McDonald's Market Entry Strategy for Vietnam: FDI Analysis

Introduction: McDonald's and the Vietnamese Market Opportunity

McDonald's is a worldwide fast food restaurant chain with a presence in over 100 countries. The company's success was largely generated by franchising its business model to operators and carefully ensuring that every standard is strictly followed. Establishing a presence in new markets around the world would only benefit this American corporation by furthering its expansion and global recognition.

Among the countries in which the restaurant chain does not currently have an established location are several emerging Asian markets, including Vietnam, Mongolia, and Laos. This paper investigates the feasibility of entering the Vietnamese market — a democratic and emerging economy in Southeast Asia. The feasibility study covers several types of market entry, including foreign direct investment (FDI) and franchising with no corporate-owned business.

Vietnam is a developing country with an emerging economy that is expected to shift its living habits in line with global trends and increased fast food consumption. Contributing factors include greater involvement of women in the labor market, less time dedicated to household activities, and a growing number of foreign visitors and residents. The analysis takes into consideration McDonald's specific competitive advantages, Vietnam's macroenvironmental factors (economic, social/cultural, and political), and the characteristics of each potential market entry mode, along with the consequences for the parent company, franchisees, and consumers.

McDonald's Competitive Advantages as a Franchisor

McDonald's is a well-known and globally successful franchise in the food industry. It can be seen as a proven business formula with success virtually guaranteed, provided that the franchisee adheres to the franchisor's standards of quality, service, cleanliness, and value. Moreover, McDonald's provides all the training and support needed to operate the business.

McDonald's represents a tested formula that does not require additional research and development costs to validate. Its cooking process is broken down into small, repetitive tasks, which fosters high efficiency among employees. Additional efficiency is generated by economies of scale, enabled by the division of labor and high-volume turnover. As a result, the risk for the investor or franchisee is reduced because they do not need to invest time and resources in market research or product development — McDonald's manages those activities centrally.

Each new franchisee must complete a nine-month training program, paid for entirely by the franchisee. The training covers a wide variety of topics, ranging from staff uniform standards to food preparation. This investment is complemented by continuous support from a highly qualified team of professional consultants.

McDonald's is a well-recognized brand that enjoys top-of-mind awareness in virtually every country in the world. Most tourists, expatriates, foreign students, and international travelers are familiar with the brand, having visited one of its restaurants at least once. When operating a McDonald's franchise, the franchisee gains implicit access to the company's brand name, signage, symbols, and design. The multinational coordinates its marketing at a global level, actively participating in high-profile international events such as the Olympic Games and FIFA World Cups.

Country Analysis: Vietnam's Economic, Social, and Political Environment

The Vietnam War devastated much of the country's economy. Following the war, the government adopted a planned economy. The first market economy reforms were introduced in 1986 during the Sixth Party Congress, with the most significant initiatives encouraging private ownership in industry, commerce, and agriculture. The country achieved approximately 8% GDP growth between 1990 and 1997 and around 7% between 2000 and 2005. Over the same period, foreign direct investment increased threefold. Nevertheless, Vietnam remains a relatively poor country, with a GDP per capita of $1,040 (2008 estimates) and a notable share of its population living in deep poverty — defined as living on less than $1 per day. On a positive note, the number of people living in deep poverty has been decreasing substantially year on year, and inflation stabilized at around 7–8%.

Following new land reforms, Vietnam became the world's largest producer of cashew nuts, holding one-third of global market share, and the second-largest exporter of rice after Thailand. Other major exports include coffee, rubber, tea, and fishery products. Agriculture, however, accounted for only 20% of GDP in 2006.

Significant improvements have been made in other sectors as well. In July 2006, Vietnam strengthened its intellectual property legislation to bring it into compliance with TRIPS (the Agreement on Trade-Related Aspects of Intellectual Property Rights). The country also became a World Trade Organization (WTO) member in 2006. Vietnam's main trade partners include China, Japan, Australia, the United States, ASEAN countries, and Western European nations.

