Non-Equity Modes of Trade in ASEAN
Promoting new forms of trade between
Japan and ASEAN

Viet

Nam

PAPER 10DECEMBER

2018

For inquiries, contact ASEAN-Japan Centre(ASEAN Promotion Centre on Trade, Investment and Tourism)
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Paper 10 / December 2018 / Non-Equity Modes of Trade in ASEAN: Viet Nam
Promoting new forms of trade between Japan and ASEAN

Non-Equity Modes of Trade in ASEAN
Promoting new forms of trade between
Japan and ASEAN

PAPER 10DECEMBER

2018

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NOTESThe terms country and/or economy as used in this study also refer, as appropriate, to territories orareas; the designations employed and the presentation of the material do not imply the expressionof any opinion whatsoever on the part of the ASEAN-Japan Centre concerning the legal status of any
country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers orboundaries.

The following symbols have been used in the tables:• Two dots (..) indicate that data are not available or are not separately reported.
• A dash (-) indicates that the item is equal to zero or its value is negligible.
• Use of a dash (-) between dates representing years, e.g., 2015–2016, signifies the full period
involved, including the beginning and end years.
Reference to “dollars” ($) means United States dollars, unless otherwise indicated.

There are 10 papers in total. The other nine papers will be produced subsequently.
Paper 1. Brunei Darussalam
Paper 2. Cambodia
Paper 3. Indonesia
Paper 4. Lao People’s Democratic Republic
Paper 5. Malaysia
Paper 6. Myanmar
Paper 7. Philippines
Paper 8. Singapore
Paper 9. Thailand
Paper 10. Viet Nam

Prepared by Dr. Shunji Karikomi (Viet Nam Research Institute, Waseda University, Japan)
and trade staff members of the AJC under the direction of Masataka Fujita (AJC). Errors
and omissions are only those of the authors and should not be attributed to their respective
organizations.

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CONTENTS
1. Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Characteristics of non-equity modalities in Viet Nam . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.1 Scale and scope. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.2 NEMs by modality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8(1) Subcontracting: Textile and garment manufacture . . . . . . . . . . . . . . . . . . . . . . . . 8(2) Subcontracting: Electronics manufacturing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  12(3) Outsourcing: IT-BPO services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  14(4) Franchising: Retail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  17
3. Opportunities and Challenges for NEM in Viet Nam. . . . . . . . . . . . . . . . . . . . . . . . . . .  21
4. Policy Implications. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
4.1 Facilitation and promotion of NEMs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
4.2 Improving productive capability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
4.2.1 Strengthening human capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

4.2.2 Enhancing technological capacities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
5. Postscript . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
5.1 Positioning of NEMs in Viet Nam . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
5.2 Importance of FDI as well as NEM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
5.3 Concluding remarks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Annex. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

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KEY MESSAGES• From being one of the world’s poorest countries Viet Nam has become one of the most dynamic
manufacturing countries in ASEAN. With a relatively young population and average annual GDP
growth rates of 6.4 per cent since 2000, the country’s prospects for economic development arebright, in both the short and the long term.
• The volume of non-equity mode (NEM) exports from Viet Nam has been increasing, reaching an
estimated $62 billion in the goods sector alone in 2016. NEMs are estimated to have accounted for
35 per cent of total merchandise exports in 2016. If services are included, NEM exports that year
would have reached at least $70 billion.
• The textile and apparel industry has traditionally flourished in Viet Nam. The export value of textile
and garment products in 2016 was $23.8 billion, with 10 per cent average annual growth in 2014–2016. Viet Nam is the fourth largest garment exporter, following China, India and Bangladesh.
Textile and garment exports under NEMs or subcontract manufacturing are estimated at $20
billion, approximately 11 per cent of all merchandise exports.
• The electronics industry accounted for 23 per cent of Vietnamese GDP in 2016. Viet Nam’s
electronics industry is the twelfth largest exporter in the world and the third largest in ASEAN.
However, leading electronics manufacturers still import the majority of the parts and materials
required for products that are assembled in Viet Nam facilities. Local vendors are capable ofproducing only low value added products such as basic plastic components, packaging andinstruction manuals.
• Product assembly businesses (including electronics) and garment businesses have flocked to Viet
Nam. These two rapidly expanding industries require components and raw materials that cannot
be procured in the country, the greatest amount of which has thus been imported. In order topromote NEM production in these industries, it is necessary to nurture supporting industries.
• IT-BPO (information technology and business process outsourcing) is the leading growth industry
in Viet Nam, with $4.6 billion in sales in 2016. It is set to grow faster in the near future, as Viet
Nam has become better known as an outsourcing destination. However, the lack of education andtraining in IT, and the lack of practical application and soft skills are obstacles to expanding thescale of the industry.
• Viet Nam’s retail industry is forecast to reach a value of $109 billion in 2017. Attracted by low
barriers to trade, many international retail groups have entered the local market, which has
nearly 100 million consumers. International retailers are expanding their stores by franchising.
In this industry, transnational corporations (TNCs) and local partners can work together throughinternational brands and sales networks to optimize each other’s resources.
• Facilitating and promoting NEMs requires an enabling legal framework, stronger promotion
policies and home-country support. Viet Nam is still an emerging country with obstacles that cannegatively affect local business operations. The government needs to relax rigid regulations andto simplify various business procedures.
• Viet Nam’s current educational and vocational training systems do not produce an adequate levelof skills in its entire workforce. Under the ASEAN Economic Community, Viet Nam will have to open
its doors to skilled labour from other ASEAN members in certain sectors. Vietnamese workers
cannot continue to compete with others in the region unless their professional qualifications,foreign languages and soft skills improve further.

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P R O M O T I N G N E W F O R M S O F T R A D E B E T W E E N J A PA N A N D A S E A N• Development strategies related to NEMs can be realized. It is important for Viet Nam to implement
policies for productive capacity-building, including education policy. Technological policies areneeded to encourage the development of local firms and to overcome the low value added ofactivities under NEMs.
• For TNCs, NEMs can be used as test cases before undertaking full-scale entry into the market.
Viet Nam will need to maintain its competitiveness by improving the production capacity of local
firms so that foreign clients will not choose to withdraw readily if the test case does not work out.

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1. INTRODUCTION
The international business conducted by transnational corporations (TNCs) has traditionally been
trade and investment. It is especially common for TNCs to engage in foreign direct investment (FDI)
when manufacturing overseas in order to take advantage of wage disparities, government support
or other benefits.
However, as TNCs’ business networks grow larger and more diverse, TNCs have come to maintaincore competencies that generate large amounts of value while outsourcing some production
processes that create lower value. Value chains, which encompass all stages from production tosales, are being shaped at a global level, and by controlling and managing them, TNCs can control
their resources and market efficiently.
Even if TNCs do not engage in equity participation (investment), non-equity modes (NEMs) ofinternational production are still carried out by partner companies managed by TNCs. One typicalformat is contract manufacturing. In the past, processing on consignment has been used in developing
countries to perform labour-intensive operations, such as those involved in manufacturing clothing,shoes and toys, but the scope of NEM has expanded to include electronics manufacturing services(EMSs) and information technology and business process outsourcing (IT-BPO) services. Other
NEMs include contract farming, franchising, licensing and management contracts.
As economies grow more globalized, it is not sufficient to look only at FDI when considering how,and to what degree, TNCs can control global value chains (GVCs). For example, China is now one of
the world’s largest foreign-investing countries, but the involvement of Chinese companies in GVCs
is still in low-end stages. Even when TNCs do not use FDI, they use GVCs and industrial distribution
to control important stages of creating high value added products. Recently, international GVCs havebeen formed through the intertwining of FDI, trade and NEMs. NEMs are modes positioned midway
between FDI and international trade (figure 1), and cover a wide range of scales and scopes.
In 2016 Viet Nam was the forty-seventh largest economy in the world and the sixth largest economy in
ASEAN in terms of GDP. The country began developing economically with the Doi Moi policy, initiatedin 1986, which promoted shifting to a market economy and opening up to foreign business. In the
1990s, the economy developed through infrastructure investment and FDI. In this period, Viet Nam’s
GDP grew an average of 7.5 per cent a year. Under the impact of the Asian currency crisis, however,Viet Nam’s economy slowed and faced a decrease in FDI. In the mid-2000s, rising wages in Chinese

Figure 1. Positioning of selected types of cross-border NEMs

FDI
Foreign
directinvestment

Source: UNCTAD (2011).

NEM
Non-equity
mode
international
production

Trade
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coastal areas and the manifestation of the risks of doing business in China brought increased attention
to Viet Nam as a possible additional candidate or as an alternative to China. After the late 2000s, thecountry again attracted attention as an investment location for foreign firms. Its economic growth
accelerated because of many factors, including a shift in production from China in light of both the“China Plus One” strategy and Viet Nam’s joining the World Trade Organization (WTO) in 2007.
The GDP annual growth rate of Viet Nam in 2016 was 6.2 per cent, and it had been at a 6 per cent level
since 2011, excluding 2012 and 2013. Among major factors behind the high growth during the 2010s
were increases in production and exports due to business advancements by foreign companies into
the country that led to employment growth and income increases. Now Viet Nam is a middle-income
country, with a GDP per capita of $2,088 (2016), though that is still lower than the ratios in Indonesia($3,362) and the Philippines ($2,858).
With the recent economic growth, NEM trade is spreading in Viet Nam in several forms: international
subcontracting in manufacturing industries, such as electronics and garments; contract farmingin agriculture and fishery; international franchising in fast food and retail stores; variations ofbuild-own-operate transfer arrangements and other concessions in infrastructure projects; andmanagement contracts (e.g. in international hotel chains) (table 1). Offshore software development(i.e. IT-BPO) has become popular in Viet Nam, and these businesses are largely undertaken undercontractual agreements with foreign entities. This paper examines the case of Viet Nam in theoverall framework of the ASEAN-Japan Centre (AJC) project (box 1), particularly in four industries:
garments, electronics, IT-BPO and retail trade.

