All these motives drive MNE’s to go abroad and expand their business internationally.

Many of these MNE’s looked to the so-called emerging markets as developed markets became increasingly saturated. These emerging markets consists out of countries in Asia, such as China, Vietnam, and India but also in South America, Brasil, Chile and Peru. These countries are key locations for future growth for MNE’s. When entering these markets the MNE’s mostly focused on the elite top of the market, the most affluent consumers and therefore the so called ‘’Top of the Pyramid’’ where the MNE’s apply the same business models as those used in the developed world (Arnold and Quelch, 2012 and Prahalad and Lieberthal 1998). However, by focusing only on the consumer group at the top of the pyramid MNE’s are missing a huge part of potential income as only a small part of the total market in these emerging markets is reached. Within these emerging markets, most of the potential consumers only earn less than $1.500 per year which puts them at the ‘’Bottom of the Pyramid’’ as defined by Prahalad and Hart (2002). It is precisely this income group that represents a huge opportunity for MNE’s.

7 In addition to assets, the value of economic transactions in these markets may match or even exceed what is recorded in the formal economic sectors in developing countries (Henderson, 1999).

However, the strategies MNE’s use to reach the Top of the Pyramid are believed not to be suitable for reaching the customers at the Bottom of the Pyramid as MNE’s will face different challenges (London and Hart, 2004). So did London and Hart (2004) argued that the low-income markets in the emerging markets require different entry strategies and business models as these markets are characterized by the fact that social contracts and social institutions dominate the economy. Informal social boundaries seem often to dominate within these markets instead of legal the formal contracts relied upon in more developed markets. Also, the fact that traditional partners may lack the necessary experience and knowledge for entering the Bottom of the Pyramid, which is a very different consumer group that the Top of the Pyramid, adds to the idea that a different entry strategy is needed. Lastly, London and Hart (2004) discussed that there is increasing pressure from society that it is expected from the MNE’s that they consider the societal and environmental impacts of their activities (Soros, 2002). Summing up, it is believed, and well argued, that MNE’s will need and/or are using different strategies for entering the Bottom of the Pyramid in emerging markets. But what are the specifics of how to operate and reach the Bottom of the Pyramid?

In addition to the above, this report will focus on the local level as well as on the role of local actors such as local partners, NGO’s and the local government in successfully reaching the customers at the BOP. The goal of this research is to make implicit assumptions more explicit, thereby adding concrete knowledge how to successfully operate in the lowest income markets. Two output effects must be realized with this model: The MNE must have a positive return on investments and at the same time the local community must also benefit, in terms of improved conditions of life and increased economic activity.

This report will start with discussing the research objective and research questions after which the conceptual model will be explained that resulted from previous literature and the results from the interviews that were conducted with different companies all active at the Vietnamese BOP.

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Research objective

The research objective of this report is to build upon the research that has been done by Pennink (2014), Van Genderen (2013) and Gada Farag Nagi (2012) to the BOP. Van Genderen (2013) did research to how MNEs increase their chance of profit by integrating the Bottom of the Pyramid in their strategies in such a way that it will help to raise the living conditions and/or wealth of the poor and at the same time secures their future market which is the Bottom of the Pyramid. Also, Gada Farag Nagi (2012) explored how MNE’s set up local economic activities within local communities, by using a model that brings together social entrepreneurship on three different levels namely the macro-, meso- and micro level. They both focused here on:

 The needs of consumers.  The needs of MNE’s.

 And how they interact with each other.

They built a model that attempts to explain the actors and variables that are important within this process by adopting the model of Stimson et al. (2009). We want to build upon this and other previous research that already identified the local level as an important area of research for reaching the BOP. By focusing on the role of local actors we want to make implicit assumptions more explicit, thereby adding concrete knowledge how to successfully operate in the lowest income markets. Especially, we are interested by the Vietnamese BOP. Vietnam offers a great opportunity to expand the empirical evidence base to check whether the matrix made by Pennink (2014), van Genderen (2013) and Gada Farag Nagi (2012) still applies. In addition to that, we will focus on the specific role local institutions, like NGO’s and local leaders play within the process and the importance of being part of a network in reaching the BOP and in developing social embeddedness.

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Research questions

The following questions are adapted from our conceptual model and will be a guideline through our report:

Main Question: How MNE’s can conquer the BOP market by matching strategy with the needs of the people who live at the BOP

Sub-questions

1. What role does the identification of the needs of the people at the BOP play?

2. What business capabilities do the MNE’s need in order to be successful at the BOP?

3. How to reach the future market, the BOP, with the help of local non-traditional partners in Vietnam?

4. Which non-traditional partners help MNE’s to develop this extra ability of social emdeddness?

5. Is it important to be part of a relevant business network within the BOP market? Does the ‘’liability of outsidership’’ play an important role here?

6. Is it important to create legitimacy and trust and how to do this?

7. Is it necessary for MNE’s to develop new business strategies and business models to be able to succeed at the BOP?

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Conceptual model

As discussed, the focus of this report will be on the local level just as previous research done by Gada Farag Nagi (2012) (2012) and van Genderen (2013). Like their model our model starts with the independent variables on the left: The needs of the consumers at the BOP and the capabilities of the MNE. MNE’s must be capable, the must have access to the right resources, competences, technology etc., to match the needs of the consumers at the BOP. MNE’s need to be capable of adjusting to the new business environment that characterizes the BOP such as underdeveloped institutions, infrastructure, information- and communication systems, and low education and low income rates is a precondition for MNE’s to be able to meet the needs of the BOP market.

In the center of the model a combination of intervening variables can be found that are connected to each other as within this report, according to previous research, it is believed that these variables interact with each other.

12 This is because trust is not only an important ingredient for building reliable and lasting relationships with other (non) traditional partners, like NGO’s and institutions but it also helps creating legitimacy and acceptance among the consumers at the BOP market. We believe that trust has to be created and sustained in order to succeed at the BOP.

