6. Business linkages in Viet Nam

As noted in Chapter 3, Viet Nam has become an export powerhouse in the last 20 years, mostly thanks to its ability to attract foreign direct investment (FDI) in manufacturing. Multinational enterprises (MNEs) indicate that economic and political stability and low labour cost are the main pull factors to invest in Viet Nam (UNIDO, 2018[1]). In addition, independent surveys about possible alternative FDI destinations in the region point to Viet Nam as the most attractive location in Asia (AmCham, 2019[2]; EIU, 2019[3]).1

Since 2010, Viet Nam’s inward FDI stock has grown at an average yearly rate of 12.8%, reaching USD 145 billion in 2018 (Figure 6.1, Panel A). This is 10 times the FDI stock in 2000 and 2.5 times that in 2010, corresponding to almost 20% of all investments going to developing Southeast Asian countries. From 2003 to 2017, the manufacturing sector, which attracted about one-third of total FDI in Viet Nam, was the recipient of 1 101 new investment projects.2 The main industries of attraction were apparel and textiles, food and tobacco, electronic components, and metals (44% of the investment projects). The top countries of origin were Japan, Korea, and Taiwan (335, 133, and 109 investment projects, respectively).

FDI has favoured export-oriented growth, transforming Viet Nam into a manufacturing-based and GVC-integrated economy. Nevertheless, FDI-driven exports include large import contents and low domestic value added with limited linkages between the MNEs based in the country and domestic companies (Hollweg, Smith and Taglioni, 2017[4]). A survey of Japanese-affiliated firms operating in Asia indicated that the local procurement of raw materials and parts in their local production activities in Viet Nam was only 36.3%, compared with 66.3% in China, 57.2% in Thailand, and 42% in Indonesia (JETRO, 2019, p. 45[5]). World Bank’s enterprise surveys also find that the average share of local sourcing reported by foreign MNEs in Viet Nam is lower than the one reported in Thailand, Indonesia and Malaysia, albeit still significant at 45% (OECD/UNIDO, 2019[6]).

The experience of Viet Nam, similarly to other countries that have been major FDI recipients, shows that strong business linkages between MNEs and local SMEs are determined by the characteristics of foreign investors, such as the length of their presence in the country, the motivation underpinning their investments, and their global sourcing strategies; the characteristics of the domestic firms, such as their technological capacity, their human resource skills and their scale; and the characteristics of the institutional framework of the host country, such as the state of development of the domestic innovation system (Farole and Winkler, 2014[7]).

Viet Nam’s GVC integration is predominantly via backward participation, measured by the foreign value added share of gross exports (FVA)3. This means that Viet Nam specialises within GVCs through the import of intermediate parts and components that are domestically assembled and then exported as final products. Indeed, Viet Nam’s FVA showed a general increase from 36% in 2005 to 44% in 2016, compared with declining FVA shares in Indonesia, Malaysia and Thailand (Figure 6.1, Panel B). This increase was consistent across the main manufacturing industries attracting a large share of FDI, except for metal products (Figure 6.1, Panel C). This also implies that the domestic value-added share of total exports (DVA) has decreased over time in Viet Nam, and it is much lower than in Indonesia, Malaysia and Thailand.4 This is especially true in the apparel industry, where Viet Nam’s DVA is 55% compared with 80% in Indonesia and 75% in Malaysia and Thailand.

Vietnamese local suppliers are generally engaged in low value-added activities, either producing non-core intermediate components or involved in assembling components. Most domestic suppliers are indirectly linked to the GVCs, often as third-tier suppliers, with no direct connections with the lead foreign firms and few connections with first-tier suppliers, which have the largest potential impact on domestic productivity and technology (World Bank, 2017[9]). This is reflected in the relatively weaker perceptions of the capacity and quality of local suppliers in Viet Nam compared to other ASEAN countries (WEF, 2017[8])5. On “local supplier quality”, based on an executive opinion survey of the World Economic Forum (WEF), Viet Nam ranked 116th out of 137 countries, trailing far behind Malaysia (23rd), Indonesia (54th), the Philippines (73rd), and Thailand (74th) (WEF, 2017[8]). In addition, the value chain breadth (degree of involvement of local companies in the value chain) is narrower in Viet Nam (score of 3.3 out of 7) than in Malaysia (5.2), Indonesia (4.5) and Thailand (4.3) (Figure 6.1, Panel D).

