Chapter 2
Supporting Industries:
A Review of Concepts and Development
Nguyen Thi Xuan Thuy*

1. Introduction
Many researchers and policy makers use the term “supporting industries,” but its origin and initial meaning are sometimes not well known to them.
They define this term according to their own understanding and purpose. In
reality, “supporting industries” is Japanese-made English employed first by
Japanese enterprises long before becoming an official term. It gained popularity
in Japan in the mid-1980s when the Japanese government used it in its documents, as explained below, and has been widely used in Asia ever since. The
idea of supporting industries is now routinely discussed in regional meetings on
the development of small and medium enterprises (SMEs).
The term began to be officially used in Vietnam relatively late, that is,in 2003. The Vietnamese government did not give much attention to it until thedrafting of a master plan for developing supporting industries was requested by
the Vietnam-Japan Joint Initiative Phase 1 (2003–2005) as one of the urgent
measures to promote foreign direct investment (FDI).
Because of autarky, economic planning, and heavy industry-oriented
policy of the past, Vietnam fostered industries that internalized manufacturingof all inputs in a vertically consolidated structure, be it agricultural machines,
bicycles, or automobiles. These industries no longer exist, have been streamlined, or have shifted to other activities since the implementation of Doi moi in
1986. Due to the lack of information as well as the fact that local suppliers∗

The Vietnam Development Forum (VDF) and Vietnam’s Ministry of Industry (MOI). This
research was conducted in 2006 when the author was a researcher at VDF-Tokyo.

27

Nguyen Thi Xuan Thuy

could not meet stringent quality requirements, foreign firms that came to Vietnam in the mid-1990s were of the view that supporting industries were nonexistent or extremely primitive in Vietnam. However, the survey conducted by theJapan External Trade Organization (JETRO) in 2004 found that this view was
not entirely correct, and that Vietnam’s supporting industries were burgeoning(Ichikawa, 2005).
Sustainable growth of supporting industries requires a proper policyof the government, and the Master Plan for the Development of Supporting
Industries must be designed to meet this requirement. The current version under
MOI’s internal review still leaves much room for improvement. This paper
reviews various concepts and related issues of supporting industries in the hopethat this will offer some practical inputs for the master plan.
In particular, the following questions are posed: (i) what does theterm “supporting industries” mean, (ii) why does Vietnam need to develop supporting industries, (iii) how did other countries develop their supporting industries, and (iv) what can Vietnam learn from their experiences and what should it
do to promote supporting industries. Different definitions of supporting industries give different industrial scopes as well as different policies to address
them. We also propose our own definition, which can be used in the Vietnamese policy context. In studying international experiences, promotion policies for localization, foreign direct investment into supporting industries, industrial linkages, and production networks are particularly important.

2. Concepts of supporting industries
Although the term “supporting industries” is widely used in many
countries, it is still ambiguous and without consensus in definition. Whether“supporting industries” is understood broadly to include all industries that provide production inputs or narrowly as industries that provide only parts, components and tools for certain industries depends much on the user.
On a practical level, the leather footwear industry needs industries
which produce parts of footwear, processed leather, leather working machinery,and design services. Supporting industries of the motorbike industry supply
motorbike assemblers with material inputs and their processing as well as serv-

28

Supporting Industries: A Review of Concepts and Developmentices. On the other hand, supporting industries also refer to industries which aremuch broader and without a clear borderline. This means that, for policy formulation, the scope of supporting industries must be specified concretely andstrategically by policy makers in a way that ensures consistency between definition and policy purpose.
For instance, Thailand defines supporting industries to be enterprisesthat produce parts and components that are used in the final assembly processesof the automobile, machinery and electronic manufacturing industries (Ratana,
1999: 2). Meanwhile, the US Department of Energy defines supporting industries as those that supply materials and processes necessary to form and fabricate products before they are marketed to end-use industries (2005: 1). In Vietnam’s current context, it is not practical to import any ready-made concept of
supporting industries from abroad because of differences in economic conditions, development level and the degree of challenges that each country faces in
the global economy. It is necessary for Vietnam to select a definition of supporting industries which is most appropriate for its own socio-economic conditions.
The term currently used in East Asia originated from Japan in the
mid-1980s. The first official document to use this term, as far as we can identify, was the White Paper on Economic Cooperation 1985 by the Ministry ofInternational Trade and Industry (MITI)1 of Japan, where the term “supporting
industries” was used to refer to “small and medium enterprises (SMEs) that
contribute to strengthening industrial infrastructure in Asian countries for medium and long terms” (1985: 120) or “the SMEs that produce parts and components” (1985: 121). The purpose of MITI at that time was to promote theprocess of industrialization and the development of SMEs in ASEAN countries,
especially in ASEAN 4 (Indonesia, Malaysia, Philippines, and Thailand).
Two years later, MITI re-introduced the term to other Asian countries
through the New Asian Industrial Development Plan (known as the New AIDPlan). The Plan was a comprehensive economic cooperation package based on
the trinity of aid, investment, and trade. In the framework of the Plan, the Asian
Supporting Industries Development Program was promulgated in 1993 to
1

MITI has been changed to METI (Ministry of Economy, Trade and Industry) since January 2001.