In addition, it is discussed in the literature that it is important for MNE’s, when entering emerging markets and especially the BOP market, to develop a strong position within a relevant business network. Developing relationships with (non) traditional business partners, NGO’s and local institutions is important to create a deep understanding about the local environment (social embeddedness) as this information is hard to get because of a lack of good institutions and information systems. In short, it is important for MNE’s to be part of a relevant business network within the region and to overcome the so-called ‘’liability of outsidership.’’ Within these networks MNE’s are capable to take the role as leaders. Van Genderen (2013) and Gada Farag Nagi (2012) (2012) both adopted the model by Stimson et al. (2009) and with that incorporated the Leadership variable within their matrix. They both argued that MNE’s act as true leaders if they are capable of using and applying their resources accordingly and are able to increase entrepreneurial activities, encourage innovation, and to put pressure on local institutions for example demanding the change of or development of certain regulations, business practices and norms resulting in an enhancement of the wealth at the BOP and, at the same time, securing the future market for the MNE’s themselves.

According to the results of van Genderen (2013) in order for an MNE to act and to be accepted as a leader the MNE should have a strong and powerful position with the right capabilities.

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1. Literature Review: The Bottom of the Pyramid

‘’Two questions lie at the heart of evaluating the attractiveness of doing business in underdeveloped markets: first, why and whether to do it; and second, how to do it’’ (Seelos and Mair., 2007 page 50).

As discussed, nowadays, MNE’s are facing the fact that their home markets are becoming increasingly saturated. Therefore, MNE’s need to be on a continuous quest for growth and that growth can be found at new markets. In order to find new markets, research suggested that these companies should try to consider ‘’less attractive’’ markets as well such as those within less developed countries (Arnold and Quelch, 1998, Prahalad and Lieberthal, 1998). At first, research applied the income pyramid as a tool to segment markets, emphasizing the potential of middle-class markets. These markets are characterized by their income levels which reach up to $5,000 per year in more affluent countries. A few years later, research done by Prahalad and Hart (2002), recognized that the fortune in these undeveloped countries is not only to be found at the middle part of the pyramid but even at the bottom of it. According to them, MNE’s should focus their attention on the group of consumers with income levels of less than $1,500 per year (Prahalad and Hart, 2002). This because of the fact that the vast majority of the populations operate primarily in the large, but hidden, informal economies that are not recorded in official gross national product (GNP) or PPP statistics (Prahalad and Hart, 2002). Prahalad et al. (2002) discussed in their paper that the informal sector, worldwide, includes more than $9 trillion in hidden and/or unregistered assets. This is almost the same amount as the total value of all the companies that are listed on the 20 most developed countries’ main stock exchanges. (deSoto, 2000).

15 Furthermore, Henderson (1999) argued that the economic transactions that are taken place within these markets may match or even exceed what is recorded in the formal economic sectors in developing countries. According to the research mentioned above it seems that there is an immense and fast growing economic system waiting to be discovered and to reap benefits from.

Another reason for why the BOP is such a great opportunity for MNE’s to enter this market is the fact that most entrepreneurs and customers within these markets are mostly poorly served by low-quality vendors according to Prahalad and Hammond (2002). They further stated that these entrepreneurs and customers are exploited by predatory suppliers and intermediaries. MNE’s could, by entering the BOP market, not only generate profits for themselves, as the number of consumers at the BOP reach approximately four billion worldwide, but also create consumer surplus and reduce poverty. However, it should be noted that these opportunities at the BOP also bring new challenges for the MNE’s to overcome (Prahalad and Hammond, 2002).

In contrast, Karnani (2007) argued, in response to the propositions of Prahalad, that the BOP proposition of the ‘’fortune at the Bottom of the Pyramid’’ is too good to be true. Stating that ‘’The BOP proposition is both logically flawed and inconsistent with the evidence’’ (Karnani, 2007 page 91). However, previous research has recently shown that MNE’s can be very successful at the BOP (Rahman, Amran, Ahmad and Taghizadeh, 2014, Seelos and Mair, 2007, London and Hart, 2004, Karnani, 2007, Prahalad, 2012, Linna, 2012 Cheung and Belden, 2013 and Chikweche and Fletcher, 2012).

1.1. Corporate Social Responsibility (CSR) and fighting poverty

16 Many MNE’s operating in emerging economies have started to emphasize corporate social responsibility (CSR) in their business strategies because of the fact that these businesses are facing a growing critique. Bartlett et al. (2007) noticed this development and they described it as a movement of MNE’s strategies from an exploitative and transactional (compliance-oriented) nature towards the, what they called, transformative approaches. According to Barlett et al. (2007) MNE’s have become more sensitive and responsive to these problems and needs as the result of the fact that nowadays the problems and needs of the local business environments have become much more important to MNE’s. The initiative is even taken by MNE’s in the form of CSR efforts in the attempt to improve the local environment and economic- and living conditions of the communities in which they operate. In short, to support local development. The reason for these businesses to conduct CSR activities is that if they would ignore this trend this will result into discontent over their businesses activities which in turn spreads these negative perceptions and thoughts about the MNE’s activities globally through the web and other media outlets. The end result will be that it will be harder for these MNE’s to conduct (successful) business elsewhere around the world (Gifford and Kestler, 2008).

Fighting Poverty

MNE’s are thought to be best positioned to face the particular challenges of selling to the poor and at the same time fighting poverty as they can draw from a global resource base and superior technology. This makes them also capable to address the local customer needs and develop those markets within poor countries. As these markets develop, the economic situation within that poor country is also likely to rise and thus decreases poverty (Prahalad and Hart, 2002 and Baldwin, 2006).

Prahalad and Hammond (2002) further elaborated on the so-called “doing good and doing well” character of entering markets within poor countries. They argued that by turning the poor people into customers this will not only provide MNE’s with profitable opportunities, as they can rely on economies of scale, but at the same time help fighting poverty within that country.