Box 1. The NEM project by the ASEAN-Japan Centre
Other than arms-length relationships, equity-holding is not the only means of exerting control
over global value chains (GVCs). Companies also enter into contractual relationships with otherindependent firms. Such trade is gaining importance as the system of global production becomes
more integrated and value chains form. This is an area in which lack of knowledge and a huge
gap of research exist in ASEAN. It calls for an overall analytical framework to assess development
impacts in order to propose a generic policy framework for dealing with these kinds of transactions.
The fundamental difference from normal trade is that non-equity forms of operations relate to acontractual partnership between private parties. The role of the state in relation to this partnershipis limited to setting the framework conditions within which the private parties can freely negotiate
the terms of their cooperation. By understanding this phenomenon better, including its scale andscope, and filling in a policy analysis gap, the ASEAN–Japan Centre (AJC) can provide ASEAN
country governments with policies to consider in order to fully benefit from these new forms oftrade, as well as from investment.
In order to understand the scale and scope of non-equity involvement in major industrial sectors,
a case study methodology is used. The reasons for taking this approach are two-fold: (1) balanceof-payments and supplementary statistics do not provide the detail necessary to accurately
measure cross-border non-equity participation, and (2) the relevant microdata are fragmented
and disconnected. As much as possible, each case study builds on existing research and statistics.
New opportunities are opening up for ASEAN countries the international innovation networksof transnational corporations (TNCs). Although attracting FDI and encouraging foreign TNCs
to establish affiliates remain important options for ASEAN countries, governments also needto review current regulatory regimes in the context of international innovation networks. A key
objective of this study is to make recommendations on which policies (investment and industrial)
governments need to consider in order to fully benefit from emerging opportunities.

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Table 1. Selected NEMs in Viet Nam, with examples of typical industries and companies
Modality

Description(in the international context)

Typicalindustries

Company examples

Agreement whereby a TNC contracts
out to a host-country firm one or more
aspects of product design, processingor manufacturing. Includes contract
manufacturing and design, andoutsourcing in the case of services orbusiness processes.

Electronics

ASTI Electronics

Garments

AGV

Automotive

NGK

IT

EVOLABLE Asia
Vitalify Asia

Agreement between a TNC buyer
and host-country farmers and/or
miners (including governments),
which establishes conditions for the
production and marketing of farm and/or mining products.

Agriculture

CCL Products

Fishery

CP Group

Contractual relationship in which a
TNC (licensor) grants to a host-country
firm (licensee) the right to use an
intellectual property (e.g. copyrights,
trademarks, patents, industrial design
rights, trade secrets) in exchange fora payment (royalty). Includes brandlicensing, product licensing andprocess licensing. (Also called crosslicensing and intrafirm licensing.]

Food

Chikaranomoto

IT-BPO

Qualcomm(PCB Graph Tech)

PharmaceuticalInnovus(Densmore)

Contractual relationship in whicha TNC (franchisor) permits a hostcountry firm (franchisee) to run a
specified business modelled on asystem developed by the franchisor in
exchange for a fee.

RetailFamilyMart/JUMBO

Education

Cohas Kids

Management contracts

Agreement under which operational
control of an asset in a host country
is vested in a TNC contractor thatmanages the asset in return for a fee.

Tourism andhospitality

Regent Hotel (BIM),
Hilton (BRG)

Other
e.g. build-operatetransfer (BOT) and thelikeIncludes concessions, leaseagreements, BOT arrangements,
etc., in the context of public–private
partnerships.

Infrastructure

JEXWAY, NPC EVN

Subcontracting

Contract farming
and/or contract mining

LicensingFranchising

Source: AJC.

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2. CHARACTERISTICS OF NON-EQUITYMODALITIES IN VIET NAM
2.1 Scale and scope
Table 1 describes various forms of NEMs in use in Viet Nam. NEMs can be compared with FDI
from the perspective of TNC motivation. For example, contract farming is motivated by a search for
product resources. Contract manufacturing, outsourcing and subcontracting are motivated by thedesire to improve efficiency by reducing costs. Licensing and franchising are motivated by the desire
to capture markets. Whereas subcontracting is similar to FDI in that it consists of transferring
resources, technologies and expertise to contractors operating locally, licensing and management
contracts involve little transfer. Following is an overview of the features of each NEM in Viet Nam.

(1) Manufacturing: Subcontracting
Subcontract manufacturing grew significantly in the electronics industry in the 1990s worldwide.
During the preceding decades, major electronics companies dedicated themselves to researchand development (R&D), product design and brand management, and had EMSs (e.g. Celestica,
Flextronics and Foxconn) perform manufacturing on assignment. A small number of contract
manufacturers control the industry: the top 10 account for two thirds of global EMS sales. Of these,seven are headquartered in East Asia.
The electronics and electrical industry thus has been playing a major role in driving Viet Nam’s
exports as well as FDI into the country. As the top dollar earner of the country in 2016, the industry
accounted for 30 per cent of total exports, at $53.2 billion. Telephones and parts are the mostexported items, accounting for about 19 per cent of all exports from the country. Since Samsung
Electronics built its mobile-phone-related factories in 2009, mobile phones and parts have become
the largest export goods of Viet Nam, overtaking garment products in 2013.
Samsung Electronics, Intel, Nokia, LG Electronics and other global companies have made Viet Nama centre of global smartphone production. Foreign firms export about 80 per cent of total production.
As of 2016, there were 115 registered companies in the industry, the majority of them companies
from Japan, the Republic of Korea and the United States. Vietnamese subcontractors provide parts
for those foreign electronics manufacturers.
Garment manufacturing is an important industry for less developed countries, as it establishes afoothold for industrialization. Labour-intensive production processes are a good fit for developing
countries with low-cost labour forces. Many foreign textile companies have therefore moved into
Viet Nam in order to take advantage of its low labour costs. These companies include Japanesecompanies such as Wacoal, Gunze and Itochu, and American ones such as Gap, as well as numerous
textile companies from countries such as China, the Republic of South Korea and Taiwan Provinceof China. In addition to textile companies, U.S. footwear companies such as Nike are also moving
into Viet Nam.1

1

A high number of foreign textile companies have entered the Vietnamese market because of the low labour costs
and because of the U.S. and Vietnamese participation in the Trans-Pacific Partnership (TPP) negotiations since2010. Roughly half of Viet Nam’s textile products are exported to the United States. Once the TPP took effect, there
was expectation that the export destination of textile products from Viet Nam base would expand to TPP signatory
countries. However, because the United States has pulled out of the TPP, Viet Nam’s competitive position withrespect to tariffs on exports to that country will not be realized.

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The textile and garment industries have played important roles for economic development inViet Nam and have been growing constantly. Over 7,000 textile and garment companies operate
in the country, and the industry employs more than 3 million workers. The export value of textile
and garment products in 2016 was $23.8 billion, having grown 10 per cent per year on average in
2014–2016. Viet Nam is the fourth largest garment exporter in the world, following China, India and
Bangladesh. Textile and garment exports through NEM or subcontract manufacturing are estimatedat $20 billion, approximately 11 per cent of total merchandise exports. Local companies are involved
directly in subcontracting for foreign apparel makers, including major brands such as Gap (Hansae
Viet Nam) and Uniqlo (Viet Tien Garment).

(2) IT-BPO: Outsourcing
In TNCs’ value chains, in addition to the manufacturing process itself, business functional
segmentation is also outsourced as a back-office function or a part of customer service. Major
advances in information and communication technology (ICT) have made it possible to outsource,
so that the locations where services are created are physically separated from the locations where
those services are consumed. Service outsourcing began in developed countries in the 1990s withIT “onshoring,” but in a short while shifted to developing countries where costs could be kept down.
Information system companies are able to offshore, thereby actively using outside resources in
implementing their business strategies. This is the result of economic globalization and regulatory
relaxation, which has led to demand for greater cost reductions and higher quality levels in ITrelated companies.
IT-BPO is one of the most dynamic industries in Viet Nam in terms of employment and revenues,
generating $67 billion2 in 2016. The local industry has attracted TNCs such as Fujinet, Harvey
Nash Viet Nam and the Hoa Sao Group to operate in Viet Nam and has been helping create job
opportunities in the sector.
Major outsourcing services contractors are primarily located in Asia. India, the Philippines and China
enjoy advantages in terms of specific languages, IT skills, human resources and infrastructure.
However, with mature outsourced operations in India and China, outsourcing locations have been
expanding into other countries rapidly. Viet Nam has emerged as one of these new locations, with anoutsourcing export value of $4.6 billion (table 2).

(3) Agriculture: Contract farming
Contract farming is widespread. TNCs use this NEM in over 110 developing countries and it is involvedin a diverse range of agricultural products (UNCTAD 2011). For example, in Viet Nam roughly 90 per
cent of cotton and fresh milk, 50 per cent of black tea and 40 per cent of rice are sourced throughcontract farming (UNCTAD 2011). It is a tool for efficient procurement of agricultural products
because it enables TNCs to secure the quantity and quality they require. In addition, farmers cansecure stable sales and income levels. TNCs demand high quality from contract farmers, andfarmers try to meet that demand. In return, farmers acquire new information and technology
through contracts with TNCs.
Contract farming contributes to a large number of jobs for small-scale farms, generating areasonable impact on the reduction of poverty. Although the total number of contract farms is hard
to identify, data from individual projects show that several tens of thousands of workers are employedat farms that use this NEM.

2

The figure includes hardware production.

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P R O M O T I N G N E W F O R M S O F T R A D E B E T W E E N J A PA N A N D A S E A N(4) Retail, Hotels, and Other Businesses: Franchising or management contract
Franchising is a well-known method of marketing and distributing products or services. In franchise
agreements, typically franchisors provide franchisees with various types of support related tooperation of the business. It can include initial and ongoing assistance, training, management
guidance, marketing and human resource development. Through their franchise management,
franchisors can not only expand operations rapidly and efficiently, but also procure capital. The
method is being applied to the retail industry, including high street retail and goods stores, as wellas to restaurants, hotels, business services, education and a variety of other business types.
Convenience stores and fast food chains have entered the Vietnamese market under franchise
agreements with local partners. Viet Nam’s retail market is characterized as one of the mostdynamic in the region, with high annual growth rates. In 2016 Hanoi and Ho Chi Minh City wereranked among the top 10 Asian cities for retail expansion.3 Convenience stores are proliferating
rapidly in urban areas, replacing local shops and stores. The number of convenience stores owned
by foreign companies, especially Japanese ones, is increasing rapidly. There has been an opening
rush in the south, especially in Ho Chi Minh City, where there were 122 FamilyMarts (of 133 total) and
71 MiniStops as of February 2017. Other foreign-owned chains such as Shop&Go (Singapore) andCircle K (United States) have been entering the country since 2000.
Hotels are frequently operated as franchised businesses, with the franchisee taking on the style andbrand reputation of a leading chain under license. Many structures are available for the ownershipand operation of a hotel. The structure chosen depends on the scale of investment by the investor
or hotelier, and land ownership is also an important factor. If the hotelier would rather minimize theobligations and responsibilities that are associated with land ownership, then a management contract
is a good choice. International hotel chains such as Hilton and Sofitel are doing business in Viet Nam,through management contracts with local operators. Normally, the management contract lasts 10 to
20 years. The management fees charged by the operator in exchange for performing duties specified
in the contract are the base management fee, calculated as a percentage of the hotel’s gross operating
revenue, and the incentive management fee, which is linked to the operating profit.4•••
NEM export activity in Viet Nam was estimated at $62 billion in the goods sector alone in 2016, withtotal exports of goods at $177 billion.5 Services exports that year rose to $12 billion, from $4 billion
in 2005, with average annual growth of 10.5 per cent during the period. As the travel service industry
has continued to expand significantly, NEM activity in the industry has also grown. In fact, if services
trade were considered, NEM exports of goods and services would reach at least $70 billion.
Table 2 presents a summary of NEM operations in the three major sectors for 2016. In each sector,
NEM exports were substantial. In the primary sector, coffee production and exports under contract
farming were operated and managed by companies such as CCL Products Group (Ngon Coffee)

3
4
5

CBRE, Asia Pacific Research Reports 2017.
HVS (2014), Hotel management contract survey.
UNCTAD (2011) estimated global NEM production at more than $2 trillion of sales in 2010. Contract manufacturing
and services outsourcing accounted for $1.1–1.3 trillion, franchising $330–350 billion, licensing $340–360 billion,
and management contracts about $100 billion (UNCTAD 2011). However, the report also states that the analysis
of NEMs is complex, as “the web of directly owned, partially owned, contract-based and arm’s-length forms ofinternational operation of TNCs is tangled, and some of the distinctions between the different modes are blurred”.
Thus, the analysis is limited to a number of industries in which NEMs are especially important.