29

Nguyen Thi Xuan Thuy

Figure 1. Scope of supporting industries according to MITI

Source: Japan Overseas Enterprises Association (1994: 19)

resolve trade imbalances, bottlenecks of infrastructure, and shortage of professional workforce in ASEAN 4 and to promote industrial cooperation between
Japan and those countries (Japanese Bank for International Cooperation [JBIC],
2005: 125). In this Program, supporting industries were officially defined as“industries that supply the necessary things such as raw materials, parts andcapital goods for assembly type industries” (as quoted by Japan Overseas Enterprises Association, 1994: 19). The scope of supporting industries was widened
from SMEs to the industries that produce intermediate and capital goods for
assembly-type industries without regards to firm size (Figure 1).
A question might be raised as to why the term appeared in Japan but
not in other countries, and in the middle of the 1980s but not earlier or later.
The higher yen value and the efforts of MITI to develop an industrial base inorder to support Japanese firms operating in Asia could be considered as the
response to this question. The sudden appreciation of the yen after the Plaza
Accord in September 1985, from 240 yen per US dollar in September 1985 to
160 yen per US dollar in April 1986, had a great impact on export-related enterprises (MITI, 1987). The higher yen made Japanese firms reduce exports of finished products and shift production to countries with lower labor costs. However, Japanese factories abroad had to import parts and components from subcon-

30Supporting Industries: A Review of Concepts and Development

tractors in Japan because the providers of essential parts and components were
not available in developing countries, including ASEAN 4. Thus, the term “supporting industries” was used to indicate the lack of such industries in thosecountries. Consistent with this context, MITI subsequently introduced the New
AID Plan in 1987 and the Asian Supporting Industries Development Program in
1993, as explained above, which promulgated the term to other Asian countries
as well. Therefore, it can be said that the appreciation of the yen and the effortsof MITI were necessary and sufficient conditions for the birth of the term “supporting industries” in Japan and Asia in the 1980s.
Vietnam adopted the term “supporting industries” relatively late, as
mentioned above. In the past, concentration on the development of heavy industries in the centrally-planned economy required a wide range of production
inputs. Vietnam did not attach importance to the concept of supporting industries because parts and components for finished products of such industries asagricultural machines, bicycles, and automobiles were produced in-house and ina vertically integrated fashion. Even when the term “supporting industries” wasintroduced in most Asian countries at the meetings of the Asian Productivities
Organization (APO) and the Asia-Pacific Economic Cooperation (APEC), Vietnam, which was in the early years of the Doi moi process, continued to pay little attention because it was dealing with other urgent issues such as agriculturalrevitalization, hyperinflation, economic reform, and poverty alleviation.
When foreign investors started to come to Vietnam in the mid-1990s,
it was difficult for them to find qualified local suppliers for production inputs.
They pointed to this problem and asked the Vietnamese government to takeappropriate measures to resolve it. However, at that time the Vietnamese government was not familiar with the concept of supporting industries. The problem included the absence of a legal definition for supporting industries, which
prevented any effective execution of promotion measures. The Vietnamese government remained unclear as to how this situation could be corrected (Ichikawa,
2005). The Japanese government was proactive in supporting Vietnam to
improve the business and investment environment through the Ishikawa Project(1995), the New Miyazawa Initiative (1999), and the Vietnam-Japan Joint Initiative (2003). These programs were beneficial to both countries: Vietnam wasable to absorb much more FDI and foreign firms doing business in Vietnam

31

Nguyen Thi Xuan Thuy

enjoyed an improved business environment.
The main themes of the Ishikawa Project were to help Vietnam
smooth the transition from a planned to a market-oriented economy, to integrate
Vietnam into the international community, to modernize the financial system, tostrengthen industrial competitiveness, and to develop rural areas. In relation tothese themes, the request from the Japanese business community for a better
legal system was also encompassed under this Project2. The New Miyazawa Initiative was an Official Development Assistance (ODA) loan to Vietnam, which
was used to promote Vietnam’s economic reform policy, including formulationof a private sector promotion program, auditing of state-owned enterprises, andtariffication of non-tariff barriers3.
The Vietnam-Japan Joint Initiative, launched in 2003, aimed tostrengthen Vietnam’s economic competitiveness through promotion of FDI
flows into Vietnam. In the Action Plan of the Initiative, the first item in the listof required actions was the “development, introduction, and utilization of supporting industries in Vietnam,”4 which indicated that Vietnamese officials started to realize the importance of supporting industries in the process of industrialization and FDI attraction. However, during Phase 1 of the Initiative, whichlasted two years, this action did not fully materialize. Therefore, the need foraction was reiterated in its Phase 2, which included establishment of a masterplan for supporting industries development, setting up of a database of supporting industries, and creating industrial zones for supporting industries.
To fulfill this requirement effectively, Vietnamese policy makers
must clearly grasp the nature of supporting industries and related concepts, andchoose a definition of supporting industries which can serve as a foundation for
designing a comprehensive industrial policy for these industries.