17 In short, within these BOP markets the challenge lies with the fact that consumers are willing but often not able to pay.

In order to be successful at the BOP and also to reduce poverty within these countries Prahalad (2004) argued that MNE’s will have to adopt new strategies and new competencies as the traditional ones, who are successful within developed markets, will not work within the BOP markets.

In contrast, Karnani (2007) again criticised the traditional BOP view of seeing the people at the BOP only as consumers. He argued that in order to really decrease poverty MNE’s should increase the ‘’affordability’’ of the people at the BOP markets by (1) increasing their income or (2) decreasing the prices of the products/services by lowering production costs or by lowering quality. Interestingly, according to Barki, and Parente, (2006), a MNE preferably should try to lower their production costs since they argue that the idea that consumers at the BOP only want to buy cheaper and lower quality products is a misconception.

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2. Success at the Bottom of the Pyramid

As mentioned, a number of articles have proven that the BOP consist of a very large market of consumers that are willing to buy but most of the time are not capable to do so.

Also, a number of cases have shown that nowadays MNE’s are already conducting successful business at these markets with high return on investments and at the same time creating benefits for the local community (Rahman, Amran, Ahmad and Taghizadeh, 2014, Seelos and Mair, 2007, London and Hart, 2004, Karnani, 2007, Prahalad, 2012, Linna, 2012, Cheung and Belden, 2013 and Chikweche and Fletcher, 2012). However, not much research has been done to the how-question. As discussed, this research will try to develop a BOP matrix that can identify key abilities a MNE has to get in order to be successful at the BOP.

2.1. Bottom of the Pyramid: Different markets

Within the BOP context there has to be made a distinction between different kinds of BOP markets according to Anderson, Markides and Kupp (2010).

Within their research they have argued that there are three types of markets or environments namely the urban slums, deep rural areas and conflict zones. Each of them having their own special characteristics and therefore companies will need to apply different strategies to each of them in order to reach them successfully (Anderson et al., 2010).

People living in the urban areas have different needs in comparison to people living in rural areas as there are a range of other problems facing these two groups, problems ranging from insufficient drinking water or low quality housing to overcrowded and insecure residential status within urban areas. In addition, these people have no access to credit and public services, have marginal economic power and are socially marginalized as well (Anderson et al., 2010).

19 Lastly, the so-called conflict zones are characterized by war, with problems like severe lawlessness and insurgency against the constituted authority. As a result of this companies are very vulnerable to risks such as robbery, theft, kidnapping and physical assault (Anderson et al., 2010).The focus of this report will be on the urban BOP markets as this is in line with the previous research done by Gada Farag Nagi (2012) and van Genderen (2013). Specifically, this report will focus on the Vietnamese urban BOP market.

2.2. The needs of the consumers at the BOP market

The BOP is characterised by a number of unique features that makes it a challenge for MNE’s to conduct successful business within these markets such as the younger age demographic, the nature of BOP rural and urban locations, gender discrimination and of course the high degree of uncertainty and turbulence in these markets. Also, the infrastructure is underdeveloped and not of the same level as in developed countries (Mahajan and Banga, 2005).

Austin (1990) already addressed this as he argued that conducting business in the BOP market provides both local and international firms with unique challenges. One of these challenges is for the marketers of the MNE’s to reach the consumers at the BOP according to Chikweche and Fletcher (2012).

They did research to the BOP markets of Zimbabwe by conducting in-depth interviews with MNE’s who are conducting business within these markets. They found that MNE’s, in order to successfully reach the consumers at the BOP, will need to modify their current marketing mix at the BOP through initiatives such as modification of the products and adjusting current marketing strategies that are successful at their home markets (higher income markets). Chikweche and Fletcher (2012) underlined the importance of interaction between the BOP consumers and the firm so that the needs of the consumers are clear and marketing mechanisms/strategies can be applied to those needs.

20 2.3. Creating Trust, legitimacy and developing Social value

As mentioned above conducting business in an emerging economy setting offers unique challenges as well as unique possibilities. Mapping these unique challenges and how to overcome them has been an important topic of investigation ever since the article ‘’The Fortune at the Bottom of the Pyramid’’ by Prahalad and Stuart Hart in 2002. From this point on scholars have investigated doing business at the BOP using institutional theory, transaction cost economics, and the resource-based view of the firm among others.

This report takes another point of view namely one that can be found in the organizational legitimacy literature. We think that this concept can be a powerful mechanism to understand the success and failures of MNE’s in especially emerging economies.

Trust

Trust is a very important component when it comes to relationship building as it plays an important role when it comes to the development of successful business relationships and networks (Johanson and Mattson, 1987 and Morgan and Hunt, 1994).

‘’Trust implies an ability to predict another’s behavior’’ (Johanson and Vahlne, 2009, page 1417).

Trust is essential for successful learning, for the development of new knowledge by being part of a business network and in the early phases of a relationship (Johanson and Vahlne, 2009). Next to the fact that trust is important for developing knowledge it can also be served as a substitute for knowledge in case a MNE lets another business, for example a partner or middleperson, take care of its foreign activities. In addition, trust enables information sharing and promotes the development of joint expectations (Madhok, 1995). Especially in a business environment characterized with high uncertainty as the result of low or no formal institutions, like within emerging markets and the BOP markets, trust is very important as it reduces this uncertainty (Johanson and Vahlne, 2009).

Legitimacy

21 MNE, to survive. It stresses the importance of the need to create local support and that the actions of the organization are appropriate and desired within some socially constructed systems of beliefs, values, and norms (Suchman, 1995, p. 574).

Suchman (1995) views legitimacy as an operational resource that an organization can extract, competitively, from their environment in pursuit of their goals. In this sense legitimacy is a resource, just like finance, which an MNE requires in order to operate successfully. The actions of the MNE can increase or decrease the legitimacy it enjoys in a particular market. Legitimacy is thus a process with which an organization seeks approval or avoidance of sanction from groups in society (Kaplan and Ruland, 1991, p. 370). Although legitimacy itself is an abstract concept it has very concrete consequences which can be positive or negative (Tilling, 2014).

