Sunday, 19/8/2018
Enhancing the competitiveness of Vietnamese private enterprises in the process of joining the global value chain
12/12/2017 14:23' Send Print
The Conference to set up the Vietnam Private Business Association (VPBA)

Some competitiveness restrictions

Since 1986, with the comprehensive reform of the country, the Communist Party of Vietnam has pursued a multi-sectoral commodity economy that acknowledges the existence and development of the private economy. Successes in the development of the economy of Vietnam, including getting out of the low-income country group to become a middle-income country, have made significant contribution to the economy. However, there are some concerns on the development of private enterprises, especially their competitiveness in the global value chain as follows:

Vietnam has succeeded in developing outward linkages in the global value chain, but the inward linkages are less developed. While foreign direct investment (FDI) enterprises have been assembling and producing relatively high-end products for international market, most domestic firms have been still locally oriented or just exported goods with low added value. In fact, Vietnam imports are equivalent to 90% of its export value and depend on imported raw materials. (1)

As efforts are focusing on increasing the number of new businesses, opportunities to build capacity of existing businesses have not been fully grasped hence trade opportunities from global value chain have not been harnessed. Currently, of the nearly 477,808 businesses operating in Vietnam as of 31 December 2016, large enterprises only account for about 3%, while the remaining 97% are small- and medium-sized enterprises, of which nearly 60% are very small. Due to their small size, many domestic enterprises are not competitive enough to export to foreign markets or join the global production network.

Domestic businesses have difficulties climbing up the value chain, thus creating two separate business categories: domestic and FDI enterprises. In other words, given the lack of Vietnamese private enterprises, which able to participate in the global value chain, Vietnam’s supply chain has been broken and fragmented. Unlike China or India, Vietnam's domestic market is not large enough to attract investment, so it is a good idea to target FDI enterprises looking for manufacturing centers for the region beside strong businesses in the supporting industry to attract investors.

Participation in the global value chain network is still low compared to similar economies in Southeast Asia. Research by the Asian Development Bank (ADBI) found that only 36% of Vietnamese firms joined the production network (including direct and indirect exports) compared to 60% in more developed economies, such as Malaysia, and Thailand; 21% of small- and medium-sized enterprises (SMEs) participated in the global value chain compared to 30% of Thailand, and 46% of Malaysia. This shows that the supply chain in the Thai and Malaysian economies is less fragmented and SMEs are more likely to benefit from the rippling effects of foreign investment, technology and knowledge transfer and productivity improvement.

Causes to constraints and weaknesses

- Inefficient market support mechanisms. The private sector has not enjoy equal access to resources; the system of law on contract, contract enforcement, transactions, dispute settlement and withdrawal mechanisms is unclear and ineffective. Policies on supporting enterprises in the supporting industries have been scattered and not yet brought about expected effectiveness.

- The role of industrial clusters in business linkages is limited. In the world, the majority of business clusters are formed as a result of natural relations in the supply chain that develop into industrial clusters. This allows small-sized businesses to scale up, connect directly to the industrial market, logistics infrastructure for export and thus maximally saving input costs. Banking services, training, and business support are also often available in industrial clusters, which creates "production complexes" to exploit local competitive advantages. Meanwhile, in Vietnam, industrial clusters are essentially industrial parks with the main objective of ensuring infrastructure for large enterprises and FDI enterprises, so SMEs have to spend a lot of effort, costs, and complete all procedures to access resources (capital, land, buildings, technology, electricity, water, etc.) as large enterprises do and thus can hardly focus on developing market, and improve competitiveness.

- Enterprises have not won high level of trust from multinational corporations and FDI enterprises. High confidence among domestic and foreign enterprises will encourage positive activities among enterprises, such as information sharing, technical knowledge, production cooperation and marketing.

- The quality of human resources has not met requirements. Most of high-level executives-CEOs at Vietnamese enterprises have not received training in business administration in a holistic manner in close association with production and business. Most of them have run business at their convenience and this restricts businesses to join the production network.

Capacity of policy development and implementation of corporate development policies of a part of state cadres and employees, especially in localities, is not high enough to catch up with market rules. They have lacked knowledge on the supply chain, creating some obstacles to businesses.

Of particular concern is the low level of education, technical training, and professional qualification of the labor force. This has directly caused impacts on internal labor productivity of enterprises hence no breakthrough is made.

- Low level of technology. In general, the level of technology application of most export products of Vietnam is still low. Though high-tech goods share is rising, the growing speed is still slow. Most of the exports do not apply any technology.

- Access to long-term loans is difficult and at high cost. So does access to capital and fixed capital by SMEs. In order to join the production network, SMEs often have to access unofficial sources with higher interest rates and become less competitive. In addition, Vietnamese businesses have often sought finance from banks. Financial companies, investment funds’ services are quite limited and attract little attention from businesses.

Policy and action priorities

1. Reform institution and create conditions for the development of private enterprises

- Study and promulgate the Law on supporting SMEs to unify the legal framework for SME development aiming at not only rapid quantity increase but also paying more attention to rational structure, sustainable growth quality, substantial competitiveness of the entire business sector, creating favorable conditions for informal businesses to transform into corporate entities and help small-sized and micro enterprises to develop into large and medium-sized enterprises through market expansion, and support SMEs entering the supply chain.