Domestic firms more intensely involved in GVCs are very different from other firms in Viet Nam. They tend to be larger and more diversified in terms of products than companies with no connections with foreign investors (UNIDO, 2018[1]); are engaged in more product and process innovation activities, often developed in co-operation with other firms or institutions, and spend more on R&D; use more information and communication technologies (ICTs) to communicate with their clients; and are more likely to hold international certifications and invest in formal training of their workers than non-suppliers (World Bank, 2017[9]). In addition, they are also more likely to be a member of business associations, which increases the probability of becoming a supplier of foreign-owned firms, especially in the food, apparel, and wood industries (Chuc and Thai, 2017[10]). The challenge for Viet Nam is the short supply of domestic enterprises sharing these characteristics.

The nature of GVC participation in Viet Nam (e.g. backward or forward linkages and regional or global value chains) varies a lot across industries (UNIDO, 2018[1]). This is illustrated through the examples of GVC integration in three key industries attracting a large amount of FDI in Viet Nam: textiles and apparel, electronics, and motor vehicles.

Apparel and textiles industry: The apparel industry in Viet Nam consists of domestic producers catering mostly to the local market and foreign-owned enterprises that export. In 2018, Viet Nam was the 8th largest world exporter of textiles (USD 8.3 billion) and the 4th of apparel (USD 31.5 billion, after China, the EU and Bangladesh) (WTO, 2019[11]). This sector, dominated by foreign investors, is the second largest exporting industry after electronics. The foreign-owned firms import inputs from their global networks, as evidenced by the very low domestic value added in the sector (see Figure 6.1, Panel C) and the large share of textile imports, which corresponds to 2.6% of the world total (the 4th largest after the EU, the United States and China). Foreign investors mostly originate from China, Hong Kong, Korea and Taiwan and are mainly motivated by low labour cost and preferential access to high-income markets. FDI in apparel has generated huge opportunities for low skilled local employment and labour intensive “cut-make-trim” (CMT) processes (particularly for females), but it has also produced weak spill-overs and very limited knowledge transfer to local producers due to few backward linkages (Hollweg, 2017[12]).

Domestic firms, mainly concentrated in Ho Chi Minh City and Ha Noi, are vertically integrated and largely oriented to produce and sell apparel in the local market. Most of this production is not of export quality and satisfies around 15% of domestic demand (UNIDO, 2018). The few domestic export-oriented firms are partly owned by the Viet Nam National Textile and Garment Group (Vinatex) or other state-owned enterprises, with very few new private ventures emerging in the industry since 2005 (Frederick, 2017[13]).

Electronics industry: The electronics industry in Viet Nam started to develop after WTO accession in 2007 as foreign investors looked for new competitive production locations6. Leading electronics firms in the country include Samsung and LG, contract manufacturers such as Foxconn, and platform leaders such as Intel and Microsoft.

With an investment of more than USD 17 billion, eight factories and one R&D centre, Samsung is the largest foreign investor in Viet Nam, employing 160 000 workers (largely semi-skilled high school graduates and women, who represent three-quarters of its workforce) (UNIDO, 2018[1]). Around one-third of Samsung’s worldwide phone production is assembled in Viet Nam, in particular in Thai Nguyen, North Viet Nam, where Samsung has located the largest smartphone factory in the world employing 60 000 workers.7 Korea’s LG and Japan’s Canon have placed the largest laser printer and inkjet printer factories in the world in the Ha Noi area. Microsoft has also moved production to Viet Nam because of rising labour costs in China, making Viet Nam its second largest employment base after the United States (Sturgeon and Zylberberg, 2017[14]). In 2019, phone system devices, including smartphones, represented 20.7% of Viet Nam exports, followed by integrated circuits (8.6%), almost entirely manufactured by foreign-owned enterprises. Besides competitive wages (which have however more than doubled between 2008 and 2014), Viet Nam has the geographic advantage of being on the border with China where the existing supply chain is based, has a large population and a growing middle class (UNIDO, 2018[1]). Furthermore, foreign firms have also been attracted by tax incentives and preferential land access.