10.3% average export
growth over 2014–2016

Germany 15.4%
United States 13.2%

By 2020, the goal is toprocess 25% of coffee
domestically andproduce 250,000 tons of
instant coffee a year.

Average export growthMarket or trade scale

Product or service
scope

Further human resource
development is needed
to meet the demandfor IT engineers both
domestically and abroad.
Seven Eleven opened thefirst store in June 2017 in
Ho Chi Minh City. It aims
to open 100 outlets in Viet
Nam by 2020.
Korean companies lead
local production andexports; 22.7% of export
volume comes from
Samsung Electronics.

All the stocks of Vinatech
held by the Vietnamese
government (53.5%) will
be sold in 2018.

Viet Nam aims to reachthe goal of $10 billion in
shrimp exports.

Source: AJC.
Note: Selected industries only; 2016 data unless otherwise noted.
a
As of 2017 February.
b
Including hardware.

Japan
United StatesEU

VinMart+ 60%
Circle K 13%
B’s Mart 10%
FamilyMart 9%
MiniStop 5%
Shop&Go 3%
Smartphone-related
products are the main
export products

United States 55%
EU 17%
Japan 14% (2015)

United States 22.5%
EU 19.1%
Japan 19%
China 13.8%

780,929
More than 10-fold sales
growth over 2009–2016

15,000293% sales increase from2011(2015)

8 million in the
manufacturing industry

Subcontracting

29% average export
growth over 2012–2015

3 million

Franchising, licensing$67.0 billionb sales($4.6 billion)

10% average export
growth over 2014–2016

3.5% average export
growth in marine products

Over 4 million in thefishery industry

596,000 (global coffee
platform)

Estimated employment

Subcontracting

Contract farming$205.0 million sales (2015)

NEM mode$40.4 billion($12.1 billion)$23.8 billion($20.0 billion)$4 billion and 727,743 tons
(2015) ($2.4 billion)$3.3 billion and 1.75
million tons ($1.1 billion
and 0.6 million ton)

Estimated export
volume (Estimatedexports by NEMs)

Hoa Sao Group(Bellsystem 24)
Transcosmos
KDDI

VinMart +; Circle K;
B’s Mart; FamilyMart;MiniStop; Shop&Go

Four P Company (LG)Hansae Viet Nam (Gap)
Viet Tien Garment(UNIQLO)

Minh Phu Seafood Corp
(Mitsui)

CCL Products Group(Ngon Coffee)
Olam International(Café Outspan)

Major companies(TNC partners)

Over 1,000

1,561a115 (Viet Nam Electronic
Industries Association:
VEIA)

Over 7,000 (Viet Nam
Textile & Apparel
Association: VITAS)

IT-BPO87 (Viet Nam Associationof Seafood Exporters andProducers: VASEP)

Over 100 (Viet Nam
Cocoa Association:
VICOFA)

Number of companies[NEM-related,
estimation]

Convenience stores
Call centres; softwaredevelopment

Electronics
Small retail groceries;
snack foods;
confectionery;
soft drinks; tobacco

Garments and textiles
Mobile telephone;computingGreen coffee bean
(Robusta coffee)

Productor services

Shrimp

Tertiary

ApparelCoffeeIndustry (representative
example)SecondaryBlack tiger prawn;
whiteleg shrimp

Primary

SectorTable 2. NEM operations in the three major sectors, 2016

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and Olam International (Café Outspan). Coffee exports produced through NEMs were estimatedat $1.1 billion and 0.6 million tons in 2016, one third of the total exports in both value and volume.
Most of this production went to Germany and the United States. Farmed shrimp is one of the major
foreign currency earners in Viet Nam. Exports of farmed shrimp from Viet Nam in 2015 amounted to$4 billion and 727,743 tons, the largest volume in the world. The export destination was mainly
Japan, but exports for the United States and the European Union (EU) have increased significantly.
The Vietnamese government aims to attract not only FDI by TNCs, but also NEMs for production forinternational distribution. NEMs in all sectors have been contributing to the economic developmentof the country.

2.2 NEMs by modality
Many foreign firms and TNCs do business with local partners in the form of NEMs in various
industries. The ways they are involved in NEMs and their contributions to the national economy varyby modality and industry. This section examines modalities such as subcontracting and franchisingby looking at particular industries that rely on them.

(1) Subcontracting: Textile and garment manufacture
Subcontracting is a method of production and processing in which an outside company or provider
is hired to perform specific parts of a business contract or project. In the past, Japanese companies
have subcontracted with companies in China, which is nearby and has low labour costs. However,as labour costs there rise, subcontracting (also called processing on consignment) is shifting to thecountries of Southeast Asia. Viet Nam is one country that is drawing a great deal of attention. This isbecause in addition to its low labour costs, it also has increasingly developed infrastructure, whichmakes easy to carry out production on consignment in various types of industries. The general flowof how a TNC outsources the manufacturing process in Viet Nam appears in figure 2.
Sewing is the most labour-intensive processing stage in the garment industry and has the lowest rateof return. Sewing is the stage that newcomers to the industry often choose to enter first because it
does not require high investment in technology. Countries with developed apparel industries, having
participated in GVCs for a long time, no longer perform steps in this stage but tend to outsourcethem to developing countries such as Viet Nam, Cambodia and Bangladesh, countries that havecheap labour and underdeveloped production of input materials. This is a common feature of the
production stage in the apparel industry around the world.
For enterprises engaged in such processing, value added earned in the apparel segment will also
vary depending on export mode; for example, “cut, make, and trim” (CMT) products (for details,
see box 2). CMT processing on consignment refers to garment manufacturers handling the three
processes of cutting, making, and trimming in production and distribution networks. It is the main
form of production and distribution in Viet Nam.
Viet Nam has several powerful garment manufacturers, but even these companies do not maketheir own plans or their own brand or design decisions, or handle distribution or market formation.
As for original equipment manufacturing (OEM) production, almost no companies perform material
selection and procurement on their own. In many cases, companies are merely involved in producing
and stocking materials designated by the buyer.
For raw material procurement garment manufacturers rely on imports from other economies suchas China, Taiwan Province of China and the Republic of Korea (figure 2). In fact, many Japanese
garment firms in Viet Nam entrust only the sewing process to local companies. Suppliers of raw

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9Figure 2. Flowchart of contract manufacturing

Survey of subcontractors

Sample production

Contract to manufacture

Dispatch amanagement
personProvide materials,
machineProduction activity

Inspection work

Delivery (import of production)

Settlement

Cancellation of a contract

Source: AJC.

materials and fabrics are located in China, sewing is done in Viet Nam and finished products arethen exported to Japan. Many garment manufacturers intend to increase their procurement from
Viet Nam in the future, but in the current OEM scheme, they cannot find suppliers there.

Box 2. Outsourcing apparel businesses for garment export
Apparel businesses that subcontract for garment exports typically apply one of four modes ofexport: CMT, OEM, ODM and OBM.
1) CMT (Cut, Make, Trim)
This is the easiest export method in the apparel industry and brings the lowest value added. Under
this method, TNCs offer all the inputs for production including raw materials, transportation,
designs and specific requirements; manufacturers carry out only the stages of cutting, sewing
and trimming the products. Businesses working under this export method need only a basic
understanding of design patterns and the ability to produce finished products.
…/

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10Box 2. Outsourcing apparel businesses for garment export (Concluded)
2) OEM (Original Equipment Manufacturing)This export method, which entails buying raw materials and producing and selling final products,
creates higher value added than CMT. Unlike under CMT, local firms buy necessary material
inputs instead of being supplied with them directly by their buyers.
3) ODM (Original Design Manufacturing)This method entails purchasing fabric and materials, cutting, sewing, finishing, packaging andshipping products. The ability to design reflects a higher level of knowledge by the providers andtherefore brings higher added value for products. ODM businesses create designs, finish products
and sell them to buyers, which are most of the major brand owners in the world.
4) OBM (Original Brand Manufacturing)This method of production is an improvement over OEM, as the manufacturers are responsible for
their own designs and sign both domestic and foreign goods supply contracts for their own brands.
Under the OBM method, manufacturers in developing economies distribute products mainly intheir domestic market and in the markets of neighbouring countries.
Source: AJC.

According to a report by the Viet Nam Textile and Apparel Association (VITAS), there are 7,154 textile
and garment firms in the country. Of these, approximately 62 per cent (4,458) are garment firms
and the other 38 per cent (2,696) are in the upstream or midstream process, 1,204 in spinning and
1,492 in dyeing and weaving. Raw materials are mainly supplied from Taiwan Province of China
and China (figure 3).

Figure 3. Raw materials suppliers for apparel
Yarn and Fiber

Fabrics
2

1

10

15

5
3
3

33

15

9

20

15

44

27

Taiwan Provinceof China

China

Korea, Rep. ofJapan

Malaysia

Other TPP

Others

Source: AJC based on MRI (2017).
Note: As of 2016. “Other TPP” includes the United States.

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11Figure 4. Production mode of textile and apparel industry

TextileSpinning

Weaving/
Knitting

Dyeing/Finishing

FabricApparelBrand

DesignRawmaterialsourcing

Cutting/
SewingMarketing/Distributing

CMT
OEM/FOB
ODM
OBM

Source: Bui Van Tot (2017).