- Promulgate decrees on supporting industries in order to make breakthrough solutions in a number of key branches and products to create conditions for the private sector’s operation; concentrate investment on human resources, science and technology and finance in the value chains of agricultural and industrial products; adopt appropriate mechanisms and policies to encourage FDI enterprises and large enterprises to assist SMEs in joining the industrial satellite network for technology transfer, guidance and training; develop services to provide consultancy to connect businesses and support business joining the supply chain.

- Study and promulgate a separate decree on business associations and create favorable conditions for FDI enterprises to actively participate in the activities of business associations, strengthen business associations’ functions to represent businesses, provide policy consultancy, especially regional development policies; enhance the role of business associations in quality supervision and certification of product quality standards, compliance with law, social responsibility of member enterprises; encourage cost sharing to create product competitiveness, develop common brands and use public services from the public sector, encourage business associations’ participation in business associations in the region and in the world.

2- Develop supporting industries, infrastructure for SMEs and business development service organizations for supporting industries

Establish a number of agro-industrial clusters and industrial clusters on the basis of restructuring a number of industrial clusters, thus ensuring linkages among enterprises in the production chain. Enable entrepreneurs to create linking clusters.

Provide business development services in industrial clusters to connect directly to the industrial market, develop logistics infrastructure for export and banking services. Industrial clusters create a production complex to exploit local competitive advantage.

Set up a number of business complexes in the agricultural sector; ensure that food-processing enterprises are at the center of the linkage between farmers and scientists. Develop simple "instant" industrial parks with suitable area, so that SMEs can have easy access to infrastructure conditions suitable to their needs and payment ability.

3- Capacity building and human resource development

- Establish Institute of Directors (IOD). The establishment of the IOD can enable Vietnamese entrepreneurs to lead large global companies to join the global value chain. This model has been successfully applied in many countries around the world, starting in Great Britain and is now popular in the countries of the Association of Southeast Asian Nations (ASEAN).

- Strengthen the team of experts to support enterprises through volunteer groups from foreign countries, and connect with overseas Vietnamese; send Vietnamese engineers and experts to work and learn experiences of other countries.

- Improve labor skills to increase the quantity and quality of skilled workers as stated in the solutions reached at the Vietnam Development Partners Forum (VPDF) 2013.

- Improve the capacity of state management staff in policy design, planning and implementation of regional economic development and policy implementation. Associate regional and local development planning with the development strategy of enterprises on the basis of exploiting the competitive advantages of localities. Particular attention should be paid to linking commercial infrastructure to the supply chain: seaports, warehouses, transportation, production sites, and raw material areas in order to minimize costs, damage and waste of raw materials, fuel and finished products, especially agricultural and aquatic products.

4- Financial support to the private sector

- Strengthen the SME Development Fund's activities, thereby create long-term, reasonable interest rates for private sector enterprises to invest in supporting industries, the value chain of agriculture and create bonds between banks and businesses. Re-evaluate the operation of the Credit Guarantee Fund, and fundamentally reform the operation mode of this fund.

- Adopt policies to encourage banks to provide long-term loans to enterprises. Build capacity of credit evaluators through coordination between credit agencies, banking associations, SMEs in supporting industries and FDI enterprises.

- Develop financial support policies for enterprises to innovate in each period: start-up and growth to develop into big enterprises.

- Establish relevant databases for enterprise credibility assessment, assessment of risk in giving loans to the private sector, especially for SMEs without track record of access to credit, through which increase unsecured loans.

- Promote private equity funds, venture capital funds; promote sale, purchase, merger and acquisition to faciliate the formation of large-scale enterprises.

5. Select branches with competitive advantages, take advantage of the rapid rippling effects of FDI to prioritize development, and concentrate on developing enterprises with business efficiency

Speed up the implementation of Directive No. 32/2012/CT-TTg, on December 7, 2012 of the Prime Minister "On removing barriers and improving mechanisms and policies to improve invesment efficiency,” including the task of developing a "Scheme prioritizing the development of enterprises with high competitive advantages in the period of 2013-2020." The list of priority can include general agro-business (by chain of products from production, culture, process to distribution), textiles, electronics, wood processing, pharmaceuticals, software industry, and tourism.

Reviews development policies in those sectors, identify major bottlenecks to develop strategies to support businesses in joining the global supply chain. Build some pilot specialized industrial parks and clusters and leading research centers to provide technical and technological assistance to enterprises.

Develop national brands for some Vietnamese products with competitive advantages in some of the above-mentioned sectors. To do this, the State needs to invest in research on international markets for potential Vietnamese products, so that Vietnamese enterprises (a group of enterprises in one sector) will work to improve the value chain according to market demand and export.

Strengthen the capacity of the National Brand Council of Vietnam with specific objectives and concrete action programs to concentrate resources for supporting the development of some big brands. Develop policies to encourage concentrated support to medium-sized enterprises to innovate new business models capable of promoting the rippling effect of FDI. Encourage Vietnamese enterprises to invest in foreign countries, step by step upgrade Vietnamese products and become a primary supplier and main contractor.

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(1) Report of the Government at the Vietnam Development Partnership Forum 2014: Economic institution reform, strengthening Self-reliance and competitiveness of the Vietnamese economy, Hanoi, p. 30

Pham Thi Luong Dieu, PhDUniversity of Social Science and Humanities, National University Hanoi