Ministry of Foreign Affairs (MOFA) Press Briefing on: Summary of meetings held by Prime
Minister Keizo Obuchi at the Association of Southeast Asian Nations Summit, December 1998.
3
MOFA Press Release: ODA Loan to Vietnam – to support economic reform of Vietnam,
September 29, 1999.
4
MOFA’ s Report on Vietnam-Japan Joint Initiative to Improve Business Environment with a View
to Strengthen Vietnam’s Competitiveness, December 4, 2003.
2

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Supporting Industries: A Review of Concepts and Development

3. Related concepts
Parallel to the term “supporting industries,” other related concepts arealso used to refer to supplier industries, inter alia, related and supporting industries, subcontracting, ancillary, part and component industries, and vendors
have close meaning to that of supporting industries.
3.1. Related and supporting industries
The term “related and supporting industries” is used by Michael E.
Porter, a professor at Harvard University, as a fundamental determinant of
national competitive advantage. In his book The Competitive Advantage of
Nations (1990), he introduces the Diamond Model (Figure 2), which includes
four interlinked key factors for competitive advantage and can be applied to all
nations and industries.
Among these four factors, the term “related and supporting industries” is defined as “the presence or absence in the nation of supplier industries
and related industries that are internationally competitive” (1990: 71). He
divides this determinant into two factors: supporting industries and relatedindustries. Supporting industries create advantages in downstream industries
because they produce inputs that are widely used and important to innovation or
Figure 2. Porter’s Diamond model for the competitive advantage of nations

ChanceFirm strategy,
structure, andrivalry

Factorcondition

Demandconditions

Related andsupporting
industries

Government

Source: Porter, M.E. (1990: 127)33

Nguyen Thi Xuan Thuy

to internationalization, whilst related industries are those in which firms cancoordinate or share activities in the value chain when competing, or thosewhich involve products that are complementary (1990: 100–105). Three other
determinants include (i) the strategy, structure and rivalry of firms, which show
the conditions in which companies are created, organized and managed, and thenature of domestic rivalry; (ii) demand conditions, which are the nature ofhome demand for the industry’s product or service; and (iii) factor conditions,which imply the key factors (i.e., skilled labor, capital, and infrastructure) thatare necessary to compete in a given industry. In addition to these four factors,
Porter also emphasizes the role of government because policies implemented
without consideration of how they influence the entire system of determinants
are likely to undermine national advantage.
The term used by Porter is broader and academic, while MITI’s term
is more specific and empirical. However, both emphasize the importance of
supporting industries to strengthen the industrial competitiveness of nations.
3.2. Subcontracting
The term “subcontracting” was used some decades ago but has notalways been specified in an explicit manner. The recent definition by the United
Nations Industrial Development Organization (UNIDO) indicates that subcontracting is “an agreement between two parties—the main contractor and thesubcontractor. The main contractor entrusts one or several enterprises with the
production of parts, components or sub-assemblies and/or provision of industrial services necessary for the manufacture of its final product. The subcontractor
executes the work as per the specifications provided by the main contractor”5.
Unlike supporting industries, subcontracting emphasizes only long-term commitments and relationships between large firms and subcontractors, and it does
not cover other types of transactions, e.g., in-house or outsourcing.
In the Japanese economy, the public view on subcontracting has drastically changed over time. In the 1940s and 1950s, subcontracting was thoughtof as the exploitation of small firms by large ones, that the latter utilized their

5

UNIDO’s official website definition at http://www.unido.org/doc/4558?language%5fcode=en#Where34