FDI has fostered local employment in the industry, generating low- and mid-skilled jobs mostly in hardware manufacturing and in the assembly of smartphones, even though workers in knowledge-intensive business services, such as software services, are slowly increasing (Sturgeon and Zylberberg, 2017[14]). In general, export-oriented foreign investors have a low localisation ratio (i.e. share of local content and value added retained locally) because domestic companies do not have the appropriate capabilities in terms of the required scale, cost, delivery and quality. As a result, local suppliers are mainly in low value-added services, such as packaging and printing, and serve predominantly as second or third-tier suppliers. Instead, the main suppliers in the electronics industry are also foreign-owned companies that have followed the lead buyer in Viet Nam to reduce logistics costs (Binh and Linh, 2013[15]).8

In order to help improve the technical capabilities of local producers, in 2012, Samsung set up a large R&D centre in Ha Noi (the largest in Asia) and supported the Ha Noi University of Science and Technology with grants and scholarships to address the talent bottleneck of skilled workers. Similarly, Intel took actions to deal with the lack of technical and managerial human resources in Viet Nam by launching the Intel Study Abroad Programme, which since 2010 has sent Vietnamese students to the United States to be trained as engineers and managers.

Motor vehicle industry: Viet Nam’s motor vehicle industry is composed of three main segments: 1) two-wheelers, a well-developed segment with a strong local supplier base and about 90% of domestic value added, 2) passenger cars, mainly consisting of assembly plants and targeting the domestic market, but with a low rate of localisation, and 3) buses and trucks with a higher local content (Arenas, 2017[16]).

The two-wheeler industry focuses on the production of motorcycles and motorcycle parts. The domestic industry started in the mid-1990s under market protection. At the beginning of the 2000s, Chinese companies began to export low-cost kit components of slightly modified versions of Japanese models, which were assembled by Vietnamese firms. In doing so, Chinese companies rapidly took a large part of the market. In reaction to this, the Vietnamese government introduced quality and environmental standards and enforced stricter local content rules and import tariffs with the aim to develop a stronger local supplier base. However, when Viet Nam joined the WTO, tariff barriers had to be dismantled, which led Japanese producers to invest in this industry to satisfy the booming domestic market. Driven by Japanese manufacturers, domestic suppliers in the two-wheeler industry were able to meet higher quality standards, although they specialised only in a limited number of activities (Fujita, 2013[17]).

In the passenger car subsector, several Original Equipment Manufacturer (OEM) brands, such as Honda, Hyundai, Toyota, and Mercedes Benz, invested in Viet Nam to perform assembly operations nearly two decades ago, mainly to avoid high import tariffs. The small size of the domestic market (about 300 000 cars per year) makes it difficult for Viet Nam to compete in this sector, given that most plants do not reach minimum economies of scale and have higher production costs than in neighbouring countries (Arenas, 2017[18]). The OEMs source locally only low value-added components, such as seats, tires and batteries, and the simplest phases of production, such as assembly, painting and welding. The local manufacturers of auto parts number about 200-300 firms, most of which are SMEs with low production capacity and poor technological endowment (Arenas, 2017[16]). More sophisticated parts, such as gear boxes and engines, are imported from branches of the parent companies or from foreign suppliers. The result is low local content in the passenger cars sector (under 20%), much less than in other neighbouring countries, such as Thailand (45%), which is the motor industry powerhouse of the ASEAN region (Arenas, 2017[16]).

Local content in the bus and truck subsector is higher than in the production of passenger cars. Seventy percent of electrical components and all frames and trunks are domestically produced. The production of commercial vehicles is much less susceptible to economies of scale than the passenger car subsector, so Viet Nam has been able to develop domestic capabilities in the local manufacturing of relevant parts and components (Arenas, 2017[18]).

Growing FDI has brought many benefits to Viet Nam: jobs for a young and growing population, opportunities for women to join the formal labour force, and a decrease in agricultural employment (from 65% in 2000 to 39% in 2018). However, linkages between MNEs and local companies are not automatic. The low propensity of MNEs in Viet Nam to source local inputs is a long-standing phenomenon. Recent statistics show that MNEs in Viet Nam still import large amounts of parts and components and when they buy locally tend to develop linkages with foreign rather than with domestic suppliers (OECD/UNIDO, 2019[6]). If domestic enterprises lack the prerequisites to meet international standards on product quality, cost, reliability and time delivery, MNEs will often ask their established international suppliers to relocate.