Low legitimacy will have particularly dire consequences as an organization will be seriously hindered in doing business when it lacks the support conferred by legitimacy (Hillman and Wan, 2005).

In particular, table 1, adapted from Hybels (1995, p. 244), identifies four critical organizational stakeholders and which resources they control.

Legitimacy plays an important role for each stakeholder, as it influences the flow of resources crucial for the organizations’ establishment, growth and continued survival, either by direct control or by the communication of goodwill (Hybels 1995, p. 243).

22 Source: Hybels (1995, p. 244)

Legitimacy is especially important for MNE’s in emerging economies. The reason for this can be found in the fact that most emerging economies are characterized by a predominant informal economy. Within an informal economy, the rules of the game are less clear. Contracts are more difficult to enforce and within such an environment legitimacy naturally plays a bigger role in human economic behavior (London and Hart, 2004).

In Vietnam the informal economy plays a vital role in everyone’s daily lives. In fact, in a recent report it is shown that a majority of the jobs in Vietnam are classified as belonging to the informal sector (International Labour Organization Report, 2011).

There are many different definitions for the informal economy, but within this report the definition given by the International Labour Organization is used. They define the informal economy as;

‘’all private unincorporated enterprises that produce at least some of their goods and services for sale or barter, are not registered (no business license) and are engaged in non-agricultural activities’’ (International Labour Organization Report, 2011).

The figure below clearly stipulates the importance of the informal economy in Vietnam where almost 82% of employment can be defined as belonging to the informal economy. It is further estimated that the informal economy contributes at least 20% to Vietnamese GDP.

23 Source: International Labour Organization Report (2011).

As the definition of the informal economy clearly states, the informal economy operates without business licenses, unregistered and unchecked. Therefore, unlike westerns-style developed economies, it is not legal contracts that dominate relationships with governmental entities at national, regional and local levels but social contracts (Chambers, 1997).

Social development programs

24 Thus, from the MNE’s perspective, engaging in social activities increases its local visibility and can be a way of attracting the best and keeping the brightest by establishing a name for itself as an attractive employer (Porter and Kramer, 2002). From the perspective of the employee, a MNE’s social development programs will show a respect and commitment to the local community in which it operates. This can lead to a higher acceptance and esteem for the firm and considering the importance of social networks in emerging economies, it is not unlikely that he or she will identify themselves more with a company that engages in activities to reach out to its local community. In accordance with this, Yang and Rivers (2009) note that social programs like community development are one of the most relevant efforts MNE’s can undertake to build good rapport with its employee base. These activities also reflect back on the individual employee by lifting the social status of the employee among his or her family members and in his or her community (Dutton et al., 1994). Furthermore, it can lead to a higher degree of identification with the company by the employees which results in a better performance of these employees to help the MNE surpass its competition (Neville et al., 2005; Paulraj, 2011).

In a similar strain of thought Reimann et al. (2012) not only found a positive relationship between a MNE’s social activities and the performance of their employee base in emerging economies, but also evidence that employees are aware and value the social activities of their employer.

Local institutions

In accordance with Hybels (1995), which identifies the state as a critical stakeholder, Walker and McCarthy (2010) emphasized that MNE’s, next to local (non) traditional partners, will also need to build good rapport with local authorities to gain external legitimacy. Building good rapport with local institutions fosters a cooperative relationship which can be especially important in less developed economies.

It can help MNE’s gain favorable access to resources, timely responses to the firms requests, but also the reduction of bureaucratic hurdles and the hassle-free granting of required licenses (Reimann et al., 2012). Furthermore, cooperation between MNE’s and local governments can give rise to mutual benefits. MNE’s who engage in creating social value for the local community contribute very explicitly to the improvement of local living standards.

25 with their respective stakeholders, such as voters or superiors (Gardberg and Fomburn, 2006 and Godfrey, 2005). In fact, MNEs that engage in social development may help local governments to secure their own authority and credibility with the local population (Gifford and Kestler, 2008). In this way, creating sustainable social value not only provides legitimacy at the local level, but it can transcend to a regional or even national level, depending on the impact of the social development programs initiated. Therefore another benefit of social development programs is the creation of legitimacy. Social development programs influence positively the perception about a company’s presence and activities, thereby increasing its legitimacy with the local institutions.

Legitimacy thus plays a much more important role for businesses operating in the informal economy as it forms the base for mutual trust and cooperation. In the informal economy it is vital for a MNE that its activities and presence in the local community is seen as desirable and wanted. Indeed, Suchman (1995) views legitimacy as a resource a MNE can subtract from its local environment. To avoid losing legitimacy it is important that a MNE knows and understands its local environment. It needs to have an understanding of the social norms and values.

However, to gain, or as Suchman (1995) put it, to extract legitimacy, a MNE needs to go beyond a simple knowledge of its local environment and instead develop a deep understanding of and integration with the local community in which it operates. Or, what London and Hart (2004) call it; to develop social embeddedness.

Social Embeddedness

26 ‘corporate giving’, which is often infrequent and unsustainable to ‘’creating social value’’. Which is sustainable, more frequent and more effective in developing a favorable view of the MNE in its local environment.

Social value

By creating social value through sustainable community development, MNE’s gain local legitimacy (Gifford and Kestler, 2008). This view has been further supported by a report of the world bank which states that MNE’s which lack the ability to create and appreciate social value or which lack the ability to become locally- and socially embedded in the social infrastructure that dominates low-income markets will find it very difficult to gain legitimacy and overcome their liability of foreignness (World Bank, 2001). For most MNE’s, creating social value will be outside of their core business. Therefore, MNE’s need to partner up with non-traditional partners to develop inclusive business models for the BOP that generate social value (London and Hart, 2004).