Supporting Industries: A Review of Concepts and Development

dominant position in a transaction to unfairly impose on the former unprofitableconditions, for instance, delays in payments to subcontractors. In the 1970s and1980s, as Japanese gained confidence in their economic system, the view
swung toward the opposite end. Subcontracting has been regarded as one of theimportant components of the Japanese economic system, with presumed benefits in saving costs to search for and select new suppliers, having successful
quality enhancement and cost reduction in cooperation with subcontractors, andhaving efficient risk-sharing mechanisms (Kimura, 2001). Nevertheless, recent
studies indicate that subcontracting no longer upholds its advantages such as
long-term stability and quick reaction to changes in the large firms, but that it
instead brought pressure, gave limited scope for bargaining, and lowered profits
for subcontractors in comparison with independent suppliers (Kimura, 2001;
Subrahamanya, 2006). As such, there has been a recent trend for subcontractors
to become independent suppliers that are similar to enterprises operating in supporting industries.
3.3. Ancillary industries
The term “ancillary industries” has been widely used in India sincethe 1950s. It was defined in the Industries (Development and Regulation) Act
of 1951 as “an industrial undertaking, which is engaged or is proposed to beengaged in the manufacture or production of parts, components, sub-assemblies, tools or intermediates, or the rending of service...” The term is known
only in India, as the Indian economy had not yet linked closely to the global
economy. A few Indian policy makers did try to introduce this term to the outside world, for instance, in an article “Development of Ancillary Industry inIndia” published in the Small Industry Bulletin for Asia and Far East, Vol. 5,
Nanjappa (1967, as quoted by Fuminori, 2004) wrote that in order to foster
small scale enterprises, the Indian government had set up a committee to promote ancillary industries to act as suppliers of necessary parts, components, andsemi-finished products to large enterprises. The term, however, did not gainwidespread appeal outside India. A reason for the lack of appeal might bebecause this term indicated a subgroup of small-scale industries, and thus rarely
found a specific concern, policy, or strategy for the promotion of such industries, even in India.

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Nguyen Thi Xuan Thuy

3.4. Part and component industries
There is no specific definition of the term “part and component industries,” but it is usually understood to mean industries that produce parts andcomponents. The term is widely used in assembly-type industries such as
motorbikes, automobiles, electrics, and electronics. This is the narrowest related
concept, as it does not cover any other input which can be included in the concept of supporting industries such as services, tools, machines, and materials.
Part and component industries are seen as the core of supporting industries, andas an important element for assessment of local procurement.
3.5. Vendors
Like “part and component industries,” there is no specified definition
for “vendors.” The term is widely understood to mean the sellers of commodities and services for an industry. It is widely used in Malaysia and South Asian
countries, and refers to SMEs that work as subcontractors for large firms.
Unlike “supporting industries,” “vendors” implies individual firms rather thanan industry as a whole. Vendors are basically a unit of supporting industries
whose operations play a decisive role in the development of these industries.

4. Definition of supporting industries
The above review shows that “supporting industries” and other related concepts have a common view, which emphasizes the importance of theindustries that manufacture inputs for finished products. However, each concept
determines a different scope of these industries. Broad concepts, e.g., supporting and related industries and subcontracting, delineate a broad scope, which
covers all supplier industries. In contrast, part and component industry or vendors draw a relatively narrow scope. “Supporting industries” is a vague term;
without a clear definition, it is impossible to identify which industries they are
and to what they provide support. Therefore the scope of supporting industries
mentioned in industrial policies and strategies varies depending on concepts andpurposes used by policy makers. The more detailed definition of the term is, theeasier policies can be formulated, and the more feasible they are.
Figure 3 illustrates three common concepts of supporting industries

36

Supporting Industries: A Review of Concepts and Development

Figure 3. Scopes of supporting industries  
Assembly
Sub-assembly     
Logistics
Storage 
Tools

Distribution  

Parts
Components 

  

Insurance

Machines
Steel
Chemicals

and their respective scopes. The core concept, which leads to the smallest
scope, defines supporting industries as industries which supply parts, components and tools to produce parts and components. There are two broader
scopes, in which one corresponds to the concept that defines supporting industries as the industries which supply parts, components, tools to produce partsand components, and production services such as logistics, storing, distribution
and insurance, while the other refers to the concept that defines supporting
industries as those which supply all physical inputs including parts, components, tools, machines and materials. Noticeably, the scopes of supporting
industries do not specify firm size, ownership, or manufacturing architecture.
They can include foreign and local firms, larger firms and SMEs, integral andmodular manufacturing firms.
In the current context of Vietnam, with budget constraint, underdeveloped industrial bases, and pressures of international integration and competi-

37

Nguyen Thi Xuan Thuy

tion, the core concept is more suitable to mobilize all resources for the development of supporting industries. An operational definition of supporting industries, appropriate to the purposes of research and policymaking in Vietnam, isthus proposed as follows: Supporting industries can be defined as a group ofindustrial activities which supply intermediate inputs (i.e., parts, components
and tools to produce these parts and components) for assembly-type or processing industries.
While firm size and nationality are not considered in the definition of
supporting industries, SMEs and local firms are often targeted in industrial policy. Besides, supporting industries have other characteristics that are not mentioned in the definition, but should be considered carefully in the policymaking
process. These characteristics of supporting industries include: (i) they are relatively more capital-intensive and require more skilled workers than assemblytype industries, (ii) their products are supplied for both domestic use and export,(iii) they produce both standardized parts and components, which are usually
modular manufactured and export-oriented, and bulky and specific ones, which
are integral-type manufactured and used domestically, and (iv) they are
required in both assembly-type industries (such as automobiles, motorbikes,
electronics) and processing industries (textile and garment, footwear industry),
but vary in their features and require different treatment; the former requires
more skilled labor force, produces many metal, rubber and plastic parts, andstrongly influences the product’s quality, while the latter can use low-skilledworkers, consists of a few part industries, and the product’s quality does notheavily depend on them. That is why supporting industries of these two sectors
should be addressed and grouped separately in strategic planning.