A critical barrier to deeper GVC integration is Viet Nam’s large number of small and informal companies which feature average low productivity (World Bank/MPI, 2016[19]). Lack of economies of scale also explains why the cost of manufacturing intermediate inputs in Viet Nam is often higher than the cost of imported inputs, especially in the automotive industry (APEC, 2017[20]). Many firms also face language barriers in communicating with MNEs, a problem particularly stringent with Japanese companies which prefer establishing supplier relationships with Japanese-speaking firms to minimise miscommunication (APEC, 2017[20]). Finally, only a limited number of domestic firms are qualified for higher international standard certifications, such as ISO 14 000, occupational safety, health management, and corporate social responsibility (World Bank, 2017[9]).9

In addition to these firm-level constraints, there are also barriers in the business environment that prevent a more qualified involvement of domestic companies in GVCs. Foreign-owned firms express concerns especially about the inadequate level of education of the workforce and the complex regulatory environment (World Bank, 2017[9]; UNIDO, 2018[1]). The weak enforcement of the Intellectual Property Rights (IPR) Law is also an issue for MNEs, particularly in high-technology sectors (World Bank, 2017[9]). Another problem consists in finding reliable information about domestic suppliers and their capacity, which results in high search costs for MNEs and weakens linkage opportunities.

Logistics is also an issue, notably the poor efficiency in customs clearance, weak infrastructure quality and limited availability of competent service providers (Shepherd, 2017[21]).The service sector in Viet Nam is still in its infancy, with a contribution to GDP of 41.6%, slightly lower than in Indonesia (44.2%) but much lower than in Malaysia (54.2%) and Thailand (58.6%).10 Domestic services contribute very little as inputs into other sectors’ exports, pointing to the lack of a modern domestic service sector that could tap into GVC downstream activities (Hollweg, 2017[12]).

Due to these constraints, Viet Nam has not fully benefited from the potential technology and productivity spill-overs from existing FDI. Most imported inputs are sourced at short distances from other emerging or developing countries, with the exception of Japan and Korea (UNIDO, 2018[1]). Technological and knowledge spill-overs are also weakened by the low absorptive capacity of domestic companies. Furthermore, when positive spill-overs happen, they are geographically concentrated in the regions where the FDI is located (Anwar and Nguyen, 2014[22]).

The Vietnamese Government has adopted the term “supporting industry” (SI) to define all industries manufacturing materials, accessories, components and spare parts used for assembling finished goods.11 The term was employed first by the Ministry of International Trade and Industry in Japan in 1985 and has been widely used in Asia ever since. The concept was initially introduced in Viet Nam in 2003 by the Viet Nam-Japan Initiative, which aimed to strengthen Viet Nam’s economic competitiveness through the promotion of Japanese FDI into the country and the development of domestic “supporting industries” (Thuy, 2007[23]). Since then, Viet Nam has introduced a number of decrees and laws aimed at regulating and promoting SI.

A progressive series of regulations from 2007 started to identify the supporting industry sectors – textiles and apparel, leather and footwear, electronics, automotive, metal products and high-tech industries (manufacture of special-use materials and supporting equipment, software and services for hi-tech industries) – and to clarify the various SI incentives. The Ministry of Industry and Trade (MOIT) was designated as the main co-ordinator for SI development across ministries.

Decree No. 111/2015/ND-CP confirmed the six target supporting industries, provided a list of prioritised SI products for each industry eligible for assistance policies and incentives (which can be updated periodically), detailed the different policy instruments, and confirmed the key co-ordinating role of the MOIT, as well as the responsibilities of other ministries.

As of 2020, the Programme on the Development of Supporting Industry for 2016-2025 (Decision 68/2017) was the main SI policy. The objectives of the programme are to address the lack of competitive local suppliers by supporting and connecting domestic enterprises to foreign customers in the selected SI sectors and to further attract foreign investment in these sectors.

The total budget for the first phase of implementation (2016-2020) was around USD 43 million, 86% from the state budget and the remaining from other sources; in the second phase (2021-2025), the estimated budget is an additional USD 38 million.12 Among the instruments included in the Programme are supply-side measures aimed at enhancing the capacity of firms to become more competitive and demand-side measures designed to widen the customer base of the supporting industry firms. Box 6.1 highlights the main measures included in the Programme.

While the very existence of a programme on SI indicates a high level of commitment by the government to attract FDI and build supplier capacity in the selected sectors and products, a number of improvements could be made to the existing policy framework. An initial and important observation is the limited availability of resources to implement a vast and ambitious array of measures. The definition of eligible SI enterprises and products is also problematic. In general, the simplification of procedures for being certified as a SI firm has been successful, but there are still rigidities in the definition of a “new investment” or identification of the sector of specialisation (APEC, 2017[20]).