Vietnamese companies are not involved in stocking material, designing or building garment sales
channels, or marketing (figure 4). This means that they have low levels of business risk, but alsothat the production they perform provides little value added and is not knowledge-intensive. In Viet
Nam, the value added of garment manufactures gained through CMT activity seems to be only
5 per cent of total value added. Materials and secondary materials such as fabric and accessories
account for 8 to 9 per cent of total value added; the remaining amount is acquired by companies
in developed countries that handle planning and distribution. Firms in developing countries arein general contracted for low value added production and distribution formats, and Viet Nam
is no exception.
For Viet Nam, the key to its development strategy is to produce more advanced processes, products
or functions within global production and distribution networks. It is also important to haveknowledge-intensive functions such as design and brand formation or distribution development.
However, at present, the lack of large-scale, well-developed systems, which can be seen in labour
disputes and complex, unclear trading procedures, are holding back the advancement of thegarment manufacturing industry. With the growth in production values of both textiles and clothingover the past 10 years, the sewing and spinning segments have been expanding rapidly. In contrast,
the growth of other segments such as fabrics and fabric-related products are not expanding. Thisimplies that the midstream and upstream processes in Viet Nam are still immature.
The government intends to develop the downstream textile process in Viet Nam. In the domestic
textile industry, Ho Chi Minh City and Hanoi have been regarded as high-value apparel manufacturingbases. Thus, the government is aiming to develop upstream and downstream processes in northernand central Viet Nam. Following the initiative taken by the government, it is expected that downstream
processing will also develop in Viet Nam. At present most local firms are engaged in OEM; it isexpected that they produce and export high-value apparel. Original design manufacturing (ODM)
and original brand manufacturing (OBM) modes provide such opportunities, which may come with
NEMs. Developing NEMs in the textile and apparel industry is a viable means to create higher value
added products.

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12(2) Subcontracting: Electronics manufacturing
Although many industries are growing rapidly in Viet Nam, electronics is growing the most rapidly.
Viet Nam was poised to export more than $70 billion worth of electronics in 2017, thanks to large
investments from electronics giants such as Samsung, LG and Intel. Vietnamese electronics
manufacturing firms can play a bigger role in the industrial development of the nation and help thegrowth of the country’s exports, thereby creating more jobs. At present, the industry is dominatedby foreign firms. In 2015, $10 billion of FDI into the industry came from multinational corporations,such as Samsung and Panasonic. Foreign affiliates hold 80 per cent of the local market share andproduce 90 per cent of electronics exports.
Viet Nam exports great amounts of electronics products to the world but imports many electronics
parts. In 2016, for example, it exported mobile phones worth $34.3 billion but imported mobiles andparts worth $10.6 billion (table 3). Leading electronics manufacturers still import the majority ofparts, for assembly in the country. According to a 2016 JETRO survey, the local procurement ratein the Vietnamese electronics industry by Japanese-affiliated companies in 2015 was 28.5 per cent(table 4). The share of procurement from Vietnamese companies was only 14.3 per cent.6

Table 3. Viet Nam’s major trade items, 2016
Export1 Phone system devices(including smartphones)
2

Garment

3 Computers, opticalreaders

Amount(US$ billion)

Share
(%)

Amount(US$ billion)

Share
(%)

34.3

19.4

Machineryequipment

28.4

16.3

23.8

13.5

Computers, opticalreaders

23.1

16.0

19.0

10.7

Phone system
devices

10.6

6.1

Import4 Footwear

13.0

7.4

Yarn

10.2

6.0

5 Machinery equipment

10.1

5.7

Iron, iron scraps

7.5

4.6

6 Fish7.1

4.0

Plastic raw
materials

6.0

3.6

7 Wood/wooden products

7.0

3.9

Fiber and fabric

5.0

2.9

8 Autobike/parts

6.1

3.4

Petrorium material

4.9

2.8

9 Coffee

3.3

1.9

Metal

4.8

2.8

10 Bag, Suitcase,

3.2

1.8

Plastic raw
materials

4.4

2.5

Total (incl. others)

176.6

100

Total (incl. others)

174.1

100

Doemstic firms

52.7

29.8

Doemstic firms

71.8

41.3

Foreign Firms

123.9

70.2

Foreign Firms

102.3

58.7

Source: General Department of Viet Nam Customs.

6This is considerably lower than in China (66.2 per cent) and in Thailand (54.8 per cent).

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13

Table 4. Parts and materials suppliers of Japanese-affiliated companies in Viet Nam,
2015 (Per cent)
Viet Nam

Local

JapaneseaffiliatedOther
foreign

Japan

ASEAN

China

Others

Total

32.1

41.2

45.1

13.7

35.5

11.9

12.1

8.4

Food
processing

67.2

85.3

11.7

3.0

10.6

12.8

3.7

5.7

Textileand apparel

29.0

39.7

29.1

31.2

33.9

9.7

16.5

10.9

Plastic

22.1

32.2

48.3

19.5

32.1

22.4

11.0

12.6

Transportation

28.3

18.6

73.5

7.9

41.5

18.3

5.6

6.3

Electronics

28.5

14.3

59.7

26.0

21.7

12.7

30.2

6.9

Source: AJC based on JETRO (2016).
Note: The figures for local, Japanese-affiliated and other foreign show each as a share of all suppliers in Viet Nam.

Some 610 businesses operate in the electronics sector in Viet Nam, 52 per cent of which manufacture
electronics components. The number is not high enough to sustain a healthy electronics industry. To
maintain a high share of local content in electronics production, the number of component suppliers
should be greater than that of assemblers. Most electronics on the domestic market are either
imported as complete build-up units (CBUs) or assembled from imported components. Given that
foreign companies account for almost all of Viet Nam’s electronics exports, there is a negligible role
for local companies in the industry.
Viet Nam’s lack of electronics component suppliers is preventing the industry from achieving its fullpotential. In the process of industrial development, supporting industries play an important role.
The supporting industry in Viet Nam is immature compared with those in other countries such as
Thailand and Malaysia, and many problems need to be solved. The capacity to deliver the products
needed by the industry in Viet Nam is very low. There is not enough local capacity to meet therequirements of foreign firms that might consider building a processing plant in Viet Nam. The
number of local companies operating in the electronics industry is still small, and the components
and parts available locally are limited to only the basic products. The problem of low-quality products
is a fundamental problem of Vietnamese supporting industries. Lack of capital and technology also
frustrate their attempts to expand production lines and to improve product quality.
This has led to a difficulty in upgrading the quality of human resources and thereby reduced thecompetitiveness of Vietnamese products. Firms must rely on imports from other countries, as seen
with Japanese firms in Viet Nam, whose products typically have a local content of only 28 per cent.
For Samsung, the current local content rate is between 30 and 35 per cent. For all firms, however,most of their suppliers are foreign companies operating in Viet Nam. Local vendors are capable
only of finishing the packaging, printing instruction manuals and making plastic components, which
all add very low value. Given the high localization ambitions of international manufacturers, theindustry needs to strengthen its supporting clusters. NEMs can offer significant opportunities for
local suppliers to join the market.

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P R O M O T I N G N E W F O R M S O F T R A D E B E T W E E N J A PA N A N D A S E A N(3) Outsourcing: IT-BPO services
Viet Nam is becoming a hot destination for outsourcing, thanks to its competitive labour costs
and other business environment costs. It was ranked as the sixth most attractive location in 2017
by A.T. Kearney, on the basis of three indicators: finance, human resource skills and businessenvironment. It is highly ranked in terms of its financial index. In early 2016, Hanoi and Ho Chi
Minh City continued to rank in the top 20 of the 100 most attractive cities for outsourcing services,
according to a Tholons report.
During 2011 and 2016, the software and digital content industry in Viet Nam maintained a
10–15 per cent annual growth rate, two to three times higher than overall economic growth.
Exports of software and digital content rose from $1.1 billion in 2009 to $4.6 billion in 2016. Over theyears IT-BPO outsourcing companies in Viet Nam have broken into the markets of the United States,
Japan and several European countries. Viet Nam has recently become Japan’s second-largest
software outsourcing partner after China, accounting for about 21 per cent of the market, while theU.S. and European markets have generated growth rates of 20–30 per cent per year. IT industries areconcentrated in the metropolises of Hanoi and Ho Chi Minh City.7
In terms of personnel costs, in comparison with IT industry salaries in other ASEAN countries,
the average salary in Viet Nam’s IT industry remains the lowest. According to a report by the
Asian-Oceanian Computing Industry Organization, the average salary of newly graduated engineers
is $280 per month. For engineers with three years of experience, it is about $550 per month.
For middle managers, it is $1,000 per month and for senior managers, it is about $2,000 per month,equivalent to one third of the salary in Malaysia, and one fifth of the salaries in Japan and theRepublic of Korea.
Most of the information system companies in Hanoi handle orders from the public sector, whereas
those in Ho Chi Minh City focus on overseas offshoring development, which is IT outsourcing such as
for development of systems and smartphone applications. Viet Nam is seeing a rise in the amountof orders in this field. In offshoring development, Vietnamese information system companies receivefrom overseas an order for part or all of the development of operational software for an information
system. There are two types of operation consignment: outsourcing offshoring, which uses external
resources that are not part of the company’s own group, and in-house offshoring, which uses thecompany’s own resources, including its overseas sites, overseas subsidiaries, and other companies
and partner companies within the same group (figure 5). The former tends to create NEM linkages.
IT outsourcing services generate about $5 billion in foreign exchange a year. However, Viet Nam
is still a boutique market when it comes to outsourcing, lagging behind its regional peers such as
India and the Philippines, which earned $98 billion and $21 billion, respectively, from providing IT
services in 2015. Nevertheless, outsourcing companies in Viet Nam over the years have broken into
the markets of the United States, Japan and several European countries.
Japan is the most important client country in IT-BPO. Like China and India, Viet Nam has high growthpotential as an offshoring site for information system development. For Japanese companies, theconsignment of system development to Viet Nam produces several potential advantages: reduced
development costs, resolution of the shortage of domestic system engineers, reduced delivery timeand progress toward entering the global market. Information system companies such as Hitachi
Solutions and NEC Solution Innovators have thus shifted more business operations into Viet Nam.

7

Unlike contract manufacturing, service outsourcing contractors are commonly located in cities with developed
communications infrastructure.

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15Software development processes use the transaction relationships and development management
systems shown in figure 6. At present, many Vietnamese companies fulfil only the stage of low value
added work (coding and unit testing).

Figure 5. Outsourcing and offshoring by type

Mode

Home

Location

AbroadInternal(equity)

Domestic
operation

Captive
offshoring

External(non-equity)

Outsourcing

Offshoreoutsourcing

Control

Source: AJC.

Figure 6. Offshoring to Viet Nam IT firms from Japan

Vietnam

Japan
High

Low

Value added

Customer

IT vendor

Local firm

Requirements
analysis/Definition

Basic
designExternal
designInternal
designProgramdesignPrograming

Operations
test

User
test

Systemtest

Linkagetest

Acceptance
test

Unit
test

Project management

Source: AJC.