5. Necessity for Vietnam to develop supporting industries
Vietnam is currently challenged by competition from regional countries in absorption of FDI, flood of Chinese products, and pressures of international integration. Development of supporting industries is an essential measure
for Vietnam to overcome these challenges.
Supporting industries play an important role in promoting FDI. In the
1980s, the massive investment inflows from multi-national corporations38

Supporting Industries: A Review of Concepts and Development(MNCs) to developing countries were attracted by the low labor cost. Nowadays, when MNCs choose a location for FDI, they consider not only the advantage in labor cost but also the comparative advantages in other production
inputs such as parts and components and production services, which can help
them to improve their competitiveness in price and quality.
Vietnam is now trying its best to achieve its goal of becoming an
industrialized country by 2020. Like other developing countries, Vietnam has
utilized FDI as a force to drive its economy. Although Vietnam is attempting toabsorb FDI and develop its industrial sector, it does not seem to realize theimportance of supporting industries in industrialization and FDI attraction. It is
not really proactive in promoting these industries like other ASEAN countries
such as Thailand, Malaysia, and Indonesia have done. Thus, it is necessary for
Vietnam to learn from the successes and failures of other countries to design aproper strategy and policy on the development of supporting industries.
Supporting industries are essential for Vietnam to compete with
China. The growth of the Chinese economy is a threat to all the economies in
the world. However it would be unwise for Vietnam to compete directly with
China. Manufacturing industries in China, which have advantages of cheap andabundant labor and a large market, are characterized by mass production ofmodular products with copied design and technology and high competitivenessin prices. Only through promoting high-quality supporting industries andbecoming a crucial integral partner of MNCs can Vietnamese products enter the
global market without clashing with Chinese products.
Strong supporting industries will also expedite Vietnam’s integration
into the international economy and participation in the global value chain. Pressures of globalization do not allow any country to protect its industries by nontariff measures or protective policy. In recent years we have seen the formationof global-scale economic systems which are tightly integrated and often managed on a day-to-day basis. Many firms have had international operations andtrading relationships, and all activities are divided among multiple firms andspread across the world. Today, the process of economic development cannot
be isolated from these global systems. Supporting industries will help Vietnam
to diversify its tradable products and to deeply involve itself in the global value
chain through partnerships and linkages with FDI firms and MNCs.

39

Nguyen Thi Xuan Thuy

Nevertheless, supporting industries do not develop naturally and Vietnam cannot take full advantage of these industries if the involvements of Vietnamese firms in such industries do not exist. For this reason, deepening thelinkages between Vietnamese firms and MNCs, which will be addressed below,
must be considered carefully in the policymaking process.

6. International experiences in developing supporting
industries
General observations show that latecomer countries implemented various measures to strengthen industrial infrastructure. In the first half of the 20th
century, non-tariff measures and protective policy, such as local content regulations, were utilized to protect infant economies. When these were removed
because of the pressure from international integration, FDI was used as a driving force for economic growth. In addition, linkages between SMEs and larger
firms, local firms and MNCs, as well as participation in the global production
networks were considered crucial factors for the development of industries in
the latecomer countries.
6.1. Local content regulations
Taiwan and Korea developed their industries, absorbed technologies
from foreign companies, and achieved international competitiveness in automobiles and electronics through local content regulations. Taiwan introduced the
Local Content Regulations (LCR) in the 1960s covering most automobile, electric and electronic products. The LCR were phased out from 1975 to 1986 whencommitments of trade liberalization were fully implemented. LCR were useful
in forcing foreign makers, who monopolized the local market, to transfer parts
manufacturing technologies to their local joint venture partners or to other local
parts suppliers (APO, 2002: 67, 68). Korea launched two five-year programs on
localization in 1987–1991 and 1992–1996. According to those programs, a total
number of 7,032 parts and components were designated for localization. The
programs were successful in the automobile parts industry (about 78% of designated parts were localized), but not in the electrical and electronic parts industry(success rate was only 38%) (APO, 2002: 64, 65). Nowadays, latecomer coun-40