Furthermore, although a list of eligible SI products is clearly defined in the Programme, a detailed list of parts and components could place first movers in new products or materials at a disadvantage in meeting the requirements for programme support. In other words, gaining approval for the inclusion of “unlisted components” for programme support could be a constraint for more innovative companies and suppliers operating in industries subject to rapid changes, given that the updating of the directory of eligible products would require time.13

A further concern is the absence of services in the list of eligible SI products. This reflects the general perception about services in Viet Nam, which are not yet considered a potential key area of value addition in GVC domestic participation (APEC, 2017[20]; Hollweg, Smith and Taglioni, 2017[4]). Services, such as telecommunications, information technology (IT), logistics and transport services could be included in the list of supporting industries. In manufacturing industries, in particular electronics and automotive, post-production services are increasingly generating high value added within GVCs, based on the increasing availability of data from the embedding of sensors and semiconductors in manufactured products. If Viet Nam were to develop stronger ICT skills, this could open up GVC opportunities in IT-related services, such as design services, software development, programming and business and professional services (see Box 6.2).

In some cases, the exact nature of the activities covered by the Programme and the mechanisms for access also need further clarification. For example, the kind of training supported as well as the type of expenditures covered in the area of human resource development are not well defined. In this area, support measures should be more selective and tailored to the particular capacity-building needs of individual enterprises. For example, Malaysia uses the SME Competitiveness Rating for Enhancement (SCORE) system, a diagnostic tool to assess SME capabilities and performance, whose rating eventually informs the provision of tailored assistance for domestic SMEs (see 6.3). In adopting such a diagnostic tool in Viet Nam, vouchers could be used to send employees to training courses and tax rebates could be offered to SMEs going through the process of acquiring international standard certifications.

Finally, the Viet Nam Association for Supporting Industries (VASI) publishes an annual directory (hard copy) with detailed information on well-established Vietnamese manufacturing enterprises that have successfully become contractors of MNEs in Viet Nam, but focuses only on three sectors: mechanical, electronics and plastics and rubbers. Thus, the directory falls short of being a comprehensive database of all SI enterprises searchable online by MNEs seeking qualified local suppliers. The database of SI enterprises could be strengthened by providing online access to up-to-date information about local suppliers across all SI industries. Moreover, the database could incorporate information on the “reputation” of supplier companies, based on data collected with the involvement of lead firms, which could allow suppliers to earn the status of “verified” or “trustworthy”, based on their quality and reliability over time (World Bank, 2017[9]). Approaches to improving a supplier database are highlighted in Box 6.4.

An important area for improvement is to strengthen the co-ordination of the public and private institutions involved in policies and programmes supporting business linkages. In addition to the Programme for the Development of Supporting Industries implemented by the MOIT, there are in fact other initiatives targeting business linkages. The Ministry of Planning and Investment (MPI) is the focal Ministry to implement the national programme on value chains.14 The Centres for Assisting SMEs (TACs), which operate under the MPI, also offer services to promote business linkages in collaboration with Korean and Japanese advisors.15 The Ministry of Agriculture implements GVC policies in agriculture, and provincial authorities implement support projects on potential value chains in their locality, although most have difficulty in identifying the appropriate value chains and qualifying SMEs at the local level. Furthermore, the recent SME Support Law (Law No. 04/2017) prioritises “SMEs participating in value chains” as one of the strategic segments to be supported through targeted training, consultancy, and preferential access to credit (interest rate subsidies) and premises. International donors are also active in this field, for example, the USAID-MPI Linkages for SMEs (LinkSME) Project 2018-2023 is an additional (USD 22.1 million) initiative to support linkages between SMEs and MNEs.16

If a large number of agencies are involved in implementing support programmes, and co-ordination across institutions is weak, the result is likely to be the fragmentation of policy initiatives, overlapping functions, and lack of cohesion in policy implementation. Given the limited resources available, better co-ordination and specialisation of the different institutions promoting business linkages and GVC participation could lead to more efficient and effective services. This could imply the need for a national co-ordination body or at least a mechanism with responsibility for an integrated approach to targeting SMEs with supplier development support. The experience of Costa Rica in establishing a national supplier development office is offered as a useful example for Viet Nam (Box 6.5).

It is also important to co-ordinate with the private sector in the design and implementation of the supporting industry programmes. In Viet Nam, the involvement of stakeholders during the drafting of regulations is an obligation by law, and public consultations are frequently held with various business associations. However, the private sector could also be more involved in the process of capability building of domestic suppliers and in creating a transparent system for sharing information about suppliers’ skills. This could also take into consideration linkages between first-tier and lower-tier suppliers, which could create significant space for knowledge and technology transfer. Based on an experience in Thailand, the main channels for this could be: 1) technical training visits, 2) organisation of seminars at first-tier plants, and 3) provision of manuals for lower-tier suppliers (Punyasavatsut, 2008[28]).