FDI data for 1988–2003 illustrates Vietnam's appeal to foreign investors. By 2003, the country was attracting investors from 64 countries, with Asian investors accounting for the largest share by investment value. Singapore alone had 288 projects totaling $7,370 million in registered capital, followed by Taipei with 1,086 projects and $5,998 million, and Japan with 418 projects and $4,480 million (Thuy, 2005). FDI by region shows that the Southeast and Red River Delta regions, and particularly Ho Chi Minh City (Saigon), Hanoi, and Dong Nai, concentrate most investments.

According to the Law of Foreign Investment in Vietnam (LFI), the following forms of investment are permitted: business corporate contract (BCC), joint venture (JV), and 100% foreign-invested company.

The most recent census (2008) estimated Vietnam's population at approximately 86 million, ranking it 13th in the world, with a population density of 253 individuals per km² (655 per sq mi). Vietnamese people account for 86.2% of the population, with the remainder divided among 54 ethnic minorities spread across the country. The official language is Vietnamese, though various minority languages are also spoken. Chinese and Japanese are popular foreign languages among locals. Approximately 85% of the population practices Buddhism, and much of the country's history has been shaped by Confucianism, Taoism, and Mahayana Buddhism.

The education system is largely state-controlled. A large number of public schools have been established across cities, towns, and villages to raise national literacy rates, which are already among the highest in the world. A significant number of specialist colleges have also been created to develop a diverse and skilled national workforce.

Vietnam is a Socialist Republic and a single-party state governed by the Communist Party, which controls all organs of government. The country's foreign policy emphasizes "openness and diversification and multilateralization of international relations," with a commitment to "proactively and actively engage in international economic integration while expanding international cooperation in other fields" (Ministry of Foreign Affairs, accessed June 2009).

By the end of 2007, Vietnam had established foreign relations with 172 countries and was a member of 63 international organizations, including the United Nations, the World Trade Organization, and ASEAN.

Conclusion and Recommended Market Entry Strategy

McDonald's should enter the Vietnamese market, and the market entry could be executed in multiple phases. In the first phase, the company could establish foreign direct investment facilities strategically located near high population density areas, with the purpose of producing a portion of its food products at lower cost for supply to neighboring countries where it has already established a presence. The advantages of this approach are primarily cost-related, and it also offers valuable networking opportunities to identify a suitable local market partner while giving the company time to learn about local habits and how its business model should adapt to them.

Once McDonald's is reasonably familiar with the local market from all perspectives — consumers, suppliers, and potential partners — the best strategic option is to partner with a local company to further reduce business risk. The ideal partner would have an established market presence and enjoy strong consumer recognition and a good reputation. Such a partner should also contribute to local flavor, bringing its own input to the restaurant's menu. Precedents for this kind of cultural adaptation exist across McDonald's global operations: in Germany, McDonald's serves beer; in India, the Big Mac is made with lamb or chicken; and in Norway, the chain offers a salmon sandwich with dill sauce. In Vietnam, the local contribution would need to draw on Asian culinary traditions in order to earn the trust of local consumers.

Market expansion of the joint venture restaurant chain could initially proceed only through corporate-owned restaurants, until Vietnamese franchise law evolves to permit 100% foreign-invested franchise companies to grant franchises. This consideration also highlights an essential characteristic of a suitable local partner: sufficient investment capacity to match both McDonald's expansion ambitions and the market demand for its products and services.

IMF — International Monetary Fund, accessed June 2009. World Economic Outlook — Vietnam.

Ministry of Foreign Affairs, accessed June 2009.

Ministry of Planning and Investment.

Thuy, L.T. 2005. Technological Spillovers from Foreign Direct Investment: The Case of Vietnam. University of Tokyo. www.e.u-tokyo.ac.jp

IMF Estimates (2008).

TRIPS — Agreement on Trade-Related Aspects of Intellectual Property Rights: an international agreement established by the World Trade Organization defining minimum standards for intellectual property protection.