Challenges in Enhancing
Viet Nam’s Labor Productivity
and a Proposal for National
Productivity Improvement
Kenichi Ohno
Professor, GRIPSHa Noi, April 28, 2021

Viet Nam’s Economic Achievements• During the last three decades, Viet Nam achieved high GDP growth andpoverty reduction. People’s life as well as urban and rural landscape havechanged greatly.
• Global integration has deepened with active trade, investment and humanexchange. Membership in WTO and many regional and bilateral tradearrangements has been attained.
• Structural transformation proceeded strongly from agro-based economy tothe expansion of industry and services.
• Viet Nam attained the lower middle income status in 2008. It targets highincome in the future.
• Fiscal crisis and the COVID pandemic have been managed by proper
policy actions.
2The Core Problem
Domestic value creation remains small despite fastindustrialization. It is occurring, but speed is slow.
This can be confirmed by several facts:• Overall labor productivity growth has been moderate (4.65%: 1991-2019),
not spectacular (cf. 8-10% during high growth periods of Japan or China).
• Labor productivity growth of both manufacturing and FDI stagnated oreven fell in recent decades, which is very strange.
• Participation in global value chains is limited.
• Entry-level workers are available, but highly skilled managers, engineers,technicians and global marketers are in short supply.
• FDI dominates key sectors such as electronics, motorcycles andautomobiles, as well as their supporting industries.
3

Manufacturing Labor Productivity:
Level & Growth

Labor productivity by ownership(VND million per worker, atconstant 2010 price)

FDIState

Non state
Source: authors’ calculation based on GSO data,with adjustment for the 2010 data gap.

4

Stagnant Labor Productivity in Manufacturing and FDI
Possible Causes
1. The content of FDI changed significantly in the early 2000s from capitaland technology-intensive (mining, energy, motorcycle, automobile, etc.) tolarge export-oriented labor-intensive (garment, footwear, electronic
assembly, etc.) These have low domestic value-added per worker.
2. Government failed to implement effective policies to improve productivityand quality (cf. Malaysia’s Manufacturing ++ (1990s) and Thailand’s new
FDI policy (2015)—see below).
3. Most FDI firms consider Viet Nam as a place to do simple processes, andhave no incentive to revise this strategy.
These three reasons are mutually related. If wages continue to rise faster thanlabor productivity, FDI is likely to leave Viet Nam instead of moving to higher
production processes.
5The Smile Curve and Manufacturing ++Latecomers usually start from simple cutting, sewing, component assembly, etc. From
there, Malaysia once had a strategy to go up (improve productivity) and go sideways(capture upstream & downstream activities) called “Manufacturing Plus Plus”.
Source: adapted from Malaysia’s Second Industrial Master Plan 1996-2005, with author’s additions.

Viet Nam: Export Value StructureA1995

2015

Domestic value creation

BC(21.6%)(12.6%)A

B

Imported inputs

Domestic inputs

Accrues to:CProfitmargin

Domestic workers & suppliersincl. FDI suppliers (44.5%)

Exporters(11.1%)DD
CF&T

Unknown value addition
accruing to foreign
distributors & retailers

Unknown value addition
accruing to foreign
distributors & retailers

Charges, fees & taxes paid togovernment, domestic &foreign agents for import,export & production

Total export value (FOB) = A + B + C + D
Backward participation = B / (A+B+C+D)
Forward participation = C / (A+B+C+D)

Source: Nguyen Viet Khoi and Shashi Chaudhary (2019),
rearranged and graphically presented by author. We
assume the unknown percentage of D remained the same.

Backward participation—supply of domestic inputs (supporting industries)
has increased significantly. But much of this increase is due to FDI
component suppliers.
Forward participation—shows little progress at 11-12%. Vietnamese
exporting firms just engage in assigned production and create little value or
profit in markets abroad.
Moreover—export value (FOB) received by Vietnamese producers is only
part of final retail value abroad. Additional (but unknown) value is captured
by foreign distributors and retailers.

In sum, Viet Nam mostly remains a passive manufacturer with relatively
small value creation. It does not have its own brand, design, marketingstrategy or customer service in the global economy.

8Thailand: Dual Incentive to Attract Value Creating FDI (since 2015)
Before 2015, Thailand
broadly favored
manufacturing withseveral targeted
subsectors, including
labor-intensive ones. FDI
in remote areas received
additional incentive.
In 2015, FDI policy was
upgraded to promote
Thailand 4.0, innovation,
productivity, service trade,and development of theEastern Economic Corridor.
Source: copied from the Board of Investment (BOI) of Thailand presentation (2015).
Note: A1-A4 specify high-tech activities and B1 & B2 contribute to value chains. Each activity category define concrete eligible actions.
For example, A1 includes power generation from waste, creative product design, electronics design, R&D, and so on.