Monitoring and evaluation of business linkages programmes is another area for attention. In particular, while the Programme for Supporting Industries states clear outcomes in terms of expected recipients and improvements in their performance, it does not have a monitoring and evaluation plan. Monitoring and evaluation plans are ideally established at the onset of the programme, indicating clear objectives and indicators. The evaluation exercise can take place immediately after the end of the programme or later to focus on longer-term effects and should ideally compare the treatment group of assisted enterprises with a control group of non-assisted enterprises.

A limited number of indicators, easy to measure and to collect, should be defined. Some possible indicators would include (World Bank, 2017[25]):

  • Inputs and outputs: public and private expenditures, number of companies involved, number of projects, number of hours in consultancy time, number of training hours;

  • Suppliers’ outcomes: increased sales, increased productivity, increased quality, new products, new jobs, number of companies having acquired the approved supplier status, national and international standards certifications, employee qualifications obtained;

  • Foreign investors’ outcomes: lower costs, increased local content.

It is useful to complement quantitative information with regular qualitative feedback from the MNEs and suppliers involved in the programmes. Another issue to consider is the frequency of data collection and whether to indicate mandatory reporting for companies receiving assistance.

Business linkages between domestic companies and foreign investors would also benefit from the strengthening of certain aspects of the business environment (see also chapter 3). These relate primarily to institutional and physical connectivity, fiscal and financial incentives, the innovation system, and social responsibility and environmental codes of conduct.

Soft and hard connectivity are key drivers of international competitiveness (Hollweg, 2017[12]; Shepherd, 2017[21]). In terms of institutional connectivity, there is a need to further streamline the regulatory environment, notably contract enforcement, which is positively associated with the local provision of inputs (UNIDO, 2018[1]), and to make border procedures more transparent and predictable. Viet Nam has started to implement e-customs procedures and a National Single Window to facilitate trade (see Chapter 5), which are important trade facilitation efforts. In this context, Viet Nam should continue with full integration of electronic procedures in the trade facilitation processes. Logistical support services, such as storage, warehousing and cargo handling, are also an important area in need of improvement.

In terms of physical connectivity, investments are necessary to upgrade the transport system, including ports, airports, roads and rail links. This includes establishing corridors among the major poles and trade gateways and developing a mobility strategy within the main economic centres (Hollweg, Smith and Taglioni, 2017[4]). Investment in physical connectivity is a key element for the development of a mobility value chain as described in Box 6.6, which could lead to increased opportunities for Viet Nam to move beyond a narrow focus on traditional motor vehicle GVCs.

Physical connectivity also includes ICT infrastructure. Well-developed ICT infrastructure and reliable telecom services are key for increasing economic competitiveness and for upgrading SMEs within GVCs. Viet Nam’s ranking on the ICT Development Index, based on indicators of ICT access, use and skills, has been declining relative to other countries (see Chapter 3), and although slightly better than Indonesia, lags considerably behind Malaysia and Thailand.17 This warrants further action on the part of Viet Nam to improve its performance on ICT development.

Energy and water supply are also important. The lack of chemical and waste water treatment facilities has, for example, been indicated as one of the reasons holding back investments in textile production, notably in the most polluting phases such as dyeing (Hollweg, 2017[12]). The provision of adequate infrastructure and establishment of environmental standards are therefore needed to further encourage the development and upgrading of certain value chains.

In many aspects, domestic suppliers are in a less favourable position relative to foreign suppliers. For instance, domestic suppliers have to borrow in local currency, while foreign suppliers and MNEs are free to borrow in other currencies at lower interest rates. Taxation also creates an uneven playing field between foreign and local suppliers. Foreign suppliers, when established in export processing zones, are exempted from value-added tax (VAT), whereas domestic suppliers can only be reimbursed VAT after proving their products are bound to export, which in the best scenario generates delays. This tax incentive could be extended to domestic SMEs that sell more than a certain percentage of their production to firms operating in export processing zones. An additional important issue to address is the extension of measures, such as tax exemptions on import duties, beyond first-tier suppliers.