Also, the U.N. social and economic council argued that any attempt to develop social value needs an thorough knowledge and understanding of the local community and that this knowledge needs to extend far beyond the demographics of the employable workforce. (United Nations Social and Economic Council, 2003).

In order to obtain this knowledge, MNE’s will have to develop partnerships with (non-) traditional partners, local institutions and to make sure that they are part of a relevant business network (Johanson and Vahlne, 2009, London and Hart, 2004, Walker et al., 2010 and Hybels, 1995).

Liability of Outsidership and Local (non-traditional) partners

In order to get access to the knowledge discussed above and with that entering foreign markets successfully, especially emerging markets, MNE’s will have to overcome the so-called ‘’liability of outsidership’’ (Johanson and Vahlne, 2009) as today’s business environments consist of a web of relationships or networks rather than a number of independent suppliers and customers. In addition to this, with regard to developing countries, it is argued that it is not the psychic distance (the circumstances that make it hard for businesses to do business abroad) that causes uncertainty but the ‘’outsidership’’ in relation to the relevant business network (Johanson and Vahlne, 2009).

27 within the relevant network within their business environment. This is key for MNE’s to successfully internationalize, especially in countries with larger psychic distance (Johanson and Vahlne, 2009).

Also, other research that has been conducted in the past has shown that being part of a network and creating long and lasting relationships between businesses, in the internationalization process, is very important for a firms survival and success (Bonaccorsi, 1992, Erramilli and Rao, 1990, Majkgård and Sharma, 1998 and Sharma and Johanson, 1987).

In addition, MNE’s need to be open toward involving local partners and NGO’s as meaningful participants in projects since they are particularly suited to provide this kind of knowledge to MNE’s (London and Hart, 2004). With input from these local partners and NGO’s, MNE’s are better able to understand the social as well as the business environment (Rondinelli and London, 2003).

Working together with non-traditional partners like NGO’s, village- and local governments and community groups will assure that social initiatives fit local customs and culture and succeed in building legitimacy for the MNE (Hart and Sharma, 2004).

Next to this social information, NGO’s and other non-traditional partners can also help MNE’s with the provision of relevant market information (social embeddedness) needed for conducting successful business within the emerging market as a whole and the BOP specifically. In sum, by working together with non-traditional partners the MNE will be better provided with the relevant market and societal information needed for the creation of legitimacy that is so important to successfully operate at the BOP as explained above (Gifford and Kestler, 2008 and Seelos and Mair, 2007).

Leadership

28 Also Pennink (2014) noticed this and argued that the model of Stimson et al. (2009) is a good start by incorporating entrepreneurship, leadership and institutions but by omitting the roles of local actors this model may not fully represent the situation at the local level. As discussed, this report incorporates local actors that are believed to play a role on the local level and takes a network-view developed by Johanson and Vahlne (2009), furthermore it focuses on social value as a means to create legitimacy and gain trust to successfully operate at the BOP. Within this report the leadership concept is also incorporated but then within the context of a network as on the local level, at the BOP market, more (local) actors are involved (Pennink, 2014 and Johansson and Vahlne, 2009). This report takes the position of the MNE as part of a network wherein the MNE can take the position of a leader.

The MNE as a leader: ‘’A MNC with strong Leadership means the MNC is capable of using their resources well and is able to increase entrepreneurial activities.

Furthermore it can change institutional factors like rules, law, business practices and norms. Consecutively, it can enhance the wealth of the BOP and secure the future market for the MNC.’’ Van Genderen (2013, page 8).

Within his report he adopted the model from Stimson et al. (2009) who argued that with proper leadership in a region, the region will be economically developed and competitive. ‘’Leadership is embodied by the MNC in terms of local economic development’’ (Gada Farag Nagi, 2012 page 9).

According to the results of van Genderen (2013), in order for an MNE to act and to be accepted as a leader the MNE should have a strong and powerful position within the market and have access to the right capabilities. However, van Genderen (2013) also discussed the fact that Leadership is a concept that is hard to measure. He argued that this concept is very hard to define, that it should be reconsidered and that he had difficulties measuring it. By interviewing and seeing the activities of the MNE in its local context it can be shown that a MNE acts as a leader. The problem lies in the concept of proper leadership, as it contains a degree of subjectivity. In our conclusion therefore we will refrain from this term and will only give our opinion if a leadership role is taken by companies in the Vietnamese BOP setting.

MNE Strategies and Business models

29 (especially the BOP market) will not be sufficient. In order to be successful in a low-income markets MNE’s will need to accept and understand the fact that these same business models cannot successfully be applied to the BOP. This is because of the fact that these low-income markets are characterized by their informal nature where relationships are grounded on social- instead of legal contracts (de Soto, 2000), the lack of formal institutions and the fact that traditional partners may lack the relevant experience necessary to succeed within these low-income markets.

For instance, Cheung and Belden (2013) discussed that MNE’s, in order to be successful at the BOP market, have to set up distribution channels with local partners, and in this case local distributers, in order to reach the consumers at the BOP as there is a lack of good local infrastructure.

Next to these challenges there is an increasing pressure on MNE’s to take a greater and even leading role in addressing global societal issues such as fighting poverty. This makes it even harder for MNE’s to succeed at these markets especially if they refuse to adjust their existing strategies and business models (Hart and Christensen, 2002). In other words: The importance of Corporate Social Responsibility (CSR) cannot be underestimated (London and Hart, 2004). Also, London and Hart (2004) argued from the results of their research that ‘’the success of initiatives targeting low- income markets is enhanced by recognizing that Western-style patterns of economic development may not occur in these business environments’’ London and Hart, 2004, page 350.