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16Viet Nam’s IT-BPO sector is still at an early stage, given the country’s relatively late integration of
the Internet. But the sector has registered rapid growth and has been moving up the value chain andoffering more value added work. Software outsourcing is set to grow faster in the near future, as Viet
Nam has become better known as an outsourcing destination.
According to the Viet Nam Software Association (VINASA) in 2015, the country required approximately
400,000 more IT workers for the 2016–2020 period. In 2017, it was estimated that about 200,000 IT
workers were engaged in the digital and software fields (figure 7). Some 290 universities and juniorcolleges in Viet Nam as well as 150 other training establishments produce IT workers. Viet Nam isrich in young people with a basic education (figure 8) who have the potential ability to acquire newskills quickly. To maximize the opportunities, a continued focus on workforce training is necessary,as universities currently cannot produce enough high-skilled graduates.

Figure 7. Viet Nam’s digital and software workers, 2009–2015 (Person)
200,000
150,000
100,000
50,000
0
2009

2010

2011

2012

Digital content

2013

2014

2015

SoftwareSource: VINASA (2016).

Figure 8. Age composition of Vietnamese programmers, 2015 (Per cent)
30
25
20
15
10
5
0
Under 20
Source: AJC based on VINASA.

20-24

25-29

30-34

35-39

40-49

50-59

Over 60

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17

As Vietnamese companies generally are small, many with fewer than 500 employees,8 they canprovide services only in specific areas such as application development and testing, customization,
maintenance and support, not in end-to-end services or those requiring specialized skills.

(4) Franchising: Retail
Since joining the WTO, Viet Nam has emerged as one of the most attractive retail markets in theworld. Its stable economic growth and approximately 90 million people provide attractions for theretail sector.
Viet Nam’s retail market is one of the region’s most dynamic, with high annual growth rates. Its retailindustry was forecasted to reach $109 billion in 2017 (figure 9). Many international retail groups haveentered the market recently, thanks to the lower trade and investment barriers. Hanoi and Ho Chi
Minh City were ranked among the top 10 Asian cities for retail expansion in 2016.
The retail sector in Viet Nam is fragmented and dominated by small, family-owned businesses.
It is facing a structural change, from a traditional shop to a contemporary store. According toEuromonitor (2016), traditional retail shops accounted for roughly 95 per cent of all retailers and only
5 per cent of retailers were modern retail shops. However, the number of modern retail outlets has
been growing in urban areas. Statistics from the Ministry of Industry and Trade show that more than
700 supermarkets, 125 shopping centres and 8,600 traditional markets are in operation throughout
Viet Nam. Of these, 4 per cent of the supermarkets and 25 per cent of the shopping centres are
owned by foreign businesses. The research firm IGD estimated the annual growth of the retailsector for 2018 to 2021 at 37 per cent. IGD also pointed out that disposable income in Viet Nam has
increased dramatically and that regulations have been amended to encourage foreign investment.

Figure 9. Viet Nam’s retail sales, 2008–2017 (Billion of dollards)
120
100
80
60
40
20
0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Source: EIU.
Note: Figures for 2017 were forecasted.

8

As an exception, FPT Software Company was planning to invest up to $200 million in merger and acquisition deals
between 2016 and 2020 to boost its workforce to 30,000, according to a company statement.

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Consumption habits in Viet Nam are changing significantly. Reasons for the growing number ofmodern retail shops include rising demand for high-quality, hygienic products as incomes increase,and for the convenience of buying various types of product in a single shop. The Ministry of Industry
and Trade has estimated that the number of supermarkets will grow to 1,300 within the next
10 years and that the percentage of modern retail stores will rise, especially in urban areas. Thesechanges as well as income growth are accelerating the emergence of modern retailers, which tend
to be linked through NEMs with foreign retailers.
FDI is prevalent in the department store business. NEMs (such as management contracts) arerarely observed in relations with foreign department stores, because local firms have limited
management skills and know-how. Department stores first appeared in Viet Nam in 1999, andthere are now 13. The first was Diamond Plaza, a Singapore–Korea joint venture in Ho Chi Minh
City. This was followed by Parkson, a Malaysian department store; Robinson’s, a Thai department
store; and Lotte, a Korean department store. In 2016 Takashimaya, a Japanese department store,
was also opened.
Foreign-owned supermarkets such as Metro and Big C entered the Vietnamese market from thelate 1990s to the early 2000s. Metro, a German supermarket chain, was acquired by the TCC Group,a major Thailand financial conglomerate, in 2014, and in 2016 the French supermarket Big C waspurchased by a Thai company, the Central Group. As a result, many Thai products are imported
into Viet Nam; the TCC Group plans to increase the share of Thai products at Metro to 60 per cent.
Japan’s AEON opened a store in Ho Chi Minh City in 2014, and as of August 2016 it operated four
locations in Viet Nam.
In Viet Nam, the number of convenience stores is increasing dramatically through the use of
franchising. As of February 2017, the total number of stores of the six major convenience store
companies had increased to 1,634, nearly four times more than in 2015 (table 5). Along with economic
growth, the demand for modern distribution stores has increased, and the number of convenience
stores is rapidly expanding (box 3). In particular, Japanese convenience stores are expanding.
Franchising is well known as a method of marketing and distributing products or services. In box 4,
FamilyMart’s franchise agreement in Viet Nam is explained.

Table 5. Convenience stores in Viet Nam, 2015 and 2017
Convenience
Stores

Est.

2015

2017
Ho Chi Minh
City

Hanoi

Other

VinMart+

2014

100

950

400

400

150

FamilyMart

1981

73

133

122

0

11

MiniStop

1980

17

71

71

0

0

Circle K

1961

104

211

153

54

4

Shop&Go

2005

127

119

101

18

0

B’s Mart

2013

98

150

150

0

0

419

1,634

997

472

165

Total

Source: Asia Plus Inc., Shopping Behaviors at Convenience Stores in Ho Chi Minh City.

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19

Box 3. Convenience stores in Viet Nam
Convenience stores are penetrating the lives of Vietnamese people. Along with consumer stylechanges and household size reductions, Vietnamese people cite convenience as a reason forchoosing such stores. Convenience stores in Viet Nam are air-conditioned, a place to sit and takea rest. The quality of goods is high, and the display is clean. Some stores offer free Wi-Fi service,and they are becoming places where young people gather. More than a third of households are now
doing daily shopping at convenience stores and mini-marts.
In 2014, the Vin Group, the biggest real estate conglomerate in Viet Nam, acquired a local
supermarket and entered the retail business. The Vin Group has accelerated the business of theconvenience store VinMart+ and in 2017 had 950 stores, mainly in Hanoi and Ho Chi Minh City.
Although the locations are good, many stores are narrow and contain less than 100 square metersof space. They are commonly operated by two staff people. Their one-day sales are about $700.
Major items sold are alcohol and beverages, sweets, and processed foods. The items they sell
are almost the same as supermarkets. In the summer after 4 pm, there are processed foods fordinner in the main display and they are discounted by 10 to 20 per cent. Consumers have liked thisapproach, and convenience stores are acquiring customers from traditional stores. The Vin Groupplans to increase the number of VinMart+ stores to 10,000 by 2019.

VinMart+FamilyMart

Circle K

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Box 4 . Franchising agreements of FamilyMart in Viet Nam
In 2009, FamilyMart entered a joint venture with the Phu Thai Group, a large Vietnamese regional
distribution enterprise, but in 2013 the joint venture was dissolved. In 2014, FamilyMart establisheda new company, FamilyMart Viet Nam Joint Stock Company, in Viet Nam. It intends to expand its
stores by the franchise method, using a business model based on Japanese-style convenience
stores. As its basic template for overseas expansion, FamilyMart enters into joint ventures withlocal partners (for example, the VID Group (Viet Nam Investment Development Group)) that have
local networks and expert knowledge about local customs and regulations. FamilyMart considers
that sharing its know-how with local partners increases the probability of successful businessdevelopment in the context of Viet Nam’s retail industry and logistics infrastructure.
In addition to providing licenses for the franchise, FamilyMart invests in the joint venture (51 percent ownership) and participates in its management, giving the company a stake in future profitsand dividends. FamilyMart also receives commissions commensurate with the value of licenses
and the business know-how provided to the local partner. These three sources combine to create
a well-balanced arrangement for generating income.

Box figure 4.1. Entering into joint ventures with local partners

Joint venture contract

Area franchise contract

Joint venture company

New convenience store structure
adapted to local area

Provision of license
Joint venture contract

Investment (49%)

Investment (51%)

Local partner (VID Group)Japan FamilyMart

Knowledge of local lifestyle,food culture, business practices
and legislation

Convenience store
business experience

Source: FamilyMart, Annual Report 2016.

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21Government deregulation is also driving the development of multiple stores. Although there is asystem for the Vietnamese authorities to examine the impact on local companies of issuing a newretail store permit, the criteria are not made clear. This makes chain development difficult, which
also affects NEM development in the retail industry. For example, formerly it was difficult for retailers
to increase the number of stores because of the economic needs test established by the regulation,
which allows retailers to open a new store only after the number of retail stores and population
density in the proposed store area are examined. However, as of May 2016, companies no longer
need review by the authorities to open multiple small stores – of 500 m2 or less – in the same area.
In the future, convenience store companies will expand not only to big cities in Viet Nam but also to
medium-size cities. The data show that Viet Nam has one convenience store for every 69,000 people,
as compared with higher densities in the Republic of Korea (one store per 1,800 people) and in China(one store per 21,000 people).
In addition, there are some barriers related to regulations. In Viet Nam, the regulation on subleasing
a commercial facility is not clear. At present, companies can invite tenants to occupy an estate
owned with foreign capital, but there is no rule on subleasing to attract more tenants to rented
buildings. As the criteria differ depending on the area and even the person in power at the authority,
they pose an obstacle to retailers hoping to expand the stores. In addition, the approval process forthe establishment of overseas affiliates takes too long, and sales restrictions are applied to items
such as alcoholic beverages and tobacco.
Acquiring prime retail real estate remains a challenge in Viet Nam because of disproportionately
high rents and a shortage of reliable property managers. There are also problems with poor logistics
networks and substandard local suppliers, compounding the supply chain problems and resulting
in increases in hidden costs, which may derail the development of Viet Nam as a low-cost market.
Franchised operations and joint ventures by foreign retailers help mitigate these issues, whereas
the commitment of local firms or local suppliers is essential for NEM operations.