Access to working capital to finance the supply of goods to MNEs is also a constraint for Vietnamese SMEs. The availability of supply chain finance (SCF) is in short supply, with few financial institutions in Viet Nam offering modern SCF services in significant scale. SCF services not only enable suppliers to increase their working capital and scale up production, but also allow them to conduct more open-account transactions. In turn, this increases the productivity of suppliers and make them more attractive to global buyers. To help address the issue, the International Finance Corporation (IFC) is working with the government of Viet Nam to facilitate SCF in the country by improving the regulatory framework, sector infrastructure, capacities of SCF providers, and awareness of SME suppliers of the options available. 18  In the financial sector, the adoption of fintech and blockchain technology (Box 6.7) and the appropriate regulatory framework for this, is also expected to produce a significant impact on SME participation in GVCs.

The sustainable integration and upgrading of domestic enterprises in GVCs requires a well-functioning national innovation system (Lema, Rabellotti and Gehl-Sampath, 2018[29]), whose development should include the following dimensions:

  • The integration of foreign companies into the national innovation system, notably by involving them in R&D and skills development projects aimed at the upgrading of local suppliers. Box 6.8 provides a programme example from Chile, which aimed to strengthen business linkages between domestic suppliers and foreign investors through the offer of incentives to innovation on both sides.

  • The establishment of specialised institutions and service providers (e.g. testing and certification agencies) offering support to domestic firms in acquiring and adapting new technologies, complying with international standards, and accessing technical and managerial training. Malaysia’s measurement and testing centres are an example (Box 6.9).

  • The engagement of universities and vocational training institutes to deliver education programmes in line with the skills and competencies required by foreign investors. Language skills should also be improved, especially in the languages of the main foreign investors and key providers of technology (e.g. English, German, Japanese and Korean).

  • A financial system geared towards the provision of investment credit, notably for investments in the machinery and technologically-oriented projects needed to establish long-term linkages with MNEs. This should include funding for intangible assets and access to entrepreneurial development services. Moreover, special credit facilities and advance and prompt payment mechanisms could be introduced to support domestic SMEs involved in business linkages that face cash-flow problems.

  • The strengthening of intellectual property rights (IPRs) is key both for attracting R&D foreign investments and for protecting domestic innovators, an area where there is still large room for improvement in Viet Nam (see chapter 3 for more details).

In a country like Viet Nam whose engagement in value chains has so far been mainly in labour-intensive manufacturing, upgrading the participation of local suppliers in GVCs will also involve better compliance with international social and environmental codes of conduct. Compliance with these standards has, in fact, become a common prerequisite for accessing global buyers. Awareness raising among domestic companies of international codes of conduct could be promoted with the assistance of lead firms, while universities could include issues related to business social responsibility and environmental standards in their educational and training programmes. Lead firms could also be involved in supporting through cost-sharing the participation of domestic companies in “responsible supply chain management” initiatives. An example is the Viet Nam Business Links Initiative, a collaboration of international footwear brands to help local SMEs in the footwear sector to improve compliance with supplier codes of conduct (OECD/UNIDO, 2019[6]).

Viet Nam, emerging quickly as a manufacturing hub and home to some of the largest MNEs in South East Asia, has grown mostly as an export platform. However, there have been limited opportunities for FDI spillovers deriving from the local sourcing of inputs and intermediate products by foreign investors. Enhancing business linkages has clear advantages for all parties involved in the process. Suppliers can generate jobs and improve their competitiveness, potentially moving up the value chain. Foreign investors can reduce costs by sourcing more complex parts and components from local companies. The domestic economy in general can improve its competitiveness from spillover effects, leading to an increase in productivity, innovation capacity, skills and wages.

Policies meant to attract FDI are very different from policies aiming to capture possible gains from GVC integration (Pietrobelli and Staritz, 2018[33]). To capture these gains, it is necessary to undertake programmes to strengthen firm-level capabilities, encourage supportive research from universities, foster a wide offer of advanced services, especially in the field of testing and certifications, build an efficient credit system geared towards the provision of supply chain finance and long-term credit, nurture a well-educated labour force, and build good-quality soft and hard infrastructure.

The following policy recommendations are offered to strengthen business linkages between MNEs and SMEs in Viet Nam.


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[18] Arenas, G. (2017), Developing Networked Mobility in Viet Nam, in Hollweg, C., Smith, T., and Taglioni, D. (eds), Viet Nam at a Crossroads: Engaging in the Next Generation of Global Value Chains, World Bank, Washington, DC: 187-200.

[16] Arenas, G. (2017), Viet Nam in the ASEAN Motor Vehicle Industry, in Hollweg, C., Smith, T., and Taglioni, D. (eds), Viet Nam at a Crossroads: Engaging in the Next Generation of Global Value Chains, World Bank, Washington, DC: 173-185.