Supporting Industries: A Review of Concepts and Development

tries can no longer apply local content regulations due to the rules of the World
Trade Organization. These countries, however, are still able to encourage local
procurements through incentives in taxes, loans, or technical assistance.
6.2. Promotion of FDI into supporting industries
Supporting industries were also developed through FDI. Advanced
ASEAN countries implemented selective FDI promotion policies to drive FDI
into targeted industries. They implemented various tax incentives, establishedfree trade zones under an export-oriented strategy, and took full advantage ofthe massive transfer of manufacturing bases from Japan during the 1980s and1990s due to the sharp appreciation in the value of the yen. Thailand did not
introduce privileges to favor investment in specific supporting industries.
Instead, it sought to increase the number of investment applications from foreign (particularly Japanese) smaller manufacturers, or from local concerns bylowering the minimum required investment amount. The preferential treatment
given to such investors was basically orthodox tax benefits. Malaysia promoted
FDI into supporting industries by tax incentives such as investment tax
allowances, which were a five-year tax respite, and corporate tax levied at
15–30 percent of income. These two countries have now become the major suppliers for parts and components for automobiles and electronics in the world
market.
6.3. Linkage promotion
The backward linkage promotion served as a useful measure for thelatecomer countries to promote their supporting industries. Japan, Korea, andTaiwan promoted the linkage between subcontractors, which were mainly
SMEs, and large firms. Thailand and Malaysia worked to deepen the linkage
between local suppliers and foreign affiliates (mainly Japanese firms). Moreover, UNIDO and United Nations Conference on Trade and Development(UNCTAD) also assisted developing countries to promote industrial linkage.
Japan: Japan designed its industrial policy to respond to the changes
in the business environment, and it tried to facilitate and balance the benefits
between SMEs and large firms. For instance, in the 1940s, the rapid expansion
in the demand for the products of the machinery industry made large firms con-

41

Nguyen Thi Xuan Thuy

tract out production to smaller firms rather than expand their own production
facilities. To cope with the issue, the Japanese government introduced the Law
on Cooperatives of SMEs and other Parties, which was enacted in 1949, toenhance the bargaining power of SMEs and enable them to approach new technologies and sources for loans. In the 1950s, the subcontractors were exploitedby their parent companies through buffers and delayed payments. The government intervened by enacting the Law on the Prevention of Delay in the Payment of Subcontracting Charges and Related Matters in 1956 to prevent delays
in payments to subcontractors. During the 1960s and 1970s, the rapid expansionof the manufacturing sector, resulting from mass production, led to the increasein competition between large firms. Large firms thus needed subcontractors
who could improve productivity and lower costs to enhance the competitivenessof their products. The government supported this through the Law on the Promotion of Subcontracting Small and Medium Enterprises in 1970, to ensuresmooth subcontracting (Subrahmanya, 2006).
Korea: In order to promote the linkage between SMEs and large
firms, Korea implemented the top-down policy, which designated some large
firms as the key players and required them to purchase parts from the targeted
SMEs. For example, the SMEs Sub-Contracting Promotion Act, which wasintroduced in 1975 and revised in 1978, designated some branches of industries
as well as their products as sub-contracting products. The large firms wererequired to procure those designated products through outsourcing rather than
through their own in-house production. The number of designated items rose
sharply from 41 in 1979 to 1,553 in 1984, and then decreased gradually to
1,053 in 1999 (APO, 2002: 62). In 2005, Korea launched the Strategy for theDevelopment of Materials and Parts, which targeted the main parts and materials used in electronics and automobiles. The strategy designated large firms
such as Samsung and Lucky Gold Star (LG) as core firms and designated someproducers as participant firms, which would conduct research and develop newparts and materials as substitutes for imported products. The core firms are
required to procure these parts and materials from the participant firms (Suzuki,2006).
Taiwan: In contrast with Korea, the Taiwanese government was not
deeply involved in the decision of larger firms and subcontractors, but played42Supporting Industries: A Review of Concepts and Development

the role of facilitator by providing financial subsidies. The Core-Satellite System was launched in 1984. It consisted of three linkages: (i) parts and components suppliers and an assembler, (ii) downstream users and a major material
producer, and (iii) subcontractors and a trading firm/merchandiser (APO, 2002:
69). The government supported these linkages through technical assistance,
managerial consultation, and financial aid. The core firms are responsible forcoordinating, monitoring, and upgrading the operations of its satellite factories.
The core firms are attracted by financial subsidies, while the satellite firms’
main interest was to improve productivity. The system served as the facilitator
for information sharing and provided a mechanism for the government toimplement policies.
Malaysia: To support matchmaking and linkages between local suppliers and large firms, Malaysia launched the Vendor Development Program(VDP), which appointed large enterprises as “anchors.” The anchors had to nurture “vendors” (i.e., first tier supplier and Bumiputra firms), provide them markets, and assist in technical development and management skills. The government provided support through interest-free loans, which were provided only tovendors. The program was not successful due to the lack of enthusiasm andhigh dependence of the local firms. In addition, anchor firms faced difficulties
in finding new vendors to develop, especially Bumiputra ones, because they
already had many subcontractors. They participated in VDP only because of thegovernment’s request and their commitment to cooperate with the government’s SME development policy (Karikomi, 1998).
To correct the situation, Malaysia designed a new program called theIndustrial Linkage Program (ILP), where second tier suppliers and nonBumiputra companies could also qualify as linkage suppliers. The lead principal companies would be granted special treatment such as subsidies for their
R&D activities and tax concessions.
Thailand: With a long history of FDI absorption and industrialization, Thailand has created a relatively thick layer of supporting industries, especially for supplying auto parts. However, local capability and technology arestill at low levels. Dependency on foreign technology and management remains
high even after 40 years of industrial development. The government did not
succeed in upgrading the quality of Thai supporting industries (Ohno, 2006a).