3. OPPORTUNITIES AND CHALLENGES FOR
NEM IN VIET NAM
This section provides an analysis of opportunities and challenges facing Viet Nam in promoting andutilizing NEMs (figure 10). By establishing NEM agreements with TNCs, each industry will benefit
from a number of opportunities. However, NEMs also bring challenges for local firms.
As with FDI, factors that make locations attractive and conducive to NEMs include political andsocial stability, sufficiently refined competitive policies, incentives for operations, smooth trading
procedures and strong macroeconomic policy. In this regard, Viet Nam has steadily developed its
economic institutions and can deal with promoting NEM activities, especially with its abundant,
low-cost workforce. While TNCs can enjoy the low labour cost, the government can help ensure job
creation (see table 2).99In addition, along with NEM activity, employment may be indirectly created through the spread of related industries.
For instance, in the retail sector, further employment is created by local service providers for NEM operations, suchas logistics companies and advertising firms (in the future).

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22

Figure 10. Opportunities and challenges for NEM

Local companies/
Local employees

Agreements between
TNCs and local firms
exist through NEMs
Opportunities

TNCs

Challenges

Subcontracting: Garment industry

Job creation

Competition among ASEAN
member states
Business model is basedon TNC’s side

Subcontracting: Electronics industry
Job creation

Non-equity modalities in Viet Nam

Technology absorption& diffusion

Competition among ASEAN
member states

Outsourcing: IT-BPO industry
Competition among Asian
countries (India, Philippines)
Job creation

Demand comes from outside
the country (or TNC)
Business model is basedon TNC’s side

Franchising: Retail industry (Convenience stores)
Management know-how

Training by TNC

Job creation

Localization

Contracting firm: Agriculture (Coffee, Shrimp)
Management
know-how transfer
Job creation

Source: AJC.

Substantial investment isrequired from locals
Training by TNC, norequirement for localization

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One of the salient features of NEMs is that TNCs do not directly own the business activities of local
firms but have indirect control of the activities. Non-possession by TNCs provides many potential
opportunities for local companies. Using NEM operations, Vietnamese firms can gain the opportunity
to participate in GVCs. However, NEM contracts are not guaranteed for long periods. A TNC can use
a NEM partner as a test case before full-scale entry, but it can also easily withdraw, as the sunkcosts are minimal. In such a case, technology, market access, job creation and stable income do notcontinue over the long term. Local NEM firms thus face not only opportunities but also challenges.
The issues are various: business continuity, characteristic NEM issues, capacity-building, initiativeand local embeddedness (table 6). If local NEM firms can strategically use TNCs’ know-how andtechnological skills by linking with them, they can build capacities to deal with these challenges.

NEM characteristics
TNCs can find their partners both in and outside the country through, for example, vendor databases
and matching events, and can use NEM operations more easily than FDI. For local partners,
NEMs make it easier to explore a new market under a contract with TNCs even if demand is notcreated in the Vietnamese market. Viet Nam exports many garments to developed countries as
subcontracted products and also exports IT-BPO services such as software development to Japan,
the United States and others. NEM partners can be useful in several ways including providing
access to resources they have that are not available in the client country. However, it is difficult tomanage the volume of products or services as markets and demands may change dramatically.
For example, in the electronics industry, if a TNC changes an electrical product to a new modelthat requires some input not available through the current NEM partner, it may end the contract
with that partner.

Table 6. Opportunities and challenges for local firms engaged in NEM
Opportunities

Typicalindustries
concerned

Challenges

Business continuity problem
Easier to find TNC partners both in andoutside the country through, for example,
vendor databases and matching events.
In the retail industry TNCs require local
partners that are strong and judicious,
capable of taking on risk on behalf of the
TNC.

Subcontract
manufacturing,
IT-BPO, retail

Easier for TNC to terminate the contract
and the long-term relationship is notguaranteed, if local firms in other countries
are more competitive (e.g. cheap labourcosts in Cambodia or Myanmar).

Subcontract
manufacturing,
IT-BPO

Difficult to manage the volume of products
or services as market and demand change
drastically (e.g. with a change in productmodel in electronics).

NEM’s characteristic issues
Easier to enter a new market or new areaeven though local demand is not yet createdin the country. Resources that are available
in the country (e.g. export of subcontracting
products such as garments, electronics and
IT-BPO services contribute to developing thecountry economically).
Resources that are available in the country
but are not required there can be usefully
utilized outside the country.

…/

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Table 6. Opportunities and challenges for local firms engaged in NEM (Concluded)
Opportunities

Typicalindustries
concerned

Challenges

Capacity-building issues
Many opportunities for local firms to develope
new business and boost sales.
Easier for local employees to work in NEM
activities, even with low skills. They may beable to improve their skills through working.

Subcontract
manufacturing,
IT-BPO, retail

TNCs’ technical and managerial support
may be limited because of the noncapital relationship. TNCs offer only
low-skilled work to NEM partners, so
workers’ skills improve very slowly. If TNCs
withdraw their facilities, workers lose jobs.

Diffusion of technology can promotetechnological enhancement and, through it,
can promote the involvement of local firms inglobal value chains.

Subcontract
manufacturing,
IT-BPO

Generation and dissemination of technology
is an important activity for capacity-building
in technology-related NEMs. However, it
is not easy for local firms to build further
capacity apart from receiving orders from
customers, as they obtain only relevant
know-how at most. It is important forthem to increase production volume andto improve supply chain connectivity by
reducing logistical restrictions.

Local firms can expand their businesses byusing the brands of TNCs. They do not needto consider brand value and management.

Subcontract
manufacturing,
IT-BPO

Local firms may lose initiative and design
ability and be unable to build further
capacity in management or marketing(e.g. in the IT-BPO/BPM industry and hotelindustry local firms may follow TNCs’
business models as they do not need to
implement localization strategies).

Local firms need to take the initiative foractivities that lead to operations and embedknowledge while maintaining the TNC’s basic
strategy. Through these activities, they can
open up new business opportunities andimprove management capability.

Retail

It is not easy for local companies(franchisees) to adopt TNCs’ original
strategies to localize. Local companies needto learn through operating.

Initiatives and local embeddedness issues

Source: AJC.

Capacity-building
NEMs offer local firms many opportunities for new business and sales growth. It is also easy for
local employees to work by subcontracting even if they are low skilled. The diffusion of technology
from TNCs can promote technological enhancement in local firms and, through it, the involvementof local firms in GVCs.
Local firms may be able to improve their skills through NEM activity. However, TNCs’ technicaland managerial support may be limited, owing to the key characteristic of NEMs, i.e. the noncapital relationship between the TNC and the local firm. As TNCs offer only low-skilled jobs to NEM
partners, workers’ skills tend to improve very slowly. Moreover, if TNCs withdraw, workers lose jobs.
As described earlier, the generation and dissemination of technology is an important activity forcapacity-building in technology-related NEMs. However, it is not easy for local firms to build further
capacity apart from through orders received from customers. Local firms need to create opportunities
for in-house capacity-building on their own or find outside resources such as government support.

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Initiatives and local embeddedness issues
Through NEM activity, local firms can expand their businesses by using the brands of TNCs. They
do not need to consider the value and management of those brands; therefore, they may lose
initiative and design ability and find themselves unable to build further capacity in management andmarketing. Local companies may follow TNCs’ business models in the IT-BPO industry.
When franchising, local companies may not find it easy to adopt the TNC’s original strategy tolocalize. Local companies need to learn through operating. In the retail sector, TNCs require local
partners that are competitive and sometimes more refined in their operations, capable of taking
on risk on behalf of the TNC. Local firms thus need to take the initiative for activities that leadto operations and embed knowledge while maintaining the TNC’s basic strategy. Through these
activities, they can enhance the chance of encountering new business opportunities and improvetheir managerial know-how.

4. POLICY IMPLICATIONS
NEM production can play a major role in international production activities in Viet Nam. In particular,
contract manufacturing and processing are popular in Viet Nam mainly because of the country’s
abundance oft low-wage workers. NEM production also has a major impact on a government’s
industrial development policy.
According to UNCTAD (2011), in order to maximize the benefits that developing countries can obtainby integrating local firms into a TNC’s GVC, policymakers in developing countries need to formulate
responses to several important challenges (table 7).
• Integrating NEM policies into the overall picture of the national development strategy.
• Supporting the development of the necessary production capacity for NEMs that can become an
actor in the TNC’s GVC.
• Attracting more NEMs.
• Overcoming any negative results related to NEMs.

Table 7. Maximizing development benefits from NEMs
Policy area

Key actions

Embedding NEM policies inoverall development strategies• Integrating NEM policies into industrial development strategies• Ensuring coherence with trade, investment, and technology policies• Miligating dependency risks and supporting upgrading efforts

Facilitating and promoting NEMs

• Setting up an enabling legal framework• Promoting NEMs through investment promotion agencies• Securing home-country support measures• Making international policies conducive to NEMs

Building domestic productive
capacity• Enhancing technological capacities• Strengthening human resources• Developing entrepreneurship• Providing access to finance

Addressing negative effects• Protecting labour rights and the environment• Safeguarding competition• Strengthening the barganing power of domestic firms

Source: UNCTAD (2011), p. 165.

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In particular, to encourage NEM activities, two policy areas become important for Viet Nam:facilitating and promoting NEMs, and enhancing the technological capacity of local firms. One
requirement is the formulation of appropriate domestic policy for the management of an appropriate
working environment. NEMs are based on business contract relationships, so it is important fordeveloping countries to formulate clear and transparent rules that stipulate what should be inthese contracts.

4.1 Facilitation and promotion of NEMs
Facilitation measures to promote business are important for attracting NEMs as well as FDI. NEMs
are facilitated by a clear and stable regulatory framework. UNCTAD (2011, p. 169) noted that, as
NEMs are based on contractual relationships, the laws and regulations governing these contracts
are an important determinant of NEM, and can constitute either an incentive or an obstacle forthis kind of business cooperation. Facilitating and promoting NEMs requires an enabling legal
framework and stronger promotion policies.
The cost of labour in the traditional Asian manufacturing hubs (such as China and Thailand) has
become relatively high, and Viet Nam is an economical alternative, with an abundant working-age
population. Its benefits as a production base or investment destination are widely known. However, it
is still an emerging country, with obstacles that can negatively affect business operations.
As seen in section 3, many firms operating in Viet Nam now have difficulty procuring raw materials
and parts within the country and therefore import them. For this reason, in the garment industry,
production is limited to CMT processing, with low value added. In order to increase NEM-related
production, local firms must steadily improve their production capacities (see section 4.2). However,it takes time to improve a firm’s ability. If firms operating in Viet Nam cannot procure parts andmaterials locally, the government needs to develop an environment in which parts and materials
can be imported smoothly (figure 11). Japanese affiliate firms in Viet Nam point out the complexityof Customs clearance procedures, which are a barrier in the procurement of parts and capital goods
from abroad. One example is the import restriction on used machinery.10
In order to promote production through NEMs and FDI, it is preferable to relax regulations andfacilitate procedures related to imports of raw materials and parts. Although the prohibition on
importing used parts and materials is intended to nurture local supporting industries, competition
between such imports and local parts and materials makes local production itself more active. This
leads to the development of the supporting industry.
Opaque administrative processes and the complex law system pose major difficulties for companies
doing business in Viet Nam. The complex commercial law system is hard to comprehend, even for
local experts. Thus, the majority of foreign firms need help from professional legal consultants intheir operations.