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← 1. The AmCham (2019[2]) survey was conducted by the American Chamber of Commerce in Singapore with senior executives in US companies based in Viet Nam. The Economist Intelligence Unit (EIU) survey included responses from senior executives active in the main Asian countries, Australia and New Zealand.

← 2. Data from fDi Markets, https://www.fdimarkets.com/.

← 3. Gross exports can be decomposed into two main components: Foreign value added (FVA), i.e. the value of intermediate imports embodied in gross exports, and Domestic value added (DVA), i.e. the value of domestically produced intermediates in gross exports (OECD, 2019[35]). FVA is considered a measure of “backward linkages”, that is, when an economy imports intermediates to produce its exports. DVA is considered a measure of “forward linkages”, as it captures the domestic value-added contained in inputs exported to a partner country.

← 4. DVA also depends on the export specialisation of each country. For instance, Indonesian exports are driven by oil, palm oil, gas and rubber, which explains the much higher DVA compared to Viet Nam where exports are mainly manufactured goods (Amendolagine et al., 2019[34]).

← 5. Based on responses to the WEF executive opinion survey questions as input to the Global Competitiveness Index 2017-2018, “In your economy, how numerous are local suppliers?” and “In your economy, how do you assess the quality of local suppliers?”.

← 6. With the exception of Panasonic and LG, which have older facilities in Viet Nam producing consumer appliances for the domestic market.

← 7. “Why Samsung of South Korea is the biggest firm in Viet Nam”, The Economist, 12 April 2018, https://www.economist.com/asia/2018/04/12/why-samsung-of-south-korea-is-the-biggest-firm-in-vietnam.

← 8. For instance, most inputs for Samsung products are imported and those sourced domestically are provided by Viet Nam-based foreign suppliers from Korea, Japan, Malaysia, Singapore and UK (Sturgeon and Zylberberg, 2017[14]).

← 9. For example, among the members of the Viet Nam Association for Supporting Industries (VASI), only 14% of the 132 firms specialised in metal processing and 25% of the 16 firms in electronics and electrical components had ISO 14 000 certifications. This increased to 47% among the 36 suppliers specialised in plastics and rubber.

← 10. Information from the World Bank database (Services, value added (% of GDP), 2019 data, https://data.worldbank.org/indicator/NV.SRV.TOTL.ZS).

← 11. The definition of supporting industry is set out in Decree No. 111/2015/ND-CP on the development of supporting industries, 3 November 2015.

← 12. Prime Minister Decision No. 68/QD-TTg approving the Programme on the development of supporting industries during 2016-2025, 18 January 2017, https://vanbanphapluat.co/decision-68-qd-ttg-2017-program-on-development-of-supporting-industries-during-2016-2025/.

← 13. For instance, a pre-determined list of parts and components eligible for government support can represent a limitation for potential suppliers of new inputs, such as new textile materials, or suppliers trying to undertake inter-chain upgrading, for example when producers of metal components try to shift from the motorcycle industry to commercial vehicles and buses.

← 14. The MPI, for example, has signed a Memorandum of Understanding with SME support agencies (e.g. VIETRADE) and business associations, such as the Viet Nam Association of SMEs (VASME), the Viet Nam Association for Supporting Industries (VASI), the VCCI, and the Viet Nam Textile and Apparel Association (VITAS), to deliver training and consultancy services to build the capacity of Vietnamese SMEs to participate in manufacturing supply chains. In addition, it organises events and platforms to facilitate linkages between SMEs and lead firms.

← 15. In particular, TACs co-operate with the Japanese International Cooperation Agency (JICA) to send senior experts from Japan to SMEs in supporting industries with the objective of offering advice on technical innovation, production and quality management and facilitating connections with Japanese companies.

← 16. The USAID LinkSME project provides technical support to local SMEs to help them participate in GVCs and assists foreign companies in finding qualified local suppliers.

← 17. Based on information from the International Telecommunications Union, https://www.itu.int/net4/itu-d/idi/2017/index.html#idi2017economycard-tab&VNM.

← 18. “IFC Promotes Supply Chain Finance in Viet Nam, Improving Competitiveness of Local MSME Suppliers”, International Finance Corporation Press release, 11 November 2019, https://ifcextapps.ifc.org/IFCExt/Pressroom/IFCPressRoom.nsf/0/0611FB41CE54EBA3852584AF001DCF6C.

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