Inclusive Industrialization: A Balanced View on Supply Chains in Vietnam

15 August 2017
ABOUT THIS Perspective

The impact of foreign investment and global value chain integration on Vietnam's local economy must be evaluated from a balanced standpoint.

Massive investments by high-tech multinational corporations, notably by the electronics giant Samsung, have resulted in a surge of Vietnam’s export of manufactured goods in recent years, thus making Vietnam a rising star in the eyes of numerous foreign commentators. However, the Vietnamese government’s concessions to multinationals in the form of preferential tax treatment and land provisions have also come under scrutiny. This is because critics are concerned that this may go against broader policy and institutional reforms of establishing a level playing field for all types of enterprises.

However, when foreign companies like Samsung set up shop in Vietnam, they do generate substantial employment directly or indirectly associated with the manufacturing sector. In addition, they may help to transfer knowledge on producing advanced electronic components to the domestic economy. In evaluating the impacts of foreign investment and global value chain integration for Vietnam’s local economy, it is important, therefore, to take a balanced view.

Participation in global value chains has short- and long-term impacts on the quantity and quality of employment, not just in the lead firm but also among input supplier companies, and logistics and service providers downstream in the value chain. For example, after Samsung set up its manufacturing factories in Bac Ninh and Thái Nguyên, two dominantly rural provinces in Northern Vietnam, it has made a considerable contribution to the growth of Vietnam’s electronics sector and export. The industrial plants further helped develop associated sectors of logistics, catering, transport, and housing services, considerably impacting employment.

But the route from foreign investment to local economic development is not automatic. The three key steps to shape this link include:

First, encourage investment, e.g. into manufacturing firms and hi-tech parks, from foreign firms, which are attracted by a policy environment conducive to business. Typically, this environment is often characterized by lower wages compared to alternative locations, a situation which often compromises fair wages. To make the investment a win-win situation for both firms and workers, policymakers could make this advantage conditional on gradual investments in worker training and contractual arrangements with local supplier firms.

Second, governments should actively strive to encourage localization and be mindful in supporting local companies entering the market for electronics components and intermediate products. The idea is to support small and large firms alike in increasing value added for each intermediate part of a product, e.g. by facilitating adherence to quality standards. Local companies should not stay limited to ancillary activities such as wrapping and packaging of products. The government’s support is important in making local enterprises ready to compete with foreign input suppliers that entered the market alongside the electronics lead firm.

Third, there is a need for a spill-over of technological know-how from firms that use advanced technology or produce higher quality products to local engineers and technical entrepreneurs who venture to set up their own manufacturing firms. The government should effectively work with the domestic private sector to find ways to incentivize innovations and to create favourable conditions for start-ups to emerge. This can be achieved through policies that reduce barriers and risks, such as addressing concerns about the security of intellectual property rights.

It would be unlikely for any economy to skip any of the above-mentioned stages of moving up the global value chain in terms of value added because the learning and adoption of more advanced technologies require time.

Some commentators argue that Vietnamese companies are not benefiting much from the influx of investments in the electronics sector. However, they must account for the reality that even if the right policies and institutions are implemented, it takes a long time for the effects of structural economic transformations, such as a closer collaboration between research institutes and enterprises on innovation or the diversification of electronics components, to be felt. With a gradually rising number of Vietnamese firms supplying parts and components to multinationals, their innovation-related activities could rise, as revealed by many in-depth studies with domestic firms in the greater Hanoi area.

Importantly, measures to improve working conditions, provide professional training to improve skills and strengthen job prospects, should cut across all three stages of domestic economic development. To ensure this, the government needs to set the foundation for inclusive industrialization. This can be done by incentivizing multinationals to strengthen their linkages with Vietnamese firms, and by improving the enforcement of local labour regulations. To build the momentum, the education system should be properly adjusted to equip firms and workers participating in global value chains with relevant managerial and technical skills. To this end, the collaboration between universities, vocational training centers, and enterprises should be formalized. A growing start-up culture and hands-on professional training can encourage the development of domestic technology solutions beyond the assembly line.

Many such insights were gleaned on a recent JJN field visit to Vietnam as part of an ongoing research project on transformations in supply chains and their impact on jobs.