10This measure is stipulated by the Ministry of Science and Technology Notice (Circular 23/2015/TT - BKHCN). In
principle, imports of machinery used for more than 10 years are prohibited. Many Japanese firms import themachinery used in China and other countries into Viet Nam, but some of these machines are properly maintainedeven if they are more than 10 years old. Although these machines can withstand usual use, Japanese firms cannot
import them into Viet Nam.

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Figure 11. Responding to local procurement difficulties

Difficultyof localprocurement

Importingmaterials,
parts

Simplifying
customs
procedure

Improving
importof materials
and parts

Improvingproductive
capability
in local firms

Expanding
local
content

Activatingproduction
activity inViet Nam

Progress ofindustrial
accumulationin Viet Nam

Source: AJC.

There is no specific legal framework for NEM. However, the government needs to simplify theprocedures for launching a new business. Doing so would also help in attracting FDI. In the retailindustry, it takes a long time to get some regulations approved owing to concerns from various
stakeholders, resulting in more burden on the operator than in neighbouring countries. In thisrespect, as with FDI approval, establishing a one-stop service approach by which registration
procedures are handled in one agency can shorten the time required for establishing new firms andcan reduce costs. The investment promotion agency could play an important role in promoting both
NEMs and FDI, as they are related and even established at the same time. Providing information
on relevant regulations through the agency website could contribute to the facilitation of business.
Infrastructure is another obstacle. Roads are often narrow and jammed with traffic, which causes
delays and extra costs for operations. This especially affects the retail sector, as delivery time is aparamount concern. Maintenance of the road network is indispensable from the viewpoint of theactivation of logistics, especially in rural areas with bad connections to main highways, airports andseaports. For Viet Nam to be able to attract NEMs and FDI, there is a need to speed up infrastructuredevelopment, especially in transport, power and communications, where it lags behind moredeveloped ASEAN member countries. In addition, regional integration agreements would encourage
harmonization and institution-building, and support the establishment of regionally integrated
production networks and value chains. As a result, they would promote NEM activities.
Viet Nam will face both opportunities for growth and challenges from the ASEAN Economic
Community (AEC). Established in 2015, the AEC will create a single market with free flow of goods,
services and investment within the region. Once the AEC is fully established, Vietnamese exports
to ASEAN countries can expand through the use of low-tariff and non-tariff privileges. This is a big
opportunity for Viet Nam. A competitive economic region will help to improve Vietnamese firms
and expand their production. However, the AEC may cause severe competition among the member
states. Viet Nam has to compete with others in the region with its own human resources, capital
resources and management capacity. Moreover, in various industries where NEMs are used to alarge extent, such as retail, for convenience stores – as well as in a broad range of other services
fields – it is recommended that the restriction on foreign investment could be eased . As a result, Viet
Nam would attract foreign investors as a business destination for service industries.

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4.2 Improving productive capability
Development strategies related to NEMs become meaningful only if firms in developing countries
are qualified as NEM partners of TNCs. In this context, it is important for developing countries tohave policies for productive capacity-building, including a strong education policy. Issues related tohuman capital and technological capacity in Viet Nam are discussed in the following subsections.

4.2.1 Strengthening human capital
Investment in human capital is closely associated with creating a more attractive destination forforeign firms, in both NEM activity and FDI. The current education and vocational training system
in Viet Nam does not produce an adequate level of skills in the workforce. This reduces thecountry’s competitiveness and makes Viet Nam less attractive for medium- and high-technology
manufacturers looking for suitable production bases. Local firms need to implement continuous
training to address current and future customer needs. As most Vietnamese firms are medium or
small in size, the government needs to consider establishing a public training centre. Under the
AEC, Viet Nam will have to open its doors to skilled labour from other ASEAN members, and thiswill put a strain on Viet Nam’s labour force. Vietnamese workers cannot compete with others in theregion unless their professional qualifications, foreign language skills and soft skills are improved.
In general, NEMs that are focused on reducing production costs, such as subcontract manufacturing
or services outsourcing, have been criticized for their weak employment conditions. In Viet Nam,
NEM activities have been accepted positively. In order to keep costs down and remain competitive
and attractive for TNCs, local companies may impinge on workers’ rights – through low wages,
excessive overtime, job instability and poor health care. At the moment, these issues seem not tobe coming to the forefront. However, the Vietnamese government needs to constantly monitor theseissues to protect workers from unreasonable conditions.

4.2.2 Enhancing technological capacities
As noted, the low cost of labour is one of the main reasons why TNCs outsource production to Viet
Nam. However, if Vietnamese firms cannot move up the technology ladder and towards higher value
added activities, TNCs may terminate NEM contracts. Although basic skills are required in orderto move Viet Nam along its path to industrialization, the country should make continuous efforts toimprove those skills.
In terms of the value added in each business process, the upstream segments of R&D and parts
manufacture and the downstream segments of maintenance and after-sale service are relatively
high in value added, but the midstream of the production chain creates low value added (figure 12).
At present, most local firms are responsible only for assembly and subcontracting functions. Local
firms need to move towards higher value added activities by improving technological capability andcapital equipment.
Technological policies are essential to avoid local firms being limited to low value added activities in
NEMs. The dissemination of technology is an important activity for capacity-building in technologyrelated NEM. It can promote technological enhancement and also promote the involvement of local
firms in GVCs. The promotion of partnership between local firms and foreign firms may be usefulfor the dissemination of key technologies, products, processes or management practices. Building astrategy on acquiring abilities and comparative advantages through the effective use of technologicalpolicies facilitates connectivity with the broader business world. In the long term, these efforts will
enable domestic NEM contractors to become NEM creators.

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29Figure 12. Production chain and value added

High
Sales /
After service

Value

Concept /R&D

Marketing

Branding

Distribution

DesignManufacturing

Low

Production chain
Source: AJC.

In Viet Nam, spillover effects from foreign firms to local firms are considered to be small because of
the small amount of linkages with the local economy, as demonstrated by the low local procurement
rate. Growing as a production base for foreign firms brings substantial benefits in terms of exports
and employment, but developing Viet Nam’s domestic industries remains a major challenge.
Investments by foreign companies in upstream processes, as well as in large firms, could havespillover effects on the development of domestic industries.
Many garment manufacturers in Viet Nam are still engaged only in CMT processing, and, as noted
earlier, about 80 per cent of raw materials are imported from other countries. A representative ofViet Nam Intel Products commented, “The coordination of components in Viet Nam will still takeat least 5 to 10 years.” However, some local firms are seeking to shift to ODM and OBM. So far,Japanese firms that outsource have been limited to part of the downstream process of production(figure 13). In the apparel industry, local firms want to establish partnerships with Japanese firms to
obtain high-quality fabric made in Japan. In addition, they are interested in the design and planning
capacities of Japanese firms. Through the growth of Japanese mid- and upstream manufacturers
in Viet Nam, local firms can gain opportunities to procure Japanese fabrics in Viet Nam and export
finished products, while Japanese companies use the production and sales base in Viet Nam topursue their business opportunities.

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Figure 13. Functional structure of apparel products and divisionof labour between Viet Nam and Japan

Plannning(blanding)

FunctionJapan

DesignProcurement

Planning and designfor products to Japan
Planning for products
to emerging markets

Divisionof labour
Viet Nam

Garment
production

Strengthen global
competitivenessthrough OEM or ODM

Sales /
ExportMarketingof products
to Japan

Productionof various
categories
and levelsof garments

Source: AJC based on NRI (2016).

•••
Within the overall policy framework of NEMs articulated here, the Vietnamese government may
want to evaluate the state of NEM or NEM-like operations in the country. Assuming that no such
evaluation methodology exists, the AJC proposes the checklist in table 8. The AJC’s proposal isbased on the corporate code of conduct of the Tokyo Chamber of Commerce and Industry. It provides
some tips for the Vietnamese government to use to check whether NEM agreements and operations
comply with a certain level of international standards from the viewpoints of NEM foreign clients,
NEM local firms, NEM local firms’ subcontracting firms and local employers.

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Table 8. Checklist for NEM agreements and operations to maximize benefits
from and minimize costs with NEM
NEM policy ofVietnamese
government

Compliancewith laws

Whether there is an agreement on contract performance
Whether there is an agreement on contract terms (duration)
Whether there is an agreement on contract termination andits process
Whether there is an agreement on contract arrangement(additional contract) and its process

Respect forhuman rights

Whether there are rules on non-discrimination
Whether there are rules on basic human rights
Whether there are rules on harassment(power balance exist between local NEM firms and TNC)

Environmental
considerations

Whether there are guidelines on air pollution by local NEM firms
Whether there are guidelines on water contamination by local
NEM firms
Whether there are guidelines on environmentally friendly goods orservices by local NEM firms

Work environment

Whether there are employment rules (laws) on ages under the
NEM agreement
Whether there are employment rules (laws) on gender under the
NEM agreement
Whether there are guidelines on a safe and pleasant work
environment for local NEM firms
Whether there are employment rules (laws) on working environments
under the NEM agreement
Whether there are employment rules (laws) on working conditions
under the NEM agreement
Whether there are employment rules (laws) on working hours under
the NEM agreement
Whether there are employment rules (laws) on taking holidays under
the NEM agreement
Whether there are employment rules (laws) on treatment of absence
under the NEM agreement
Whether there are employment rules (laws) on maternity related
leaves under the NEM agreement
Whether there are guidelines on provision of support system ofchildcare and nursing care
Whether there are employment rules (laws) on terminating
employment contracts under the NEM agreement

For local firms’
development

Whether there is a program which local NEM firms can take toimprove their technology or capacity
Whether there is a program which local NEM firms’ employees
can learn
Whether there is a program which local NEM firms can take tounderstand NEM policy
Whether there is a program which local NEM firms can take tounderstand business environment of the industry

Subcontractors andsuppliers

Whether there are guidelines for similar NEM policy for local
subcontractors and suppliers…/

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Table 8. Checklist for NEM agreements and operations to maximize benefits
from and minimize costs with NEM (Concluded)
For TNCs,
required by
the Vietnamese
government

Earning the trustof customers
and consumers

Whether there are guidelines for TNCs to provide correct informationon their products or services

Mutual growthwith partnercompanies

Whether there are guidelines for TNCs to respect free and fair trading
rules
Whether there are guidelines for TNCs to provide relevant information
required for trading
Whether there are guidelines for TNCs to develop relationships basedon trust with local NEM firms

Coexistencewith local
communities

Whether there are guidelines for TNCs to establish and maintaina good relationship with local community where NEM local firms
are locatedSource: Adopted from the Tokyo Chamber of Commerce and Industry (2013).