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Nguyen Thi Xuan Thuy

This was clearly seen through failures of the Board of Investment (BOI) Unit
for Industrial Linkage Development (BUILD) and the National Supplier Development Program (NSDP), which were implemented during the 1990s to provide
channels of communication for the manufacturing sector in Thailand.
BUILD was initiated in 1992 and existed until 1997 through fourphases, i.e., (i) 1992–1993: development of databases to support matchmaking,focusing on electronics, automobile and machinery industries, and upgrading of
suppliers through training; (ii) 1993–1994: technical support, seminar activities
and matchmaking activities; (iii) 1994–1995: database development, training
and participating in international trade fairs; and (iv) 1995–1997: trade fairs andseminar activities. Simultaneously NSDP, which was initiated in 1994, was acoordinator for all related programs, and provided services and information to
suppliers. While BUILD was not very successful, NSDP could not really materialize. The main reasons were: (i) while the demand for the activities of
BUILD existed, there was a lack of awareness of BUILD. In a survey of 239
companies producing auto parts and electric/electronic parts, only 43 percent of
those companies knew about BUILD; (ii) promotion of matchmaking and subcontracting was not a top priority for firms; the need to upgrade man power andmodernize machinery was a higher priority. Only 1.7 percent of the interviewed
firms had demands for matchmaking. A final reason is (iii) the lack of coordination between relevant organizations, and the Ministry of Industry (MOI) did not
wholly cooperate with BUILD and NSDP6 (Lauridsen, 2000).
Learning from those experiences, Thailand sought the cooperation of
the Japan International Cooperation Agency (JICA) to design the Master Planon the Development of Supporting Industries. The plan focused on two sectors:
automobiles and electrics/electronics.
United Nations (UN): The UN also supports member nations, especially developing countries, in the promotion of industrial linkages. UNIDO
established the Subcontracting and Partnership Exchange (SPX) on a worldwide basis in 1985 to support and promote SMEs in developing countries. The

6

At that time, BUILD and NSDP were carried out by BOI, which was under the Office ofGovernment and chaired by the prime minister. With the recent administrative reform, it wasplaced under MOI.

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Supporting Industries: A Review of Concepts and Development

ultimate objective of the SPX was to enhance matchmaking via direct contacts,
industry visits, fairs, etc. The primary industrial sectors covered by the SPX
operation were metal-mechanic (81 percent), plastic-rubber (64 percent), electric-electronic (47 percent), and industrial services (33 percent) (Rendon, 2000).
UNCTAD introduced a toolkit to promote linkages in its World Investment
Report 2001, in which specific measures to create and deepen linkages, as wellas policies to strengthen linkages were introduced. The report included guidance to design a linkage promotion program based on the experiences of someof the member nations.
6.4. Participation in global production networks
Going by the recent trends in the global supply chain, every country
has tried to attain some level of specialization and join regional or global production networks. For example, Taiwan has specialized in semiconductors,
Thailand has concentrated on automobile parts, and Malaysia has focused onelectronics. In order to join these networks, countries must have sufficiently
strong industrial bases and human resources. The industrial bases consist ofcore technologies—those that are required by most industries—such as casting,molding, forging, plating, heat treatment, planting, pressing, and plastic. Human
resources refer to skilled workers and managers. There are many examples ofsuccess in the development of human resources in Asian countries. In Hong
Kong, the Teaching Company Scheme aims to foster university-industry partnership, and it supports local companies to hire graduate students from universities in Hong Kong to assist in proper R&D work. Through the arrangement,
companies benefit from the research results. Each company and the Schemebear half of the cost for hiring students (APO, 2002: 36). In Malaysia, thePenang Skill Development Center aims to increase the supply of skilled laborfor manufacturing firms in Penang, especially for MNCs (UNCTAD, 2001). In
Japan, meister systems have been formed from the national to local levels, andeven at individual companies. These systems encourage engineers and managers to improve their skills continuously, and to transfer their knowledge totheir successors.