In addition to this, they also argued that MNE’s should rely on business strategies that focus on leveraging the strengths that the existing market environment has to offer instead of focusing all the efforts and resources on overcoming the market environments’ weaknesses. One of these strengths is for example the experience and knowledge of NGO’s in these markets, which leads to opportunities of working together with NGO’s. As such, London and Hart (2004) stated that it is important for a MNE to develop relationships with non-traditional partners, like NGO’s, to co-invent solutions with and building local capacity at the BOP. In a similar fashion, Johanson and Vahlne (2009), argue for the importance of setting up a strong network position. As discussed earlier, creating social embeddedness is an important step in order for these strategies to succeed.

30 efficient and effective for MNE’s to use their existing business models and capabilities and applying them to already existing BOP business models, this is in line with the research done by Denrell, Fang and Winter (2003). In this way new markets can be build that generate sufficient financial returns for both the MNE’s as the companies at the BOP justify their investments without adjusting their existing business models. Seelos and Mair (2007) came to this finding by conducting two case studies in which in both cases one company, already active at the BOP, set up a partnership with another large corporation/MNE which resulted into a new overall business model by assembling the existing business models of both parties into one. This seemed not only to be more cost-efficient but also very effective as the company at the BOP had the necessary network position, contacts and market knowledge while the larger corporation funded the BOP company with the necessary resources and economies of scale necessary for them to grow and gain even more income.

By doing this these larger corporations/MNE’s developed trust with parties at the BOP which is necessary in order to get access to the resources and capabilities of the local organisations already located at the BOP.

By combining two existing business models, the need to develop new strategies and business models is avoided and with that the difficulties of managing multiple new resources and capabilities into new value creating models (Seelos and Mair, 2007)

2.4. Return on Investment for the MNE’s at the BOP

31 which seems to be an important dimension of global staffing, because of the internationalization of markets, competition and technology in many global operating businesses (Shaffer, Harrison, Gregersen, Black and Ferzandi, 2006).

2.5. Profits for the BOP community: Local economic development

It has been argued by literature that it is very hard to start the process of local development, let alone the development of academic theories on this process (Pennink, 2014). Pennink (2014), van Genderen (2013) and Gada Farag Nagi (2012) (2012) were one of the first who tried to develop a model which could explain this process by adopting the model created by Stimsonet al. (2009).

Stimson et al. (2009) created a model which tries to explain how economic development is achieved by focusing on endogenous variables that are crucial for the regional economic development and growth. According to them the combination of Leadership, institutions and entrepreneurship, acts as a catalyst leading to regional economic development.

32 MNE will demonstrate the companies’ respect and care for the local environment in which it conducts its business. This also will in turn lead to higher acceptance by the local community. Lasty, according to the results of Reimann, Ehrgott, Kaufmann and Carter (2012), these social efforts will also have a positive effect on the performance of the employee base of the MNE’s.

33

3. Methodology

This report tries to answer how MNE’s can conquer the future market and what is needed to operate successfully at the Vietnamese BOP. In order to do this interviews were planned with companies operating at the Vietnamese BOP market. This section will discuss which kind of research was conducted, why the Vietnamese market was chosen and how the interviews were developed.

3.1. Qualitative Research

We make use of the grounded theory approach. This approach tries to obtain theory from systematically gathered data using techniques from the social sciences (Glaser and Strauss, 1967). Techniques from the social sciences include interviews, observations and also surveys to develop theory and these techniques are part of qualitative research.

The nature of our research calls for an open attitude towards the different stakeholders involved and their so called life-worlds. Their life-world is the sum of their interactions, activities and experiences that make up the world of an individual or corporate life. In the words of Berg (2002):

‘’Researchers may be primarily interested in individuals and their so-called life-worlds. In that case researchers utilize empirical methodologies borrowed from the natural sciences to investigate phenomena. In the case of life-worlds, researchers focus on naturally emerging languages and the meanings individuals assign to experience’’ (Berg, 2002 page 26-27).

34 3.2. Vietnam

There are a number of reasons why Vietnam was chosen. The country itself was chosen as Vietnam is a very interesting and dynamic country considering our topic. Vietnam has seen a steady rise in income over the past decades after initiating economic and political reforms, called Doi Moi, starting from 1986. It has climbed from one of the poorest countries in the world to a lower middle income country. (Worldbank, 2015) However, the country is still poor from a western perspective and challenges related to operating in a low income market still persist. There were also practical reasons that led us to choose Vietnam, our supervisor Dr. B.J.W. Pennink had connections in Vietnam, specifically with Can Tho University and Mr. Tu. There were also connections between our university, Dr. B.J.W. Pennink and Indonesia. But in the end Vietnam was chosen as a destination since earlier work on the BOP by students from the university of Groningen was done in Egypt and Indonesia, and we could not only expand the model but also check if the existing model applied to a different setting, namely the Vietnamese BOP.

3.3. The interviews

The interviews were conducted with companies and MNE’s operating at, or directly involved with the Vietnamese BOP and with a branch of the local government in Can Tho, which is responsible for trade promotion. We conducted one interview when we were still based in the Netherlands, with the BOP innovation center based in Utrecht. We tried to set up as much interviews as possible with MNE’s in the Vietnamese market as well. However this was more difficult than first expected, and we seemed to experience our own ‘’liability of outsidership’’ ourselves when we were still in the Netherlands. However, once we were based in Can Tho we did manage to get more interviews with help from Professor Tu, Can Tho University, and our contact from our first interview.

35 The semi-structured interview was based around the variables we identified beforehand by analyzing previous literature. Although we had pre-determined questions we left space for the respondents to elaborate and digress from these standardized questions.

The pre-determined questions were grouped in themes concerning the central focus of our study. For the complete interview see appendix B: The Interview. To ensure a good flow of ideas and clear communication between the respondents and us we designed our questions so that they would be understood by our respondents.

36

4. Results

Within this chapter the main results of the interviews, that were conducted with the three companies, are discussed that give answer to the research questions of this report. The results that came from the interviews with the companies will be discussed separately and the full length interviews are to be found in the Appendix (Appendix B).