5. POSTSCRIPT11
An interactive dialogue among Masataka Fujita (Secretary General of ASEAN-Japan Centre), AnhDuong Nguyen (Director of the Department for Macroeconomic Policy and Integration Studies,
Central Institute for Economic Management) and Dr. Shunji Karikomi (Assistant Professor, Waseda
University) has confirmed (1) the positioning of NEM in Viet Nam and (2) the importance of NEM as
well as FDI in the Viet Nam economy. Following the policy recommendation in this country report,
we would like to summarize our concluding remarks.

5.1 Positioning of NEMs in Viet Nam
NEMs have played a major role in Viet Nam’s production activities, in particular, contract
manufacturing and processing. As we have seen, textile and garment exports under NEM or
subcontract manufacturing are estimated at $20 billion, approximately 11 per cent of total
merchandise exports. Electronics manufacturing contributes greatly to expanding the exports ofViet Nam. IT-BPO is also becoming a key export sector. The low cost of labour is one of the main
reasons why TNCs outsource production to Viet Nam.
However, as the purchasing power of the middle class has been increasing, in the services sector,
NEM activities have been expanding. In the retail sector, international retailers have entered themarket, which has more than 92 million consumers, and have been expanding their stores by
franchising. Franchising is a well-known method of marketing and distributing special products orservices. TNCs and local partners can work together to optimize each other’s resources (throughinternational brands and sales networks). The method used for the retail sector can also be applied
to hotel and restaurant management, education and a variety of other business types.

11

The description of postscript was added in reaction to the seminar, “Seminar on Non-Equity Mode (NEM) in Viet
Nam – Promoting New Forms of Trade between Japan and ASEAN”, held at the Pan Pacific Hotel in Hanoi, Viet
Nam on 29 March 2018.

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In Viet Nam, the agriculture sector is also very important for NEMs. Viet Nam is one of the leading
exporters of seafood and agricultural products, such as shrimp and coffee. A diverse range of
agricultural products is sourced through contract farming in Viet Nam. For example, coffee isproduced through contract farming with Nestlé. Contract farming helps create a large number ofjobs for small-scale farms; it also offers farmers stable sales and incomes.
Viet Nam’s comparative advantage is still in cheap labour. The Vietnamese industries that are
involved in GVCs are driven by the labour force, rather than technology. If Viet Nam cannot move up
the technology ladder and towards higher value added production, TNCs may terminate contracts (inthe case of NEMs) or withdraw capital (in the case of FDI). Local firms need to move towards higher
value added activities by improving their technological capabilities. This is the challenge for Viet
Nam, as in order to have greater employment impact through the use of NEMs.

5.2 Importance of FDI as well as NEM
NEM contracts with TNCs offer big opportunities for local partners. However, TNCs are highly volatileand can move easily to another country. As many people pointed out in the seminar, Viet Nam stillneeds FDI, which can be expected to generate external spillovers in the country. In order to growthe economy, it needs continuous FDI in the manufacturing sector and in other industrial sectors.
Today, many foreign companies invest in Viet Nam, as the country welcomes FDI. Indeed, as aresult of foreign companies operating in Viet Nam, the volume of exports has grown significantly.
However, Mr. Nguyen pointed out that even if Viet Nam’s exports were to rise considerably, the shareof domestic value added content in total exports is very low and FDI cannot contribute much to job
creation because a large part of FDI is capital-intensive.
Mr. Nguyen stressed that FDI is by no means the only important driver of trade. Viet Nam is revising
its FDI policy in the context of economic restructuring. GVCs and NEMs are evolving and gaining more
importance in Viet Nam’s trade. NEMs can complement FDI in broadening economic opportunities.
What is important in order for Viet Nam to encourage NEM activities? At first, it is important forfirms to increase production volume. Greater production volume gives companies better bargaining
power. They can make efforts to improve the quality of products while enhancing management skills.
It is also important to improve supply chain connectivity by reducing logistical restrictions.

5.3 Concluding remarks
NEM activities with TNCs are beneficial for the Vietnamese economy, but they are not enough toensure economic and social upgrading over time. Local firms need to move towards higher value
added activities by improving their technological capabilities. Developing human capital is crucial inorder to move into higher value added activities. Local firms need to implement continuous internal
training in higher-level job skills; however, most local firms cannot implement continuous or evenregular training due to its cost. It would help local firms if there were some support for training.
As mentioned during the dialogue, Viet Nam needs to recognize the importance of NEMs and look
for measures to facilitate or promote NEMs in various sectors. Upgraded levels of both technologies
and skills are equally important for moving up in GVCs. Capacity-building is critical for all industries.
In NEM activities, rather than receiving orders from TNCs, local NEM firms need to build their own
capacities and technologies through their own learning systems. This can apply to all modes ofNEMs. However, it is not easy for local NEM firms to accomplish on their own. Learning systems

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supported by the government are necessary in all sectors. With such systems, local firms can buildon their own initiative to move up the ladder of GVCs. Through NEM activity, there is no doubt that
Vietnamese firms can be further encouraged to participate in GVCs, and Viet Nam needs to promote
NEM activity in this respect.
NEM activities contribute to the development of various sectors in Viet Nam. As this paper shows,
selected sectors (manufacturing, agriculture, textiles and garments, IT-BPO, retail) have different
characteristics and modalities, and there are many ways in which Vietnamese firms in these
sectors can get involved in NEMs. These activities may expand further, and local NEM businessplayers must demonstrate the capacity of local suppliers before foreign investors will decide toinvest in Viet Nam. NEM activity is very important in broadening economic opportunities, but it
also poses risks for companies; the government has to be aware of such risks and watch for ways
to minimize them.

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REFERENCES
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Paper 10-043, Harvard Business School, April.
Andrew Fletcher (2017), Yearbook of World Electronics Data 2017: Viet Nam, Reed Electronics
Research.
Beck, Steve, Wouter Deelder and Robin Miller (2010), “Franchising in frontier markets – what’s
working, what’s not, and why”, Innovations, 5(1): 153–162.
Bui Van Tot (2017), Textile & Apparel Industry Report: Opportunities for Breakthrough, FPTsecurity.
Cattaneo, Olivier, Gary Gereffi and Cornelia Staritz (eds.) (2010), Global Value Chains in a Postcrisis
World: A Development Perspective, Washington, DC: World Bank.
FamilyMart (2016), Annual report 2016.
FamilyMart (2017), Annual report 2017.
Gereffi, Gary, and Asian Development Bank (2002), The International Competitiveness of Asian
Economies in the Apparel Commodity Chain, Manila, Philippines: Asian Development Bank.
Mitra, Devashish and Priya Ranjan (2010), “Offshoring and unemployment: the role of search frictions
and labor mobility”, Journal of International Economics, 81(2): 219–229.
Nguyen Thi Lan Huong (2017), Viet Namese textile and apparel industry in the context of FTA: The
labour and social impacts, Institute of Labour Science and Social Affairs, Ministry of Labour,
Invalids and Social Affairs, Viet Nam, March.
OECD (2009), Guidelines for Recipient Country Investment Policies Relating to National Security,
Paris: OECD.
Tate, Wendy L., Lisa M. Ellram, Lydia Bals and Evi Hartmann (2009), “Offshore outsourcing ofservices: an evolutionary perspective”, International Journal of Production Economics, 120:
512–524.
Tokyo Chamber of Commerce and Industry (2013), “Corporate Code of Conduct, the Third Edition”.
UNCTAD (2011), World Investment Report 2011, Non-Equity Modes of International Production andDevelopment, New York and Geneva: United Nations.
UNCTAD (2013), World Investment Report 2013, Global Value Chains: Investment and Trade forDevelopment, New York and Geneva: United Nations.
Van Liemt, Gijsbert (2007), “Subcontracting in electronics: from contract manufacturers to providersof electronic manufacturing services (EMS)”, Working Paper No. 249, Geneva: International
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ANNEX
Seminar on Non-Equity Mode (NEM) in Viet Nam
Promoting New Forms of Trade between Japan and ASEAN
Hanoi, Viet Nam, 29 March 2018

TIME

ACTIVITY

09:00 – 09:30

Registration

09:30 – 09:40

OPENING REMARKS
Viet Nam Trade Promotion Agency
Ministry of industry and Trade

09:40 – 10:10

INTRODUCTORY REMARKS ON NON-EQUITY MODE OF INTERNATIONAL TRADE
Secretary General Masataka Fujita
ASEAN-Japan Centre

10:10 – 10:45

Photo session/Coffee Break

10:45 – 11:45

REPORT BY JAPAN EXTERNAL TRADE ORGANIZATION
Mr. Naoki Takeuchi
JETRO Hanoi Office

11:45 – 12:00

Q&A

12:00 – 13:30

Lunch

13:30 – 13:55

REPORT OF INDUSTRIAL SITUATION (TEXTILE AND GARMENT)Ms. Hoang Ngoc Anh
Viet Nam Textile and Garment Association (VITAS)

13:55 – 14:20

REPORT OF INDUSTRIAL SITUATION (ELECTRONIC)
Ms. Do Thi Thuy Huong (VEIA)
Viet Nam Electronic Industries Association (VEIA)

14:20 – 14:45

REPORT OF INDUSTRIAL SITUATION (SOFTWARE AND IT)
Mr. Le Quang Luong (VINASA)
Viet Nam Software and IT Services Association (VINASA)

14:45 – 15:25

PRESENTATION OF DRAFT COUNTRY REPORTDr. Shuji Karikomi, Waseda University

15:25 – 15:45

Coffee Break

15:45 – 16:05

Mr. Anh Duong Nguyen
Director of the Deptment of Macroeconomic Policy and Integration Studies

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16:05 – 16:35

INTERACTIVE DIALOGUE

Facilitator:
		

Secretary General Masataka Fujita
ASEAN-Japan Centre

Commentors: Dr. Shunji Karikomi
		
16:35 – 16:50

Mr. Anh Duong Nguyen

SUMMARY AND WRAP UP
Secretary General Masataka Fujita
ASEAN-Japan Centre
END OF THE SEMINAR
Mr. Yasushi Ishida
ASEAN-Japan Centre
Master of Ceremonies

ASEAN Promotion Centre on Trade, Investment and Tourism
https://www.asean.or.jp/en