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Nguyen Thi Xuan Thuy

7. Lessons for Vietnam from international experiences
From the above experiences, some lessons that Vietnam can learn tofoster the supporting industries are as follows.
Firstly, local content requirement can no longer be applied, but local
procurement still can be increased through incentive schemes such as reducing
tariffs on machines and raw materials which cannot be produced in Vietnam,
and setting up communication channels between foreign assemblers and local
suppliers to reduce information and perception gaps. These incentives must be
applied to all firms regardless of nationality.
Secondly, the investment environment should be made more attractive
to promote FDI into supporting industries. Nowadays, in the free trade context,
Vietnam cannot apply the industrial policy that the pioneer countries employed.
Simple external openings such as free trade and investment are not enough. To
attract massive flows of FDI, Vietnam should work in cooperation with foreign
investors, listen to their needs carefully, set agreed goals for technical transfer
and domestic procurement, design consistent supporting policies, and so on.
Moreover, Vietnam should also actively solve any problems that may arise inpursuing these goals. Vietnam has to use the targeted policies to create superior
location advantages and lower the costs of doing business, which in turnrequire, among other things, an improvement of domestic skills (e.g., production management, marketing, engineering—not just primary education), infrastructure, supporting institutions, efficient government services, and good management of industrial and export processing zones (Ohno, 2006b: 2).
Thirdly, most part and component suppliers are SMEs, so the Vietnamese government, especially the MOI, should pay more attention to thedevelopment of SMEs. The MOI should cooperate closely with local governments in order to design appropriate industrial policies that facilitate businessactivities of industrial enterprises in the country as a whole and not only theenterprises under the MOI.
Fourthly, global value chains are the current trend for MNCs. The
government should promote the industrial linkages between local firms and
MNCs by learning from international experiences and in cooperation with international organizations. Experiences from other countries show that successes in46

Supporting Industries: A Review of Concepts and Development

promotion of linkages are rooted in the quick responses of the government tothe change in the business environment (Japan); sufficiently strong leading
firms (Korea); sufficiently strong core firms and enthusiasm of firms (Taiwan);and technical and financial supports from governments. The reasons for failure
or partial success in promotion of linkages are the lack of inter-ministerial coordination (Thailand); the lack of awareness of government’s policies (Thailand);mismatch between government policy and the demand of the firms (Thailand);discrimination against types of enterprises (Malaysia), and the lack of enthusiasm of firms (Malaysia). The government should take full advantage of information technology to narrow down the information and perception gaps
between local and foreign firms. A comprehensive industrial database willserve as a catalyst or matchmaker that helps firms to save time and find their
suppliers or buyers.
Fifthly, for long-term industrial development, the MOI should draw
up an annual White Paper on Industry. The reason why the Japanese government could respond quickly to the demand of firms was that it had comprehensive White Papers, which would analyze the conditions for the development oftrade, industries, SMEs, and other issues. White Papers, as well as an industrial
database and industrial statistic system, are also necessary for industrial
research, analysis and policymaking purposes. In addition, in order to meet thecurrent requirements and to catch up with the advanced countries, industrial
policies should form industrial societies in parallel with knowledge-base societies. This means that the policy should not only target reducing costs andimproving the quality of industrial infrastructure, but should also maintain aconducive environment for innovation on the basis of a network of companies,
universities and research organizations.
Finally, for improving the master plan on the development of supporting industries, the MOI should decide an appropriate definition of supporting industries, which is not too broad, to serve as a foundation for designingproper policies and to ensure feasibility of these policies within the country’s
capability. Coordination with other government organizations and businesses
are essential for the MOI in the process of policymaking. The MOI should also
use other measures to foster the development of supporting industries, such as
promoting industrial human resources by coordinating with the Ministry of47

Nguyen Thi Xuan Thuy

Education and Training (MOET), business community, vocational schools, andforeign organizations; strengthening the development of SMEs; and promoting
linkages between local firms and FDI firms/MNCs.

8. Concluding remarks
The term “supporting industries” had been developed over a period ofat least two decades, but its nature is not very different from other related terms
used long ago, such as subcontracting, ancillary industries, and part and component industries. The logic behind the concept of supporting industries and otherrelated concepts is to emphasis the importance of the industries that manufacture inputs for finished products. This is a policy-oriented term, and thus policy
makers of each country should tailor the definition to suit the socio-economic
conditions of the country and the targets of industrial strategy.
Although Vietnam began to use this term relatively late, this does notmean that Vietnam will always be behind other countries in the process ofindustrialization. In order to catch up with the pioneer countries, Vietnam needs
to exert more effort than other countries in the development of supporting
industries. To do this, Vietnam should utilize comprehensive measures to promote localization, attract massive inflows of FDI into industries (especially supporting industries), deepen the industrial linkages, and participate in the regional and global production networks. Among other things, Vietnam needs toimprove industrial human resources, absorb technological transfer, and reducethe information and perception gaps that exist to promote the supporting industries.

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