As mentioned before the main research question of this study is ‘’How MNE’s can conquer the future market by matching strategy with the needs of the people who live at the BOP.’’

The sub questions, that followed from the main research question, are:

1. What role does the identification of the needs of the people at the BOP play?

2. What business capabilities do the MNE’s need in order to be successful at the BOP? 3. How to reach the future market, the BOP, with the help of local non-traditional

partners in Vietnam?

4. Which non-traditional partners help MNE’s to develop this extra ability of social- emdeddness?

5. Is it important to be part of a relevant business network within the BOP market? Does the ‘’liability of outsidership’’ play an important role here?

6. Is it important to create legitimacy and trust and how to do this?

7. Is it necessary for MNE’s to develop new business strategies and business models to be able to succeed at the BOP?

8. Do MNE’s measure return on investment and the effect of social activities?

37 4.1. Overview of the results

BOP Innovation Center PepsiCo Inclusive Business Accelerator

39 critical to be successful in the BOP. A MNE has to work with a NGO and other non-traditional partners in order to get access to the right social- and market information. Also local institutions play a role as their support is vital for conducting successful business at the BOP market. Another key issue is distribution. MNE’s need to rethink their basic business model in dealing with these issues. network if you want to succeed within the Vietnamese market and especially within the BOP market. So is it important for PepsiCo to work together with local governments and institutions, NGO’s but especially their position within the distribution network is of upmost importance according to the results of the interview. Also creating support from these partners and parties is very important and a precondition for success at the BOP. Within their business network PepsiCo really takes the role as a leader. This comes forward in importance that businesses make sure that they are part of a relevant business network within the BOP market. It was furthermore mentioned that this is very important because the NGO’s have an existing network but and they can also provide certain services that are attractive for businesses at a reasonable price. Also local institutions play a vital role when it comes to permits for activities and other formal support. However, it is also very important to have informal support from the local government. It makes doing business other as well as from Fresh Studio about farming techniques that work, in this way Fresh Studio is building a network in which ideas are being spread and shared which in turn helps the farmers improve their output and increases local economic development. Next to that, when Fresh Studio recruits a farmer, the whole value chain is being evaluated. Fresh Studio works with the whole value chain where it implements quality standards and improves trust along the value chain. Fresh Studio takes on a leadership role in its engagement with the them. This is because they provide information about the local market and connect them with other relevant business partners and/or organizations .

40 their way of developing and maintaining their efficient business-, social- and especially their distribution network. much more easier with the support of the local government. According to the Inclusive Business Accelerator MNE’s taking the role as a leader depends on the value chain in which they are active. farmers of the BOP. It provides them with education, advise and its consultants visit the farms on a regular basis. So it uses its capabilities to influence and increase the entrepreneuri al activities of the local community. Bevordering van de Import uit ontwikkeling slanden), which is part of the Ministry of Foreign Affairs of the Netherlands and do they receive support from development programs from several other countries. The IIT Promotion Center also thinks it is important to connect with NGO’s as they hold more specific market information and especially about the local community and its potential consumers. Trust Trust plays a

41 affordability level, the decision to buy is a very conscious decision. This means that once a MNE’s product or service earns the trust the people at the BOP are much more likely to stick with it. trust with their customers, local governments and also with their parties and partners within their business network. businesses will have to work together with many parties and establish many partnerships within this market trust is very important. ‘’Trust is very important and if you lack it than really you can’t go anywhere.’’ used: Agreements based on trust and someone’s word. It is trust that makes the relationship work or not. It takes a long time to build. Tho business association to help them get the trust and the connection from the local companies. It was mentioned that it is very important that businesses and their parties/ the local institutions must be capable to trust each other. Legitimacy If you lack

legitimacy at the communities at the BOP then you cannot do business. Building legitimacy is vital and this can be done by engaging in relationships with people who are trusted and respected in the local community. At the end of the day if MNE’s want to succeed at the BOP, they cannot If you lack legitimacy then you cannot do business, especially at the BOP market. Creating trust and legitimacy is vital and this can only be done by developing long term and trustworthy relationships with the people at the local level of the community. Legitimacy plays a vital role if businesses want to conduct successful business at the BOP market. This because formal contract are not very reliable as parties easily can choose not to comply to them. This often happens because of the fact that the BOP market is very Legitimacy also plays an important role when engaging with the BOP as producers. Fresh Studio mentioned that there has to be

advantages for both the producers at the BOP, the local

44 generated

from the investments they do. After all they are a business and they need to make a profit. Next to this, PepsiCo also has a special information department that does market research to the effect the social project have on how the consumers perceive PepsiCo and her products. ultimate goal is to make a profit. When an MNE or SME engages in CSR activities they will track this as well. However, it is difficult to calculate the return on investment for CSR activities. measure this they also use ROI measurement s. Measuring the impact social activities is very difficult to do and therefore not many businesses do this.

4.2. The Needs of the BOP

Within this section the first entry of the matrix we developed will be discussed namely the needs of the BOP. Why it is important for MNE’s to identify these needs and how.

BOP Innovation Centre

45 Center always advises MNE’s to find out what is the driver of these low income people is to purchase things.

‘’Cash restricted customers require a customer centered view’’

This is also what the literature mentioned as most people at the BOP simply cannot afford every product or service. The BOP is a very different setting than trying to do business in a developed economy as people are very much cash restricted, often they do not necessarily need your products, and because they do not necessarily need your products you cannot assume that consumers will eventually start paying for it. This is a very different compared to developed markets in which the consumer has much more to spend.

‘’Market creation as a key concept in BOP business strategy’’

Furthermore, it seems that in most of the BOP settings the market is not there yet but has to be created. MNE’s will have to create an appeal for their product and/or service and with that a demand. In order to do this MNE’s will have to get access to the right market- and social information (social embeddedness) in order to know what drives the BOP market.