Two Groups in Asia
1. High performers—growing very fast for a few decades without stopping at
middle income; now high income—Singapore, Taiwan, Korea.
2. Moderate performers—many ASEAN countries managed to reach middle
income but are slow to move up further. Without growth acceleration, they
are trapped in middle income—Malaysia, Thailand, Indonesia, Philippines.
• Our productivity study indicates that Viet Nam is in the second group.
• Good news is that Viet Nam’s labor productivity and TFP performance
have improved in recent years. We need to know the cause(s) andwhether this is permanent or temporary. Possible causes include:- Active trade and FDI thanks to many bilateral and regional FTAs.
- Continued effort by the domestic private sector- Improved policy support

10Real Per Capita GDP Relative to the United States, 1950-2018
Source: Maddison Project Database 2020.

High performers

Moderate performers
Note: there are latest comers
below this group (not shown).
11First Group – high learning capability• Meiji Japan (late 19c - early 20c) vigorously learned Western technology
by its own budget and effort; very little FDI or foreign loans were permitted.
• Korea learned electronics, shipbuilding, automobile, steel, etc. from Japan,
then quickly turned to producing its own high-quality models and brands.
• Taiwan built a strong IT industry by policy guidance and incentives, andbecame an IT hardware hub of the world.
Second Group – learning is slower• Malaysia is gradually reaching high income, but its move is slower than
the first group. Its automobile industry did not attain competitiveness.
• Thailand has automotive and electronics industry base, but still relies
heavily on FDI instead of domestic firms.
• Indonesia is de-industrializing prematurely at middle income. It exports
relatively few manufactured products compared with others.
12Policy Learning to Improve Policy Quality• The best method for industrial catch-up is international case study withproper selection and adjustment. By comparing various good practices,
government can learn how to design policies that fit domestic reality.
• Don’t copy foreign models without adjustment, or reject them because “ourcountry is unique.” These two attitudes do not improve policy.
• Select the right benchmark countries most relevant to Viet Nam. Random
selection of countries and models is not advisable.
• Three steps for adopting a foreign model:
Learning offoreign model

Local adjustment
by trial & error,
learning by doing

Nationwide
dissemination• Foreigners (FDI & ODA) can assist the first step by offering models and/or
helping with small scale pilot projects. The rest must be undertaken by thegovernment and people of the learning society.

13Five Conditions for Effective Policy Formulation
Top leader

1. Vision &commitment

5. A secretariat with sufficient authority andcapacity to coordinate the entire process

2. Consensus building

3. Documentation

Brainstorming

Studies& surveys

Set broadgoals &direction

Drafting
work

Comments& revisions(Drafting may
be outsourced)

Stakeholder
consultation

4. Substantive
stakeholder participation
Ministries& agencies

Businesses

Academics &consultants

Regions &localities

Finalize& approve

Documents are the Means, not the End
Documentation  Implementation  Economic impact• Bureaucrats often spend too much time and energy drafting thickdocuments with active stakeholder consultation, but forget implementation.
• Implementation (staffing, budgeting, institution, monitoring…) is also themeans, not the end. If the plan is executed but produces little result, there
is something wrong. Go back and rework the plan.
• High-capacity governments prefer rough and flexible plans withadjustment as you proceed (Taiwan, Singapore; past Japan). They don’t
produce 5- or 10-year plans whose spans are too long for policy efficacy.
• The essence of any policy can be stated in several pages. People don’tread long documents.

Learning from Japan
Part II of the book contains two chapters that provide information related tolearning from Japan
Chapter 6 – General issues in learning foreign models
Chapter 7 – Ten Japanese productivity tools, and experiences of
introducing them in other countries including Viet Nam
Viet Nam may learn policy from any country, but Japanese models havecertain advantages.
• Close economic relationship between Viet Nam and Japan• General popularity of Japanese productivity tools• Willingness of Japanese FDI and government to cooperate with Viet Nam

Standard Productivity Tools from Japan
1. Mindset change

6. Kosen (creative engineer education)

2. 5S and Kaizen

7. Gino jisshusei (foreign technicalinterns trained in factories in Japan)

3. Handholding (comprehensive& customized SME support)

8. Kosetsushi (SME technical supportcenters)

4. Shindan (SME diagnostics &advice)

9. FDI-domestic firm linkage

5. TVET-local firm linkage

10．Supporting industry development• Many nations in Asia and elsewhere have embraced these tools with varying
degrees of success.
• Strong political will, proper local adjustment, and attention to technical andinstitutional details are key success factors.

Viet Nam Had Some Pilot Projects but No Scaling Up
YES means projects were already introduced even in a small scale. Some means a small number of firms
or TVETs have adopted.
Small scale pilot projects
Japanesegovernment
1. Mindset change
2. 5S and Kaizen

Japanese FDI

Vietnamese
government

SomeYES3. Handholding

YES

YES

Vietnamese
private sector

Scaling up
to entirenationSome--YES--Some

4. Shindan-(Studying)

5. TVET-local firm linkage

YES

6. Kosen

YESYES

Some-SomeYES

7. Gino jisshusei mobilization-YES

8. Kosetsushi(Studying)

9. FDI-domestic firm linkage

YESYES

10. Supporting industries

YES

YES

Source: evaluation based on author’s knowledge.

------YESYES--

5S and Kaizen

India

Ethiopia• Kaizen is a bottom-up, low-cost way of improving efficiency at workplace, imported
from USA and developed in Japan in the late 1950s. It is now spread to many
countries.
• Kaizen is a philosophy with many practical tools. It pursues elimination of muda (anything or action that does not add value).
• The most basic kaizen tool is 5S (Seiri, Seiton, Seiso, Seiketsu & Shitsuke; or Sort, Set inorder, Shine, Standardize & Sustain). Seiri is removing unnecessary things from theworkplace. Seiton is placing remaining things in clear visibility for easy pickup.

Kaizen Tools Are Many

Kaizen scenes in Singapore,
India and Ethiopia

Source: M. Imai, Kaizen: The Key to Japan’s Competitive Success, McGraw-Hill, 1986.

How JICA Teaches Kaizen to Other Nations
1. Mobilize a group of Japanese industrial experts. Select 20-30 firms through ministrydatabase or initial classroom courses. Interview general directors for finalizing
candidate firms.
2. Each firm forms a kaizen team and selects one production process.
3. A Japanese expert visits every week to make the firm team think, identify and solve
problems. He gives hints and weekly homework. This process goes on for 3 to 6
months, with possible extension.

Kaizen learning has three levels
1. Only-once project – JICA experts teach and firms improve, but nothing remains after
the project ends.
2. Internalization – JICA experts teach local officials so they can practice kaizen afterJapanese experts leave. National agencies, standards and programs are created.
3. Privatization – Government withdraws and lets private consultants take over theproductivity movement.

How JICA Teaches National Productivity Movement toOther Nations• JICA’s first comprehensive productivity support was for Singapore (1983-1990) at therequest of Prime Minister Lee Kuan Yew. It was implemented in three phases.
Singapore learned very quickly and started to teach others.
Phase I – Awareness

Phase II – Action

Phase III – Autonomy(1981-85)(1986-88)(1989-)

Importance of productivity ishammered into all citizens,even taxi drivers

Japanese experts coach firms;
Singaporeans learn how to do
thisSingapore can practice withoutJapanese help; start to teachother nations• Awareness (Phase I) was most important and difficult. Singaporeans had to beconvinced, Japanese had to adjust, and trust had to be built.
• Many countries tried institutionalization of kaizen, with or without JICA cooperation,
producing varying results: Thailand, Philippines, India, Hungary, Brazil, Argentina,Paraguay, Tunisia, Egypt, Ethiopia, Tanzania, Zambia, Ghana, Botswana, Mauritius,Burkina Faso, etc.

TVET- Industry Linkage• For Technical and Vocational Education and Training (TVET) to be effective, schools
must build close linkage with industry which hires graduating students. For this,Japan can offer two mechanisms:
1. Training process management featuring the PDCA (Plan-Do-Check-Action) cycle.
2. Employment support system featuring (i) internship; (ii) company study tours;(iii) lectures by TVET graduates; (iv) job fairs; (v) collection and circulation of job
opportunity information; and (vi) career counseling.
• JICA has introduced this system to Ha Noi University of Industry (HaUI, 2010-13).
HaUI built active linkage with Japanese FDI, and created new courses for industry.
• To create linkage, Osaka Prefecture and the Dong Nai
Industrial Zone Authority (DIZA) established a consortium ofLac Hong University, Dong Nai Vocational College of HighTechnology, and Japanese component suppliers. The projectis supported by JICA , METI and Osaka industrial organizations(MOBIO, PREX).
Dong Nai-Osaka cooperation

Kosen (technical college)• Kosen is a Japanese technical and vocational higher education system. It offers afive-year program to students aged 15 to 19. There are 57 kosen in Japan with
50,000 students.
• Five essential components of Kosen are: (i) technical knowledge and skill, (ii) proper
attitude and mindset, (iii) creativity and problem-solving (just doing what is told is
not acceptable), (iv) comprehensive assistance for job search, and (v) kosen’scapacity building to offer these services.
• JICA conducted a pilot kosen project at the Industrial University of Ho Chi Minh City(IUH) from 2013 to 2018. This model was rolled out to Cao Thang Technical College(Ho Chi Minh City), Hue Industrial College, and Phuc Yen College of Industry (VinhPhuc). These are all under the Ministry of Industry and Trade (MOIT).

Industrial University of Ho Chi Minh City

JICA-supported Kosen Pilot Schools in Vietnam
Phuc Yen College of Industry, Vinh Phuc (now renamed to College of Industry and Trade)A Way Ahead• If Viet Nam is willing, Japan should continue to cooperate to introduce Japanese
productivity tools, and Viet Nam should build a mechanism to internalize and spreadthem to entire nation.
• Not all measures can be strengthened at once. We suggest that those already tried inthe past (5S and Kaizen, TVET-local firm linkage, supporting industries) should be
expanded first.
• We hope this productivity study will be useful in designing future policies in Viet
Nam, and Viet Nam and Japan will continue to cooperate for mutual benefits.

THANK YOU