PepsiCo Needs of the producers at the BOP

46 PepsiCo mentioned that it is very important to know the needs of the BOP as producers and distributors as well as their support is vital for conducting successful business at the BOP. This will be discussed more in the Networking section.

Needs of the consumers at the BOP

PepsiCo, whenever and wherever they start a new business or want to conduct business, they start with a survey with the purpose of collecting information about the business environment and especially its potential customers.

Concerning the Mekong delta, the potential customers living in that area are already classified as the lower income group of Vietnam. In comparison to other areas like Ho Chi Minh city, or other major cities in Vietnam the Mekong delta is rather poor, with an economy predominantly focused on agriculture, namely rice. PepsiCo has a a special marketing team which also works on market research who gathers and analyses this information.

They used both a product- and customer based approach for conducting business within the Mekong Delta. This is because, according to their business strategy, the product must have a competitive price which the people at the BOP can afford. Affordability is the starting point of their strategy as the people simply have to be able to afford their products will PepsiCo be able to sell them within the BOP market.

After PepsiCo made sure that the products are affordable, PepsiCo turned to a more customer-based approach of doing business namely making sure that the products satisfy the customers. PepsiCo does this by doing research to the taste preferences of the people within a certain region. For example, the Vietnamese people in the South prefer a sweeter taste (more sugar is added) than the people in the North of Vietnam (less sugar is added). Next to this, PepsiCo also develops new products with less or even no sugar at all to accommodate shifting ideas and perceptions about high sugar containing soft drinks. PepsiCo has a separate marketing team that is responsible for their own business area so that the needs of each BOP group in Vietnam are satisfied according to their unique taste preference.

‘’Based on the characteristic of the consumer of the Mekong delta, we will focus on catering our product s to their needs. And based on these demands we use special promotions, so we

47 Once this all has been established a right culture of distribution is developed.

Unfortunately PepsiCo could not tell us all the details about their successful business strategy at the BOP.

InClusive Business Accelerator

At first it was mentioned that there are multiple ways of learning about the low income group in Vietnam. However, at the Inclusive Business Accelerator they make use of a wide connected system of people who work for the statistical department of the Vietnamese government. On a yearly basis this team of people gathers all kinds of information and data related to the income, the age, and many other variables of the Vietnamese people. In short, this information is very general. However, when needed they are also capable of doing detailed in-depth research and analysis. An example was mentioned during the interview in which an in-depth research was explained that took place in October of last year where just 10 households were selected in the Mekong Delta. To sum up, there are already systems in place in Vietnam that gather general or in-depth information (for example about the households per province) that is available for agencies and companies.

‘’So the government as a source of information is very important as well.’’

Another source of information is the local tax department. They also gather and analyze information about the households of their region and this information is on its turn available for businesses as well.

However, it was mentioned during the interview that it is important to be well connected with the government agencies in order to gain access to this information. And also the tax department does kind of the same thing. So every household they will collect information about how much you earn and how many people there are in the household, they are quite effective in how they do it.

Fresh Studio Needs of the producers at the BOP

48 Fresh Studio is engaging with the BOP and really tries to incorporate the low income group, mostly farmers, into a global value chain. To achieve this Fresh Studio has identified, through experience, the bottlenecks inhibiting farmers in Vietnam to do so until now. Besides this general knowledge, when they start a new project Fresh Studio will engage intensively with the farmer to get to know his specific knowledge.

On top of that they will visit the farm with an consultant or engineer to identify specific issues related to the individual farm. Every project has its own specific demands, but mostly one of the next issues comes back.

The first one is knowledge: Farmers need to be educated on best practices, medicine use for livestock and pesticide use for harvesting. Also transportation and problems concerning logistics need to be addressed. This also entails a part of education; educating the farmers how to transport their goods so that they arrive safely and undamaged at the collection point. A recent example was an avocado project, where the farmers needed to be instructed on how to package avocados for transportation.

Second, Finance: An important aspect of consumers and producers at the BOP is that they are very much cash constrained. Therefore sometimes flexibility is asked from the client, for example in paying in advance to help the farmer start his production.

Needs of the consumers at the BOP

What Fresh Studio has identified as a need of the consumers at the BOP in Vietnam, is that the consumers demand a safe product. There have been many food scandals with imported food products from China and to this day these scandals occur on a monthly basis. This is reported by the media which in turn created an atmosphere wherein people are very aware of the fact that producers can and do tamper with food products. Therefore, it is important for businesses to establish a ‘’safe’’ and ‘trustworthy’’ reputation and to have quality control and regular checks in order to keep a trusted and good reputation with the consumers.

‘’There are problems sometimes with food imported from China so you hear a lot about food poisoning or food processing factories where suddenly all employees get sick and are

49 4.3. Business Capabilities

BOP Innovation Centre

A MNE needs to be capable to understand the needs of the BOP and act upon them. If they do not focus on the needs but on their products and services first, they are most likely to fail as mentioned above. Furthermore, it is critical for MNE’s, in order to be successful at the BOP, to be capable of working with non-traditional partners. This often requires new skills for the MNE to develop as they are most of the time not used to do this. It is important to be able to create a win-win situation for all parties involved and that requires a different mindset than doing business outside of the BOP.

PepsiCo

PepsiCo’s success is mostly thanks to their business strategy and distribution network. They are really proud of what they achieved since they started conducting business within the Vietnamese market. PepsiCo’s ability to identify the needs of the customers at the BOP and at the same time successfully adjusting their products to these needs resulted into their BOP success. Also, the fact that they were able to successfully interact with the local community to create social value and to work together with relevant business- and non-traditional partners in developing a business network made it possible for them to become, for more than 20 years, a market leader within their business area with about 75 to 80 percent market share.

So first you must have the right product that appeals to your consumers, then you must have an effective distribution and this needs to be combined with the right strategy on running your

business. And at last you must not only focus on the business, you must also focus on social activities to be a winner at the low income market.

InClusive Business Accelerator